Ratio Analysis

A STUDY ON FINANCIAL STATEMENT ANALYSIS USING RATIOS
CHAPTER 1: INTRODUCTION
PART-A
(a) INTRODUCTION TO FINANCE:
Finance is the life blood and nerve centre of a business, just as circulation of blood is
essential in the human body for maintaining life. Finance is very essential for smooth
running of business. Right from the very beginning i.e., conceiving an idea to
business, finance is needed to promote or establish the business, acquire fixed assets,
make investigations such as market surveys etc., develop product, keep men and
machines at work, encourage management to make progress and Create values. Even
an existing firm may require further finance for making improvement or expanding
the business.
(b) BUSINESS FINANCE

Business finance is a term that encompasses a wide range of activities and disciplines
revolving around the management of money and other valuable assets. Business
Finance is that business activity which is concerned with the acquisition and
conservation of capital funds in meeting financial needs and overall objectives of
business enterprises.
(c) DEFINITION
According to Prater and Wert
“Finance deals primarily with raising, administration and disbursing funds by
privately owned business units operating in non -financial fields of industry”.
SREE VENKATESHWARA COLLEGE OF SCIENCE AND MANAGEMENT STUDIES

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According to H.G.Gugtman and H.E.Dougall
“Finance can be broadly defined as activity and administration of funds used in
business”.
(d) FINANCIAL MANAGEMENT

Financial management is a body of business concerned with the efficient and effective
use of either equity capital, borrowed cash or any other business funds as well as
taking the right decision for profit maximization and value addition of an entity
.Financial Management refers to the efficient and effective management of money
(funds) in such a manner as to accomplish the objectives of the organization. It is the
specialized function directly associated with the top management. It includes how to
raise the capital, how to allocate it i.e. capital budgeting. Not only about long term
budgeting but also how to allocate the short term resources like current assets. It a lso
deals with the dividend policies of the share holders.
(e) DEFINITION
“Financial Management is the Operational Activity of a business that is responsible
for obtaining and effectively utilizing the funds necessary for efficient operation.” by
Joseph Massie.
“Financial management is the area of business management devoted to a judicious use
of capital and a careful selection of sources of capital in order to enable a business
firm to move in the direction of reaching its goals.” by J.F.Bradlery.

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(f) IMPORTANCE OF FINANCIAL MANAGEMENT

 Sound financial management is indispensable for any organization
where funds are involved. Efficient and effective management of
finance is essential for both profit and non-profit oriented
organization.
 F i n a n c i a l m a n a g e m e n t h e l p s i n t h e e f f e c t i v e d e p l o ym e n t o f f u n d s
in fixed assets and working capital. It helps profits planning, capital
spending, measuring costs and inventory control, accounts
receivable etc.
 Financial management also help in ascertaining how the company would

perform in future and essentially helps in optimizing the output from a given
funds.
(g) FINANCIAL ANALYSIS

Financial analysis is the process of identifying the financial strengths and weakness of
the firm. It is done by establishing relationships between the items of financial
statements viz., balance sheet and profit and loss account. Financial analysis can be
undertaken by management of the firm, viz., owners, creditors, investors and others.
One of the most common ways of analyzing financial data is to calculate ratios from
the data to compare against those of other companies or against the company's own
historical performance.
Financial Analysis is the process of evaluating businesses, projects, budgets and other
finance-related entities to determine their suitability for investment. Typically,

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financial analysis is used to analyze whether an entity is stable, solvent, liquid, or
profitable enough to be invested in. When looking at a specific company, the financial
analyst will often focus on the income statement, balance sheet, and cash flow
statement. In addition, one key area of financial analysis involves extrapolating t he
company's past performance into an estimate of the company's future performance.
(h) FINANCIAL ANALYST
A financial analyst, securities analyst, research analyst, equity analyst, or investment
analyst is a person who performs financial analysis for external or internal clients as a
core part of the job.
(i) DEFINITION OF FINANCIAL ANALYSIS
According to Myers , “ Financial Analysis is largely a study of the relationship among
the various financial factors in a business as disclosed by a single set of statements
and a s t ud y of t ren d of t hese fact ors a s shown i n a seri es of st at em ent ”.
(j) OBJECTIVES OF FINANCIAL ANALYSIS
1. Assessment of Past Performance
Past performance is a good indicator of future performance. Investors or creditors are
interested in the trend of past sales, cost of goods sold, operating expenses, net income,
cash flows and return on investment. These trends offer a means for judging
management's past performance and are possible indicators of future performance.

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2. Assessment of current position
Financial statement analysis shows the current position of the firm in terms of the
types of assets owned by a business firm and the different liabilities due against the
enterprise.
3. Prediction of profitability and growth prospects
Financial statement analysis helps in assessing and predicting the earning prospects
and growth rates in earning which are used by investors while comparing investment
alternatives and other users in judging earning potential of business enterprise.
4. Prediction of bankruptcy and failure
Financial statement analysis is an important tool in assessing and p redicting
bankruptcy and probability of business failure.
5. Assessment of the operational efficiency
Financial statement analysis helps to assess the operational efficiency of the
management of a company. The actual performance of the firm which are revealed in
the financial statements can be compared with some standards set earlier and the
deviation of any between standards and actual performance can be used as the
indicator of efficiency of the management.
(k) TOOLS OF FINANCIAL ANALYSIS
The following are the tools for analysis of the financial statement:-
 Comparative Financial Statement

 Common Size Financial Statement

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 Trend Analysis Fund Flow Statement
 Fund Flow Statement
 Cost Volume Profit Analysis
 Ratio Analysis
Comparative Financial Statement
Comparative study of financial statements is the comparison of the financial
statements of the business with the previous year’s financial statements. It enables
identification of weak points and applying corrective measures. Practically, two
financi al st at em ent s (bal ance sheet and income statement ) are prepared in
comparative form for analysis purposes.
A statement which compares financial data from different periods of time. The
comparative statement lines up a section of the income statement, balance sheet or
cash flow statement with its corresponding section from a previous period. It can also
be used to compare financial data from different companies over time, thus revealing
the trend in the financials.
COMMON SIZE FINANCIAL STATEMENT
A company financial statement that displays all items as percentages of a common
base figure. This type of financial statement allows for easy analysis between
companies or between time periods of a company. A common size balance sheet
each item on the balance sheet as a percentage of total assets. A common size income
statement expresses each income statement Category as a percentage of total sales
revenues.

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TREND ANALYSIS FUND FLOW STATEMENT
Trend Analysis is the practice of collecting information and attempting to spot a
pattern, or trend, in the information. Trend analysis is the process of comparing
business data over time to identify any consistent results or trends. Trend Analysis
helps to understand how business operations and practices will take place.
FUND FLOW STATEMENT
It is a statement summarizing the significant financial changes in items of financial
position which have occurred between the two different balance sheet dates. This
statement is prepared on the basis of "Working Capital" concept of funds. Fund flow
Statement helps to measure the different sources of funds and application of funds
from transactions involved during the course of business. The fund flow statement
also termed as Statement of Sources and Application of Fund, Inflow of Fund or
Outflow of Fund Statement.
COST VOLUME PROFIT ANALYSIS
A method of cost accounting used in managerial economics. Cost-volume profit
analysis is based upon determining the breakeven point of cost and volume of goods.
It can be useful for managers making short-term economic decisions, and also for
general educational purposes. Cost-volume profit analysis makes several assumptions
in order to be relevant. It often assumes that the sales price, fixed costs and variable
cost per unit are constant. Running this analysis involves using several equations
using price, cost and other variables and plotting them out on an economic graph.

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RATIO ANALYSIS
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick
indication of a firm's financial performance in several key areas. Ratio analysis is the
process of determining and interpreting numerical relationship based on financial
statements. It is the technique of interpretation of financial statements with the help of
accounting ratios derived from the balance sheet and profit and loss account.
(l) IMPORTANCE OF FINANCIAL ANALYSIS

1. Holding of Share
Shareholders are the owners of the company. Time and again, they may have to take
decisions whether they have to continue with the holdings of the company's share or sell them
out. The financial statement analysis is important as it provides meaningful information to the
shareholders in taking such decisions.
2. Decisions and Plans

The management of the company is responsible for taking decisions and formulating plans
and policies for the future. They, therefore, always need to evaluate its performance and
effectiveness of their action to realise the company's goal in the past. For that purpose,
financial statement analysis is important to the company's management.
3. Extension of Credit
The creditors are the providers of loan capital to the company. Therefore they may have to
take decisions as to whether they have to extend their loans to the company and demand for
higher interest rates. The financial statement analysis provides important information to them
for their purpose.

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4. Investment Decision
The prospective investors are those who have surplus capital to invest in some Profitable
opportunities. Therefore, they often have to decide whether to invest their capital in the
company's share. The financial statement analysis is important to them because they can
obtain useful information for their investment decision making purpose.
(m) LIMITATIONS OF FINANCIAL ANALYSIS
1. Mislead the user
The accuracy of financial information largely depends on how accurately financial statements
are prepared. If their preparation is wrong, the information obtained from their analysis will
also be wrong which may mislead the user in making decisions.
2. Not useful for planning
Since financial statements are prepared by using historical financial data, therefore, the
information derived from such statements may not be effective in corporate planning, if the
previous situation does not prevail.
3. Qualitative aspects
Then financial statement analysis provides only quantitative information about the company's
financial affairs. However, it fails to provide qualitative information such as management
labour relation, customer's satisfaction, and management’s skills and so on which are also
equally important for decision making.
4. Comparison not possible
The financial statements are based on historical data. Therefore comparative analysis of
financial statements of different years cannot be done as inflation distorts the view presented
by the statements of different years.

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5. Wrong judgement
The skills used in the analysis without adequate knowledge of the subject matter may
lead to negative direction. Similarly, biased attitude of the analyst may also lead to
wrong judgement and conclusion.
(j) TYPES OF FINANCIAL ANALYSIS
A. On the basis of material used.

1. External Analysis
Analysis of financial statements may be carried out on the basis of published

information. i.e.., information made available in the annual report of the enterprise. Such
analysis are usually carried out by those who do not have access to the detailed accounting
records of the Co. i.e., Banks, Creditors etc.
2. Internal Analysis
Analysis may also be based on detailed information available within the Co. which is
not available to the outsiders. such analysis is called internal analysis. this type of
analysis id of a detailed one and is carried out on behalf of the management for the
purpose of providing necessary information for decision making, such analysis
emphasizes on the performance appraisal and assessing the profitability of different
activities.
B. According to objectives of analysis
1. Short Term Analysis
Short term analysis is mainly concerned with the working capital analysis. In the short
run, a Co. must have ample funds readily available to meet its current needs and

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sufficient borrowing capacity to meet the contingencies. in short term analysis the
current assets and current liabilities are analysed and liquidity is determined.
2. Long Term Analysis
In the long term a Co. must earn a minimum amount sufficient to maintain a
reasonable rate of return on the investment to provide for the necessary growth and
development of the Co., and to meet the cost of capital. Financial planning is al so
desirable for the continued success of a Co. Thus in the long term analysis the
stability and the earning potentiality of the C. is analysed i.e., fixed assets, long term
debt structure and the ownership interest is analysed.
C. According to the Modus Operandi of analysis
1. Horizontal Analysis
Analysis of financial statements involves making comparisons and establishing
relationship among related items. Such comparison or establishing of relationship
may be based on financial statements of a Co . for a number of years and the
financial statements of different companies for the same year. Such analysis is called
horizontal analysis. it may take the following two forms.
a. comparative financial statement analysis

b. trend analysis.
2. Vertical Analysis.
Analysis of financial data based on relationship among items in a single period of
financial statement is called vertical analysis. From a single balance sheet or P&L
A/C relationships of various items may be established.

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PART- B
INTRODUCTION
RATIO
A ratio is the quantitative relation between two amounts showing the number of times
One value contains or is contained within the other.
1) A Ratio is an expression of the quantitative relationship between two numbers.

2) A Ratio is a numerical or an arithmetical relationship between the two figures.
RATIO ANALYSIS
Ratio analysis is one of the techniques of financial analysis where ratios are used as a yard
stick for evaluating the financial condition and performance of a firm. Ratio analysis was
pioneered by Alexander wall who presented a system of ratio analysis in the year 1909.
In financial analysis,’ a ratio is used as a benchmark for evaluating the financial performance
of a firm. Such a kind of financial analysis when under taken by taking ratio of several
figures of the firm’s financial statement, it can be termed as ratio analysis. Ratios help to
summarize large quantities of financial data and to make qualitative judgment about the
firm’s financial performance.
Standards of comparison
Ratio analysis involves comparison for a useful interpretation of the financial statements. A
single ratio in itself cannot indicate favourable or unfavourable condition Standards of
comparison may consist of:
Past ratios:-Ratios from the part financial statement of the same firms.

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Competitor’s ratios:-Ratios of some selected firms especially the most
Progressive and successful competitor at the same point of time.
Industry ratio:-Ratio of the industry to which the firm belongs.
Projected ratio:-Ratio developed using the projected or preformed financial
Statement of the same firm. Based upon the above standards of comparison following
Types of ratio analysis can be carried out.
Time series analysis (Past Ratios)
Cross sectional analysis (Competitors Ratio)
Industry analysis (Industry ratio)
Performa analysis (Performa/Projected ratios)
Steps Involved in Ratio Analysis;
 Selection of relevant dates the financial Statements depending upon the objective of
the analysis.
 Calculating of appropriate ratios with the ratios of the same firm In the past or the
ratios of some others firms of the comparison with the ratios of the industry to
which the firm belong.
Function of Ratio Analysis;
The functions of ratio analysis are as follows,
 Ratio Analysis measures the firm's ability to meet current obligation

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 Ratio Analysis shows the proportions of debt and equity in financing the firm's assets
 Analysis of ratios reflects the firm efficiency in utilizing its assets.
 Ratio Analysis will determine in future the financial strength.
 Ratio Analysis techniques attract the investors.
Objectives of ratio analysis:-
 To evaluate the profitability of the firm

 To evaluate and measure the financial strength of the firm.
 To highlights the liquidity and profitability of the firm
 To know whether the firm is in a position to meet its current obligation.
ADVANTAGES AND USES OF RATIO ANALYSIS:
There are various groups of people who are interested in analysis of financial position
of a company. They use the ratio analysis to work out a particular financial characteristic of
the company in which they are interested. Ratio analysis helps the various groups in the
following manner,
1) To work out the profitability
Accounting ratios help Id measure the profitability ratios. It helps the management to
know about the earning capacity of the business concern. In this way profitability ratios show
the performance of the business.
2) To work out the solvency
With the help of solvency ratios, solvency of the company can be measured. These
ratios show the relationship between the liabilities and assets. In case eternal liabilities are

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more than of the assets of the company, it shows the unsound position of the business. In this
case the business has to make it possible to repay its loans.
3) Helpful in analysis of financial Statements
Ratio analysis help the outsiders just like creditors, share holders, debentures holders, bankers
to know about the profitability and ability and ability of the company to pay them interest and
dividend etc
4) Helpful in comparative analysis of the performance
With the help of ratio analysis a company may have comparative study of its
performance to the previous years. In this way company comes to know about its weak point
and be able to improve them.
5) To simply the accounting information
Accounting ratio are very useful as they briefly summaries the result of detailed and
complicated computations.
6) To work out the operating efficiency
Ratio analysis helps to work out the operating efficiency of the company with the help
of various turn over ratios. All turnover ratios are worked out to evaluate the performance of
the business in utilizing the resources.
7) To work out short term financial position
Ratio analysis helps to work out the short term financial position of the company with the
help of liquidity ratios.
8) Helpful for forecasting purposes
Accounting ratios indicate the trend of the business. The trend is useful for estimating
future with help of previous year's ratios; estimates for future can be made in this way these
ratios provide the basis for preparing budgets and also determine future line of action.

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DISADVANTAGES OF RATIO ANALYSIS:
In spite of many advantages, images, there are certain limitations of the ratio analysis
technique and they should be kept in mind while using them in interpreting financial
statements. The following are the main limitations of accounting ratios.
 Limited comparability
Different firms apply different accounting policies. Therefore the ratio of one firm
cannot always he compared with the ratio of other firm
 False results
Accounting ratios are based on data drawn from accounting rewards. In case that data
is correct, then only the ratios will be correct For example, valuation of stock is based on very
high price, the profits of the concern will be inflated and it will indicate a wrong financial
position. The data therefore must be absolutely correct.
 Effect of price level changes
Price level changes often make the comparison of figures difficult over a period of
time. A change in price affects the cost of production, sales and also the value of assets.
Therefore, it is necessary to make adjustment for price level change is before any
comparison.
 Qualitative factors are ignored

Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative
factors, which may be important in decision making.
 Effect of window –dressing
In order to cover up there had financial position some companies resort to window
dressing. They may record the accounting data according to the convenience to show the
financial position of the company in a better way

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 Costly technique
Ratio analysis is a costly technique and can he used by big business houses Small
business units are not able to afford it.
 Misleading results
In the absence of absolute data, the result may be misleading.
 Absence of Standard University accepted terminology

There are no standard ratios, which are universally accepted for comparison purposes As
such, the significance of ratio analysis technique is reduced.
TYPES OF RATIO:
The various types of ratios can be classified as following ratio.
a) Traditional classification/ statement ratios:-
Balance sheet ratios
Profit and loss a/c ratios
Composite / mixed / inter statement ratios
b) Significance /ratio according to importance:-
Primary ratio
Secondary ratio
c) Functional classification or according to tests:-
Liquidity ratios
Leverage ratios
Activity ratios / turnover ratios
Profitability ratios.

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Here in this project the functional classification is considered for the studying the
financial statement of the company.
LIQUIDITY RATIO:
Liquidity means ability of a firm to meet its current liabilities. The liquidity ratio, therefore,
try to establish a relationship between current liabilities, which are the obligations soon
becoming due and current assets, which presumably provide the source from which this
obligation will be met. These are the ratios which measure the short term solvency or
financial position of a firm. These are calculated to comment upon the short term paying
capacity of a concern.
The most common ratios, which indicate the extent of liquidity or lack of it, are.
Current ratio
Quick ratio
Absolute ratio
CURRENT RATIOS:
It is defined as the relationship between current assets and current liabilities. This ratio is
most commonly used to perform the short-term financial analysis. It is also known as the
working capital ratio.
Formula for calculation of current ratio.
Current assets
Current ratio =
Current liabilities

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QUICK RATIO:
Also called acid test ratio, establishes a relationship between quick or liquid assets and
current liabilities. An asset is liquid if it can be converted into cash immediately or
reasonably soon without a loss of value.
Current assets- inventories
Current ratio =
Current liabilities
ABSOLUTE LIQUID RATIO:
Since cash is the most liquid asset, cash ratio can be determined by dividing cash and its
equivalent to current liabilities. Trade investment or marketable securities are equivalent to
cash, therefore it may be include in the computation of cash ratio.
The formula for the computation of cash ratio is
Cash + marketable securities
Cash ratio =
Current liabilities
Absolute liquid assets include cash in hand and at bank and marketable securities or
temporary investment.
ACTIVITY RATIO:
All the funds employed by the creditors and owners are invested in various assets to
generate sales and profits. Better the management of assets greater the amount of sales.
Activity ratios are employed to evaluate how efficiently the management utilizes its available
resources (assets). These ratios are also called turnover ratios.

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a) Inventory turnover ratio.
b) Debtors (Account receivable) turnover ratio.
c) Fixed assets turnover ratio.
d) Working capital turnover ratio.
e) Capital turnover ratio.
f) Creditor’s turnover ratio.
g) Cash turnover ratio.
h) Current assets turnover ratio.
a) INVENTORY TURNOVER RATIO:-
It indicates the efficiency of the firm in producing and selling its products. It is calculated by
dividing cost of goods sold by average inventory.
Sales / cost of goods sold
Inventory turnover =
Average inventory
Average inventory usually is thee average of opening and closing balance of inventory but in
a manufacturing company inventory of finished goods is used to calculate inventory turnover.
Sometimes cost of goods sold figure may not be available to an outside analyst then the other
formula can be used to calculate the turnover.
Sales
Inventory turnover =
Inventory

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From the above available data we can calculate the dawns of inventory holding. When the
numbers me days of operation in a year are divide by inventory turnover we get days of
inventory holding (DIH).
Number of days of operation (360 or 365)
DIH=
Inventory turnover
Now the interpretation part it is know that inventory turnover shows how rapidly the inventory is
turnover into receivables through sales. Generally a high inventory is indicative of goods inventory
turnover management. A low level of inventory turnover implies excessive inventory than required by
production and sales activities. A high level of sluggish inventory amounts to unnecessary tie up of
fund reduced profit and increased costs of maintenance.
b) DEBTORS TURNOVER RATIO:
Debtor turnover ratio indicate the number of times debtors turnover each year. Debtors
are convertible into cash over a short period and therefore are included in current assets. The
formula for calculating the debtor’s turnover ratio is
Sales
Debtor’s turnover =
Debtors
If Information regarding credit sales and debtors opening and closing balance is available
then these figures can be used for the calculation purpose, as they are more relevant.
C) FIXED ASSETS TURNOVER RATIO:-
Assets are generally used to general sale. Therefore a firm should manage its assets
efficiently to maximize sales. The relationship between sales and assets is called assets
turnover ratio. It can be calculated as follows

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Sales
Assets turnover ratio =
Net fixed assets
d) WORKING CAPITAL TURNOVER RATIO:-
Working capital turnover ratio indicates the efficiency or inefficiency in the utilization of
working capital in making sales. This ratio indicates the number of time the working capital
is turned over in the course of year. There is no standard / ideal working capital turnover
ratio.
This ratio can be calculated by the following formula.
Sales
Working capital turnover ratio =
Net working capital
The term net working capital means current assets minus current liabilities.
e) CAPITAL TURNOVER RATIO:-
The ratio indicates how efficiently the company has been able to contest its each rupee to
sales. The formula is as follows.
Sales
Capital turnover ratio =
Capital employed
Greater the ratio, the more efficiently, the capital employed in the business, is being
managed.

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f) CASH TURNOVER RATIO:-
Cash turnover ratio is the ratio between cash and turnover or sales. The formula for cash
turnover ratio as follows
Net sales
Cash turnover ratio =
Cash
Here, cash for the purpose means cash in hand and at bank and readily realizable investments
or securities. Turnover refers to the total annual sales (i.e. Cash sales plus credit sales)
effected during the year. However sales means net annul sales i.e. total sales minus sales
return.
USE OF CASH TURNOVER RATIO:-
This ratio indicates the extent to which cash resources are efficiently utilized by the
enterprise. It is also helpful in determining the liquidity of the concern. The standard ideal
cash turnover ratio is 10.1.
g) CURRENT ASSETS TURNOVER RATIO:-
Current assets turnover ratio is the ratio between current assets and turnover or sales (i.e. net
sales). The formula is as follows.
Net sales
Current assets turnover ratio =
Current assets

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PROFITABLITY RATIO:
Every business should earn sufficient profits to survive and grow over a long period of time.
Infect efficiency of a business is measured in term of profits. Profitability ratios are
calculated to measure the efficiency of a business. Profitability of a business may be
measured in two ways.
A). Profitability in relation to sales:-
It indicates the amount of profit per rupee of sales.
B). Profitability in relation to investment:-
Similarly in relation to investment indicates the amount of profit per rupee invested
in assets. If a company is not able to earn a satisfactory return on investment, it will not be
able to pay a reasonable return to its investors and the survival of the company may be
threatened.
Profitability ratios based on sales:-
1. Gross profit margin

2. Net profit margin
a) Net operating
b) Profit net profit ratio
3. Operating ratio
Gross profit margin:
The first profitability ratio in respect of sales is gross profit margin. It reflect the efficiency with
management produces each unit product. This ratio indicates the average spread between the costs of
goods sold to sales.
Sales - cost of goods sold
Gross margin ratio =
Sales

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Or
Gross profit
Gross marginal ratio =
Sales
A high gross profit margin ratio relative to the industry average implies that the firm is able
to produce at relatively lower cost.
On analyzing we find the high ratio can be due to any of the following reasons.
a) Higher sales prices, constant cost of goods sold.
b) Constant sale price, lower cost of goods sold.
c) A combination of both
d) Increase in the proportionate volume of higher margin items.
A low gross profit margin reflects higher cost of goods sold due to the firm’s inability to
purchase raw material at favourable terms, inefficient utilization of plant and machinery or
over investment in plant and machinery resulting in higher cost of production.
Net profit margin
Net profit is obtained when operating expenses, interest and taxes are subtracted from the
gross profit. The net profit margin ratio is calculated as

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Profit after taxes
Net profit margin = X 100
Sales
PROFITABILITY RATIOS BASED ON INVESTMENT:-
a. RETURN ON INVESTMENT
b. RETURN ON EQUITY
a. RETURN ON INVESTMENT (ROI):-
This is the most important test of profitability of a business, it measures the overall
profitability. It is ascertained by comparing profit earned and capital employed to earn it. It’s
calculated as follows.
Net profit before interest and taxes
ROI = X 100
Capital employed
LEVERAGE RATIOS:
Leverage ratio measure the relative interests of the owners and the creditors in an enterprise.
Leverage ratio indicate the relative interests of the owners and the creditors in an enterprise
further they measure the stake of the creditors as against the owners. The leverage ratios are
useful to the long term creditor’s owners and the management. Some of leverage ratios are as
follows:

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a) Debt equity ratio external internal ratio.
b) Proprietary ratio, equity ratio or net worth ratio.
c) Fixed assets to net worth ratio.
d) Solvency ratio
DEBT EQUITY RATIO:-
Debt equity ratio also known as external-internal equity is calculated to measure the relative
claims of the outsiders and the owners against the firm’s assets. This ratio indicates the
relationship between the external or the outsider’s funds and the internal equities or the
shareholder fund.
The debt equity ratio can be calculated in the basis of either of the following formulas.
Long term debts
Debt Equity Ratio =
Shareholders’ funds
Outsider’s funds / Shareholders funds
Or
External equity / internal equity
The ratio is calculated to judge effectiveness of the long-term financial policy of the business.
It also establishes relationship between the external and internal liabilities of the company.
External liabilities or equities means outside liabilities. Internal equity means shareholder

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funds. Generally a ratio of 1:1 between external and internal equities is supposed to be
satisfactory. Debt equity is a relationship between long-term loans and long-term funds.
PROPRIETARY RATIO:-
A variant to the debit-equity ratio is the proprietary ratio, which is also known as “equity
ratio”. This ratio establishes the relationship between shareholder’s funds to total assets of
the company. It is expressed as.
Shareholder’s fund
Proprietary ratio = X 100
Total assets
SOLVENCY RATIO:-
Solvency ratio is the between the total assets and the total liabilities of a concern.
Solvency ratio is, generally, expressed as a proportion it is expressed as follows:
Total assets
Solvency Ratio =
Total liabilities
Solvency is the measure of the concern. Measure of concern means the ability of a concern to
meet its total liabilities out of its total assets.
FIXED ASSETS NET WORTH RATIO:-
Fixed assets to net worth ratio as the name itself suggests, is the ratio, which expresses the
relationship between fixed assets and net worth. A fixed assets refers to assets like lands,
buildings, machinery, vehicles, furniture, etc. Which are used in the enterprise permanently.

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They do not include long-term investment on securities. Net worth as stated before means
owner’s funds the fixed assets to net worth ratio is usually, expressed as a proportion.
It is expressed as follows:
Net fixed Assets
Fixed assets net worth ratio =
Net worth

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CHAPTER-2
RESEARCH DESIGN OF THE STUDY
2.1 TITLE OF THE STUDY:-
A study on “Financial statement analysis using Ratio” at Sensong India pvt ltd in
Nelamangala industrial estate Bangalore”
2.2 STATEMENT OF THE PROBLEM
Financial statement alone are not enough to identify the progress of the company it has to be
further analysed to study the actual financial strength of it by using various techniques like
comparative statements, ratio analysis etc.
Here ratio analysis is used as a main technique to analyze the financial performance of the
company. This technique has been used to make a comparative study of financial reports of
previous four years and to find out the relative financial performance of the company.
2.3 Scope and Objectives of Study
1. To analyse the financial performance of the company over a period of four financial year.
2. To study the relative financial performance of the company.
3. To suggest certain measures through which the company can improve its financial
performance.
4. To measure the profitability and the financial strength of the company.
5. To measure the liquidity or the short-term solvency and to indicate whether the company
will be able to meet short-term solvency and to indicate whether the company will be able to
meet the short-term obligations out of its short resources.

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2.4 Methodology of study
The chapter primarily describes the methodology, tools, and instruments adopted in
conducting the present investigation. This being a financial research, it has been primarily
based on secondary data more than primary data.
Primary data of the study was collected by personally contacting the financial executive of
the company and other officials. Where in the company direct interview and discussion was
made regarding the analysis of the financial statement.
Secondary data is the data collected from the secondary sources like the company’s annual
reports and balance sheets, company website etc.,
The research instruments used in the analysis of the data collected in this study are various
ratios like current ratio, profitability ratio and turnover ratio etc.
2.5 Objectives:-
 To ascertain the financial health.
 To ascertain the liquidity position.
 To predict the financial health of the company.
 To summaries the findings & suggest the corrective action.
2.6 Limitation of study
Every effort has been made to make study complete and as exhaustive as possible, however
the study is not free certain limitations such as:-
 The study will be restricted only to Sensong India pvt ltd at Nelamangala
industrial estate, Bangalore.
 The time available is limited

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 The subject is vast the study is confined only to the main financial statement.
 The study is limited to analysis of the financial statement for 4 years only.
 Some information is not collected as it is confidential.
 Only ratios are used for financial analysis, which may not indicate the true
financial performance of the company.
 Detailed information was not provided by the officials.
 Due to time constraint detail analysis was not possible up to only four years is
taken for analysis.
 The performance analyse here been compared with company’s performance over
a small period of time and no relative study as compared to another players in the
industry has been done.
 Ratios are based on accounting figures given in the financial statements.

However accounting figures and themselves subject to deficiencies,
approximations and diversity in practice or even manipulation to some extent.
Therefore ratios are not very helpful in drawing reliable conclusions.
 The study has been completely done on the basis of secondary data.
2.7 Research Instrument
Ratios are well known and most widely used tools of financial analysis. A ratio gives
the mathematical relationship between one variable and another. Ratio analysis is a
technique of analysis and interpretation of financial statements. It is one of the most
powerful tools of financial analysis. It shows quantitative relationship of two
numbers. Two ratios are calculated for different parties or for assisting in making
certain important decisions. The ratios help in understanding financial strength and

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weakness of business organizations. There are number of ratios which can be
calculated from financial statement.
2.8 Research Measuring Tool
The tools used for data collection are
Personal Interview
The authenticity of the study would be more if, the information were collected through direct
interview. In this, discussions are held directly with the officials & section heads to get the
clear-cut information about the topic.
Secondary Sources
Annual company reports, Balance Sheets, Profit & Loss account & other literatures provided
by the company, textbooks & journals are also used to collect the data.
Further, data has been processed using various tools like,
 Comparative Statements
 Common-size Statements
 Trend Analysis
 Ratio Analysis
2.9 CHAPTER SCHEME
 CHAPTER.1 = introduction
 CHAPTER.2 = research design
 CHAPTER.3= company profile
 CHAPTER.4 = data analysis and interpretation
 CHAPTER.5 = findings suggestion and conclusion
 CHAPTER.6 = annexure
 CHAPTER.7 = biblography

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CHAPTER: 3 COMPANY PROFILE
PROFILE
Sensong started as a manufacturing unit at Bangalore in 2002, to make relays for enabling
electronic switching in telecom sector. Commitment and Passion to switching led to entry
into modular switches in 2003. Today Sensong has a team of 100 employees working in
10,000 sq.ft. Of manufacturing area with a network of committed Trade Partners in over 20
cities.
R & D wing launched successfully two series of most wanted switching devices and
innovate digital switching & control products aimed at providing smart lighting solutions. All
Sensong products including Wall art switches are designed for maximum reliability, keeping
versatility and safety of the users in mind.
Manufacturing facilities include state-of-the-art tool room, excellent molding shop, sheet
metal shop, and assembly line.
Quality control with extensive testing facilities compliments the set up which is ISO
9001:2000 compliant. State-of-the-Art-Tool-Room with best tool making machines sourced
from all over the world be it wire EDMs, spark EDMs or High speed Milling machines or the
conventional machines make the product design a reality. Processes like high speed milling
of the hardened steel avoid heat treatment process.
Molding shop is equipped with machines of high efficiency capable of delivering components
of consistent quality.
Assembly line is automated with online test equipment to ensure fast and quality output of
final products ready to occupy pride of place on walls all over.

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Quality control ensures products are designed, manufactured and tested in accordance with
present upgraded bureau of Indian Standard (BIS) IS 1293:1988 and IS 3854:1997 which are
in line with stringent IEC Standards. Testing done in-house and certified and marked by
external independent agencies put the stamp of Quality on these Wall-art Pride on the Wall
Products.
COMPANY HISTORY
The Company, First incorporated on 13th July 2002 as Sensing power pvt ltd , and was
converted into a Public Limited Company as SENSONG INDIA PVT LTD on 21st
December 2003. The Company was promoted by Mr. Mathew Joseph and Mrs. Mathew
Mary.
Sensong initially started assembling cradle relays with technology/plant/components

from Alcatel France.
The company continues in the business of manufacturing components for the telecom sector.
The company does not have any subsidiary company.
Sensong was promoted by Mr. Mathew Joseph and his son Jorge Joseph in the year 2007
-Phase 1 - for increasing the capacity from 7500 tons per annum to 9000 tons per annum
involving capital expenditure of Rs 30 million.
-Phase II - for increasing the capacity from 9000 tons per annum to 12000 tons per annum
involving capital expenditure of Rs 15 million.

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BOARD OF DIRECTORS
S.No Name Designation
1 Mr. Jorge Joseph Chairman and Managing director
2 Mrs. Stephen Director
3 Dr. Ranganathan Director
4 Mr. Krishna Kumar Director
5 Mr. A S Lakshmanan Director
6 Mr. S M Azeez Director
KEY EXECUTIVES
S.No Name Designation
1 Mr. Mustafa Kamal Compliance Officer
2 Mr. S Karthikeyan Finance Manager
Accounting policy of Sensong India Pvt Ltd
1. The Financial statements are prepared under the historical cost convention & comply in all
material aspects with the applicable accounting principles in India, accounting standards
notified under subsection (3C) of 211 of the Companies Act, 1956 & relevant provisions of
the Companies Act, 1956.

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2. Fixed Assets : Expenditure which are of capital nature are capitalized at cost, which
comprises of purchase price (net of rebates and discounts) import duties, levies and any
directly attributable cost of bringing the assets to its working condition for the intended use.
3. Depreciation: Depreciation is provided on written down value method on all assets except
machinery & tools for new projects which are being depreciated on straight line method at
the rates prescribed under schedule XIV. The depreciation on revalued cost of the assets are
being reduced from the revaluation reserve.
4. Foreign Currency transactions: Foreign Currency transactions on revenue accounts are

translated at the rates prevailing on the day when the expenses are incurred/ income earned.
Fluctuations on account of exchange rate differences are being debited/credited to revenue
account.
5. Revenue Recognition: Revenue is recognized at the point of dispatch of materials to

customers from stock points. Other income is accounted on accrual basis.
6. Inventories are valued at lower of cost or net realizable value after providing obsolescence,
if any. Cost of inventories comprises of cost of purchase, cost of conversion and other costs
incurred in bringing them to their respective present location and condition.
7. Investments: Long term Investments are valued at purchase cost. Provision for diminution
in the value of long-term investment is made only if such decline is other than temporary in
the opinion of the management.
8. Employee Benefits: \
a) Defined Contribution Plan
Companies contribution paid/payable during the year to the Employee Provident fund, ES1C,
Labour Welfare fund are recognized in the Profit and Loss Account
b) Defined Benefit Plan

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Gratuity: In accordance with applicable Indian laws, the Company provides for gratuity, a
defined benefit retirement plan (“Gratuity Plan”) covering all employees. The gratuity Plan
provides a lump sum payment to vested employees, at retirement or termination of
employment, an amount based on the respective employees last drawn salary and the years of
employment with the company. Liability with regards to Gratuity Plan is accrued based on
actuarial valuation at the balance sheet date, carried out by the Life Insurance Corporation of
India. Actuarial gain or loss is recognized immediately in the statement of profit and loss as
income or expense. The company has an employee’s gratuity fund managed by the Life
Insurance Corporation of India ("LIC").
c) Short term employee benefits are recognized as an expense at the undiscounted amount in
the Profit and Loss Account of the year in which the related service is rendered.
9. Taxes on Income: Current tax is determined as the amount of tax payable in respect of
taxable income for the period. Deferred tax is recognized, subject to the consideration of
prudence in respect of deferred tax assets, on timing differences, being difference between
taxable income and accounting income that originate in one period and are capable of
reversal in one or subsequent periods.
10. Impairment of Assets: An asset is treated as impaired when the carrying cost of the asset
exceeds its recoverable value. An impairment of loss is chargeable to the profit & loss
account in the year in which an asset is identified as impaired. The impairment loss
recognized in prior accounting period is reversed if there has been a change in estimate of
recoverable amount.

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11. Earnings per Share:
Basic/diluted earnings per share is calculated by dividing the net profit or loss for the year
attributable to equity shareholders (after deducting attributable taxes) by the weighted
average number of equity shares outstanding during the year.
12. Financial and Derivative Instruments
During the current year company has not entered into derivative/forward contracts.
13. Provisions’ provision is recognized when an enterprise has a present obligation as a result
of past event and it is probable that an outflow of resources will be required to settle the
obligation, in respect of which a reliable estimate can be made. Provisions are not discounted
to its present value and are determined based on management estimate required to settle the
obligation at the balance sheet date. These are reviewed at each balance sheet date and
adjusted to reflect the current management estimates.
VISION
1. To innovate, design and manufacture intelligent projects, system and solutions for
homes, office, Banks, Hotels, Theaters, Buildings industries etc.
2. To manufacture products that control lights, Heaters, Air conditions (LHAC), Access
safety and security.
3. To manufacture products for the longer life. With focus on comport, convenience,
energy saving and automation.
MISSION
1. To make good brand image

2. To make Toyama a competitive global player
3. To make a trusted brand committed to deliver quality products, systems, solutions
and services.

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SWOT ANALYSIS OF THE ORGANISATION
STRENGTHS
 There are continues improvement in the product in the product range for customer
satisfaction.
 Dealing with world class companies like GE, Motorola, Phillips, TI etc… From USA
and Europe.
 Wiring accessories are conceptualized, designed and value engineered in ‘State of
Arts’ design studio equipped with Pro_E software. Global manufacturing machines
from Germany and Switzerland and Kaizen driven assembly shop floor.
 The products are fire retardant polycarbonate and electric shock proof for safety.
 Adoption of new design products.
 Digital lighting and control solution.
 continuous R&D process for product development
WEAKNESS
 No marketing of the projects

 Not reachable to local market or local customers.
 Limited product sales countries. .
 High priced products ranges.
 No increase in product manufacturing.
 Lesser sales promotion activities
OPPORTUNITIES
 Customer has preference on new design products.
 The constructions of the housing sector are growing.

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 Demand for the quality assured products by Business organization. Star Hotel and
Hospitals etc..
 As technology is growing, demand for aesthetic electric products are also increasing.
 The company’s is endeavourer to benchmarks and upgrades its products to match the
onslaught of MNC competitors.
 The company is also on the outlook for export manufacturing and trying to explore
venues for the same.
THREATS
 High competition from MNC’s

 Getting sales order is very difficult.
COMPETITORS ANALYSIS:
Competition is one of the predominate role in the business world. The scope, strength
and capacity between competitors in particular product is different and varied in nature. The
healthy competition is required in business for quality and standard products and services or
desired customer in a market.
Competition can be uncared between two more competitors in a domestic industrial
world as well as international market. Now a day a company must be ready to compete both
in domestic and international marketing for getting name and frame in the industrial world.
The healthy competition between products results standard, quality with
consistent pricing policy

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PRODUCTS PROFILE OF THE SENSONG
A perfect blend of style variety and quality that's Wall art collection!
The collection is aimed to be just that - Pride on the wall. Place of pride it occupies always
matches the ambience setup aimed at. Little wonder people with a sense of class always
switch to perfectness through wall art. Besides being the perfect choice for elegant
ambiences, every switch is an icon of quality.
That is Toyama's world of switches awaiting discovery be discerning users.

Pristine White & Premium Textured Gray Switches are available with Plates of different
colours to suit every wall decor.

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CHAPTER: 04 DATA ANALYSIS AND INTERPRETATION
TABLE NO. 4.1
CALCULATION OF CURRENT RATIO:
Current assets
Current ratio =
Current liability
Years 2011-12 2012-13 2013-14 2014-15
Current 15,96,22,885 14,95,08,245 15,21,58,139 14,69,36,310
assets
Current 3,98,13,989 3,17,52,204 14,85,18,687 14,29,75,889
liabilities
Current 4.00 4.70 1.02 1.02
ratio
ANALYSIS:
The above table showing current ratio in the year 2011-12 & 2012-13 it was
4.00% & 4.70% respectively. There is gradual increase year by year. But in the year 2013-14
& 2014-15 it has decreased and constant i.e., 1.02%. Compared to previous year it has
decreased by3.68%.

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CHART NO.4.1
CALCULATION OF CURRENT RATIO
Current ratio
Current ratio
4.7
1.02 1.02
2011-2012 2012-2013 2013-2014 2014-2015
Interpretation:
From the above table it can be observed that the current ratio was 4.00 during the year
2011-12 and gradually increased to 4.70 and it is decreased to 1.02 in the year 2013-14 and
2014-15.

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TABLE NO. 4.2
CALCULATION OF QUICK RATIO
Current assets- inventories
Quick ratio =
Current liabilities
Years 2011-12 2012-13 2013-14 2014-15
Quick 8,03,87,908 9,45,53,705 10,84,85,499 7,84,96,409
assets
Current 3,98,13,989 3,17,52,204 14,85,18,687 14,29,75,889
liabilities
Quick 2.01 2.97 0.73 0.54
ratio
ANALYSIS:
The above table depicts information about quick ratio. In the year 2012-13 it has
increased by 2.97%. Where as in 2011-12, 2013-14 & 2014-15 it is 2.01%, 0.73% & 0.54%.

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CHART NO. 4.2
CALCULATION OF QUICK RATIO
Quick ratio
Quick ratio
2.97
2.01
0.73
2011-2012 0.54
2012-2013
2013-2014
2014-2015
ANALYSIS:
The above table depicts information about quick ratio. In the year 2012-13 it has
increased by 2.97%. Where as in 2011-12, 2013-14 & 2014-15 it is 2.01%, 0.73% & 0.54%.

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TABLE NO. 4.3
CALCULATION OF ABSOLUTE LIQUIDITY RATIO

Cash + marketable securities
Absolute Ratio =
Current liabilities
Years 2011-12 2012-13 2013-14 2014-15
Cash+ 82,38,534 58,31,467 37,18,305 39,64,773
marketable
security
Current 3,98,13,989 3,17,52,204 14,85,18,687 14,29,75,889
liabilities
Absolute 0.20 0.18 0.02 0.02
liquidity ratio
ANALYSIS:
From the above table which clear that the absolute liquidity ratio is gradually
decreasing year by year. Compare to all the years in 2011-12 it is high by 0.20% and there
was a decline.

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CHART NO. 4.3
CALCULATION OF ABSOLUTE LIQUIDITY RATIO
Absolute liquidity ratio

Absolute liquidity ratio
0.2
0.18
0.02
0.02
2011-2012
2012-2013
2013-2014
2014-2015
Interpretation:
Over the year it can be observed that absolute liquidity ratio was 0.20 during the year 2011-
12 and it is decreased to 0.18 and is continuously decreasing to 0.02 in the year 2013-14
and2014-15.

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TABLE NO. 4.4
CALCULATION OF FIXED ASSETS TURNOVER RATIO
Sales
Assets turnover ratio =
Net fixed assets
Years 2011-12 2012-13 2013-14 2014-15
Sales 69,28,72,588 74,89,87,373 77,68,95,202 1,06,83,98,016
Net fixed 5,72,86,711 6,18,07,716 6,89,68,607 8,39,90,602
assets
Ratio 12.09 12.11 11.26 12.72
ANALYSIS:
From the above table which shows the information about the fixed assets turnover
ratio. There are fluctuations in its level. But it is more in the year 2014-15 i.e., 12.72%
compared to previous years.

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CHART NO. 4.4
CALCULATION OF FIXED ASSETS TURNOVER RATIO
13
12.5
12
12.72
11.5
12.09 12.11
11
11.26
10.5
2011-2012 2012-2013 2013-2014 2014-2015
Fixed assets turn over ratio
Interpretation:
The above table states that the fixed asset turnover ratio was 12.09 during the year 2011-12
and increased to 12.11 in the year 2012-13 and decreased to 11.26 in the year 2013-14 and
increased to 12.72 in the year 2014-15.

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TABLE NO. 4.5
CALCULATION OF WORKING CAPITAL TURNOVER RATIO
Sales
Working capital turnover ratio =
Net working capital
Years 2011-12 2012-13 2013-14 2014-15
Sales 69,28,72,588 74,89,87,373 77,68,95,202 1,06,83,98,016
Net working 11,98,08,896 11,77,56,041 11,08,42,978 12,44,99,829

capital
Working 5.78 6.36 7.00 8.58

capital
turnover
ratio
ANALYSIS:
Above table which shows the information about working capital turnover ratio
with sales and net working capital. There is a gradual increase in the level of working capital
turnover ratio. It is more in the year 2014-15 i.e., 8.58% compared to all the years.

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CHART NO. 4.5
CALCULATION OF WORKING CAPITAL TURNOVER RATIO
Working capital turn over ratio

Working capital turn over ratio
8.58
7
6.36
5.78
2011-2012 2012-2013 2013-2014 2014-2015
Interpretation:
From the above table it can be absorbed that the working capital turnover ratio was 5.78
during the year 2011-12 and continuously increased to 6.36, 7.00and 8.58 in the year 2012-
13, 2013-14 and 2014-15.

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TABLE NO. 4.6
CALCULATION OF CASH TURNOVER RATIO
Net sales
Cash turnover ratio =
Cash
Years 2011-12 2012-13 2013-14 2014-15
Net sales 69,28,72,588 74,89,87,373 77,68,95,202 1,06,83,98,016
Cash 40,95,519 20,12,081 37,18,305 39,64,773
Ratio 169.17 372.24 208.93 269.47
ANALYSIS:
The above table depicts percentage of cash turnover ratio. It’s clear that there is
fluctuations in cash turnover ratio. But comparing all the years it’s more in the year 2012-13
i.e., by 372.24%.

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CHART NO. 4.6
CALCULATION OF CASH TURNOVER RATIO
cash turnover ratio

cash turnover ratio
372.24
169.17
208.93 269.47
2011-2012
2012-2013
2013-2014
2014-2015
Interpretation:
From the above table it can be absorbed that the cash turnover ratio was 169.17 in the year
2011-12 and increased to 372.24 in the year 2012-13 and decreased to 208.93 in the year
2013-14 and it is increased in the year 2014-15.

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TABLE NO. 4.7
CALCULATION OF CURRENT ASSETS TURNOVER RATIO
Net Sales
Current assets turnover ratio =
Current assets
Years 2011-12 2012-13 2013-14 2014-15
Net sales 69,28,72,588 74,89,87,373 77,68,95,202 1,06,83,98,016
Current 15,96,22,885 14,95,08,245 15,21,58,139 14,69,36,310

assets
Current 4.34 5.00 5.10 7.27

assets
turnover
ratio
ANALYSIS:
From the above table which depicts that the information about current assets
turnover ratio. Above table which clear that in the year 2014-15 it has increased by 7.27%
comparing with other years 2011-12, 2012-13 & 2013-14 with 4.34%, 5.00% & 5.10%
respectively.

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CHART NO. 4.7
CALCULATION OF CURRENT ASSETS TURNOVER RATIO
current assets turn over ratio

current assets turn over ratio
7.27
5 5.1
4.34
2011-2012 2012-2013 2013-2014 2014-2015
Interpretation:
During the year 2011-12 the current assets turnover ratio was 4.34 and it is continuously
increased to 5.00, 5.10 and 7.27 in the respected years 2012-13, 2013-14 and 2014-15.

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TABLE NO. 4.8
CALCULATION OF FIXED ASSETS NET WORTH RATIO

Net fixed assets
Fixed assets net worth ratio =
Net worth
Years 2011-12 2012-13 2013-14 2014-15
Net fixed 5,72,86,711 6,18,07,716 6,89,86,607 8,39,90,602

assets
Net worth 8,06,53,382 8,51,27,795 9,24,60,719 10,32,88,863
Ratio 0.71 0.72 0.74 0.81
ANALYSIS:
The above table depicts the information about fixed assts net worth ratio for last
four years. The ratio has increased gradually year by year. In the year 2011-12, 2012-13,
2013-14 & 2014-15 it is 0.71%, 0.72%, 0.74%, & 0.81% respectively.

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CHART NO. 4.8
CALCULATION OF FIXED ASSETS NET WORTH RATIO
fixed assets worth ratio

0.82
0.81
0.8
0.78
0.76
0.74 0.74
fixed assets worth ratio
0.72 0.72
0.71
0.7
0.68
0.66
2011-2012 2012-2013 2013-2014 2014-2015
Interpretation:
The fixed assets turnover was 0.71 during the year 2011-12 and it has continuously increased
to 0.72, 0.74 and 0.81 in the years 2012-13, 2013-14 and 2014-15.

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TABLE NO. 4.9
CALCULATION OF CAPITAL TURNOVER RATIO

Sales
Capital turnover ratio =
Capital employed
Years 2011-12 2012-13 2013-14 2014-15
Sales 69,28,72,588 74,89,87,373 77,68,95,202 1,06,83,98,016
Capital 87,724,835 9,02,60,742 9,63,10,396 9,66,21,250

employed
Ratio 7.89 8.29 8.06 11.05
ANALYSIS:
From the above table which shows the information about capital turnover ratio with
sales and capital employed. The ratio is increasing gradually year by year. In the year 2014-
15 it is 11.05% compared with all other years.

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CHART NO. 4.9
CALCULATION OF CAPITAL TURNOVER RATIO
capital turn over ratio

capital turn over ratio
11.05
7.89 8.29 8.06
2011-2012 2012-2013 2013-2014 2014-2015
Interpretation:
During the year 2011-12 the capital turnover ratio was 7.89 and it is increased to 8.29 in the
year 2013-14 and decreased in the year 2013-14 to 8.06 and 11.05 in the year 2014-15.

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TABLE NO. 4.10
CALCULATION OF NET PROFIT MARGIN RATIO

Net profit after tax
Net profit margin ratio = *100
Sales
Years 2011-12 2012-13 2013-14 2014-15
Net profit 50,99,140 44,74,413 73,32,923, 1,08,28,143

after tax 69,28,72,588 74,89,97,588 77,68,95,202 1,06,83,98,016
X 100
sales
Ratio 0.05 0.73 0.59 0.94
ANALYSIS:
The above table depicts the information about net profit margin with the help of
net profit after tax and sales. The level of ratio is increasing year by year gradually.

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CHART NO. 4.10
CALCULATION OF NET PROFIT MARGIN RATIO
70
60
57 57 58
55
50 50
40
38
34
30
25
20
12 13
10 11 11
0 0.05 0.73 0.59 0.94

2011-2012 2012-2013 2013-2014 2014-2015
Interpretation:
From the above table it can be absorbed that net profit ratio was 0.73 in the year 2011-12 and
it is decreased to 0.59 in the year 2012-13 and continuously increased to 0.94 and 1.01 in the
years 2013-14 and 2014-15.

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TABLE NO. 4.11
CALCULATION OF GROSS PROFIT MARGIN RATIO
Gross profit
Gross profit margin ratio = *100
Sales
Years 2011-12 2012-13 2013-14 2014-15
Gross profit 1,57,97,700 1,67,37,880 1,03,05,805 1,67,44,549

/sales X 100 74,89,87,373
69,28,72,588 77,68,95,202 1,06,83,98,016
Ratio 0.02 0.02 0.01 1.56
ANALYSIS:
Above table which shows the information about gross profit margin with the help
of gross profit / sales X 100.The ratio of gross profit margin is constant for two years and
again there are fluctuations in its level.

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CHART NO. 4.11
CALCULATION OF GROSS PROFIT MARGIN RATIO
Gross profit margin ratio

Gross profit margin ratio
1.56
0.02 0.02 0.01

2011-2012 2012-2013 2013-2014 2014-2015
Interpretation:
From the above it can be absorbed that gross profit ratio was 0.02 and in the year 2011-12
and it remains same in 2012-13 and it decreased to 0.01 in the year 2013-14 and it is
increased to 1.56 in the year 2014-15.

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TABLE NO. 4.12
CALCULATION OF RATE OF INTEREST RATIO
Profit before interest and tax
Rate of interest ratio = * 100
Capital employed
Years 2011-12 2012-13 2013-14 2014-15
Profit before 1,57,97,700 1,67,37,880 1,03,05,805 1,67,44,549

int & tax X 8,77,24,835 9,02,60,742 9,63,10,396 9,64,10,397
100
Capital
employed
Ratio 18.00 18.54 10.70 17.37
ANALYSIS:
The above table which depicts the information about the return on investment
with profit before interest and tax X 100 and capital employed. It is clear that there is
fluctuations in its level but in the year 2012-13 the ratio is increased i.e., 18.54% comparing
with all other years.

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CHART NO. 4.12
CALCULATION OF RATE OF INTEREST RATIO
100%
90%
80%
70%
60%
18 18.54 10.7 17.37
50%
40%
30%
20%
10%
0%
2011-2012 2012-2013 2013-2014 2014-2015
ROI ratio
Interpretation:
During the year 2011-12 the return on investments ratio was 18.00 and it is increased to 18.54
in the year 2012-13 and it is decreased to 10.70 during the year 2013-14 and increased to
17.37 in the year 2014-15.

Page66
TABLE NO. 4.13
CALCULATION OF EARNING PER SHARE RATIO

Net profit before tax
Earnings per share =
No of equity share
Years 2011-12 2012-13 2013-14 2014-15
NPAT 50,99,140 44,74,413 73,32,923 1,08,28,143

30,02,900 30,02,900 30,02,900 30,02,900
No of
Equity
share
Ratio 1.79 1.49 2.44 0.36
ANALYSIS:
From the above table which gives the information about earning per share with net
profit after tax and no of equity share. There are fluctuations in its level in the year 2014-15 it
has decreased by 0.36%comparing to other year.

Page67
CHART NO. 4.13
CALCULATION OF EARNING PER SHARE RATIO
2013-2014,
2012-2013, 1.49 2.44
Other, 0.36
2011-2012, 1.79
2014-2015, 0.36
Interpretation:
During the year 2011-12 the earning per share was 1.79 and it is decreased to 1.49 in the year
2012-13 and it is increased to 2.44 in the year 2013-14 and again decreased in the year 2014-
15 to 0.36.

Page68
FINDINGS, SUGGESTIONS AND CONCLUSIONS
FINDINGS:
1. It is found that the company is conservative, sourcing most of its fund out of the
owner’s equity and borrowing a very nominal amount of funds outsiders.
2. The company has got sufficient amount of current assets to meet its short-term
obligations. After analysing the balance sheet it was found that the loans and advances
granted by the company’s liquidity position is good and it has been able to keep a
proper balance between the current assets and current liabilities.
3. On analyzing the ratio it was found that the company has been able to maintain
sufficient amount of liquid assets to pay of its short-term liabilities without much of
difficulties.
4. It is found that the company maintains a low amount of cash balance to meet its
current obligations.
5. The ratios suggest that large amount of owners capital has been used to finance fixed
assets.
6. It is found that the company has been able to increase its inventory utilization to a
great extent over the years. The reasons for this can decrease in number of days of
operating cycle by adopting new technologies.
7. On analyzing balance sheet it is found that the company has been efficiently
managing its accounts receivables. The company has been able to increase its amount
of credit sales to a great extent.
8. The capital turnover ratio has been fluctuating over a period of time. The contribution
of total capital employed to sales is not up the desired level.
9. There is also increased in net profit margin showing that the company can manage the
expenses incurred with profitability.

Page69
10. The firm’s working capital turnover ratio has become high. It shows that there is high
optimum utilization of working capital.
SUGGESTIONS
1. The company should try and invest in some profitable ventures rather than keeping its
assets liquid to meet its current obligations. It should identify new opportunities and invest in
the same because it has got more than enough assets to meet its obligations.
2. The research and development department should reduce the time taken for manufacturing
cycle of the product. This may need implementation or consumption of better technology that
can save time and improve the quality of products.
3. The company is a conservative one funding most of its assets through equity shareholders’
funds. This may not given the company a good financial leverage or trading on equity
benefits. The company should try to increase the amount of borrowed funds to get the
advantage of trading on equity.
4. The company should adopt new technolo0gy and improve the quality of its products so as
meet the stiff competition being posed by the local and foreign players.
5. The company should see the absolute liquid ratio; each year decreasing the company has to
improve the cash and current liabilities.
6. The company should try to get more customers apart from the existing. From related
industries that will help in increasing its99 sales as well as its market share.
7. It need to cut down its cost of goods sold, decrease cost of production, and try to get raw
material at low cost so that it can increase its gross profit margin.
8. The company should use the shareholders funds efficiently instead of going for loans.
9. The company should maintain well trained, qualified employees which a big assets to
company.

Page70
10. based on demand and competition company must operate its price strategy.
11. The company should go for economic purchases to reduce the cost of production and sold
goods.
CONCLUSION:
Various techniques are used in analysis of the financial date to emphasis. The comparative
and relative importance of the data presented and evaluates the position of company. The
techniques of ratio analysis are intended to show the performance analysis of the Sensong
India pvt ltd ,From the above ratio calculated it could be easily concluded that the company’s
financial condition is good and it has been able to improve its performance.
Ratios are the guide or shortcuts that are useful in evaluating the financial position and
operation of a company and in comparing them with the previous year. The primary purpose
of the ratio’s to point out the areas for further investigation. They should be used in
connection with a general understanding of the company and its environment.

Page71
ANNEXURE
BALANCE SHEET AS AT 31ST MARCH 2012
2012 (Rs.)
SOURCES OF FUNDS
SHAREHOLDERS’S FUND
Equity share Capital 3,00,29,000
Reserves and surplus 5,06,24,382
Total 8,06,53,382
LOAN FUNDS
Add: Secured Loans 9,18,09,746
Unsecured Loans 70,85,793
Deferrer tax liability (Net) 45,17,330
Total Sources 18,40,66,251
APPLICATION OF FUNDS
Fixed assets 11,03,14,463
Less: Accumulated Depreciation 5,96,43,122
Net Book Value 5,06,71,341
Add: Capital working progress including capital advances 66,15,370
Total 5,72,86,711
INVESTMENTS
Immovable Properties 28,27,629
Investment in Securities 41,43,015
Total 69,70,644
CURRENT ASSETS, LOAN & ADVANCE
Inventories 7,92,34,977
Sundry debts 4,97,41,615
Cash and bank balances 40,95,519
Loans & advances 2,65,50,774
Gross Current Assets 15,96,22,885
LESS: CURRENT LIABILITIES & PROVISIONS
Current Liabilities 3,67,83,632
Provisions 30,30,357
Total 3,98,13,989
NET CURRENT ASSETS 11,98,08,896
Total Applications 18,40,66,251

Page72
BALANCE SHEET AS AT 31ST MARCH, 2013

2013(Rs.)
SOURCES OF FUNDS
SHAREHOLDER’S FUNDS
Equity share capital 30029000
Reserves and surplus 55098795
Total 85127795
LOAN FUNDS
Add: Secured loans 91005092
Unsecured loans 5170987
Deferrer tax liability (Net) 4924579
Total sources 186228453
APPLICATION OF FUNDS
Fixed assets 122405813
Less: Accumulated Depreciation 64098097
Net Book value 60107716
Add: Capital Working Progress including capital advances 1700000
Total 61807716
INVESTMENTS
Immovable Properties 2845309
Investments in Securities 3819386
Total 6664695
CURRENT ASSETS, LOANS & ADVANCES
Inventories 54954540
Sundry debtors 58700140
Cash and bank balances 2012081
Loans & advances 33840583
Gross Current Assets 149508245
LESS: CURRENT LIABILITIES & PROVISIONS
Current Liabilities 27956109
Provisions 3796095
Total 31752204
NET CURRENT ASSETS 117756041
Total Applications 186228453

Page73

2014(RS.)
SOURCES OF FUNDS
SHAREHOLDERS’S FUND
Equity share Capital 30029000
Reserves and surplus 62431719
Share Application money Pending Allotment
Non-current liabilities
Long-term borrowings
5753703
Deferred tax liability
5660760
Current liability
Short term borrowings
107203526
Trade payables 36671510
Other Current Liabilities
1657651
Short term provisions 2986000
Total 252393869
Assets
Non-current Assets
Fixed Assets
Tangible Assets
67268607
Capital work-in-progress 1700000
Non-current Investments 7488994
Long-term loans and advances 11554570
Other Non-current assets
12223561
CURRENT ASSETS
Inventories 8177917
Trade receivables
43672640
Cash and cash Equivalents
3718305
Short-term Loans & Advances
14323338
Other Current Assets 8663939
Total 252393869

Page74

2015(RS)
SOURCE OF FUND
SHAREHOLDER’S FUND
Equity share capital 3,00,29,000
Reserves and surplus 7,32,59,863
Share Application Money Pending Allotment
Non-Current assets
Long-Term Barrowings 4360969
Deferred tax Liabilities 66,00,823
Current liabilities
Short-Term Barrowings 12,05,39,408
Trade payables 1,51,07,862
Other current Liabilities 17,46,427
Short-Term Provisions 55,82,192
TOTAL 25,72,26,544
ASSETS
Fixed Assets
Tangible Assets 8,39,90,602
Non-Current investments 74,88,993
Long term loans and advances 1,88,10,639
CURRENT ASSETS
Current Investments
Inventories 6,84,39,901
Trade Receivables 6,51,30,292
Cash and Cash Equivalents 39,64,773
Short Term Loans And Advances 73,47,992
Other Current Assets 20,53,352
TOTAL 25,72,26,544

Page75
BIBLOGRAPHY
SL.NO NAME OF THE AUTHORS PUBLICATIONS

BOOK
1. Management M.N.Arora Himalaya

accounting publishing house
2. Financial management Kulakarni Himalaya

publishing house
3. Cost and financial Jawaharlal Himalaya

analysis publishing house
4. Cost and management S.P.Jain & Kalyani publishing

accounting house
K.L.Narang

Page76
CONTACT INFORMATION
INDIA
BANGLORE
SENSONG INDIA PVT LTD
NO. 56-B, NELAMANGALA INDUSTRIAL ESTATE
BANGLORE RURAL-562123
TEL PH- 25623542, 25653423.

Fax: +91 8050785976 / 8553647895
Email: 1Kantha536@ gmail.com

Page77

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A STUDY ON FINANCIAL STATEMENT ANALYSIS USING RATIOS

(a) INTRODUCTION TO FINANCE:

(b) BUSINESS FINANCE

conservation of capital funds in meeting financial needs and overall objectives of

“Finance deals primarily with raising, administration and disbursing funds by

privately owned business units operating in non -financial fields of industry”.

SREE VENKATESHWARA COLLEGE OF SCIENCE AND MANAGEMENT STUDIES

“Finance can be broadly defined as activity and administration of funds used in

(d) FINANCIAL MANAGEMENT

.Financial Management refers to the efficient and effective management of money

(funds) in such a manner as to accomplish the objectives of the organization. It is the

deals with the dividend policies of the share holders.

“Financial management is the area of business management devoted to a judicious use

of capital and a careful selection of sources of capital in order to enable a business

firm to move in the direction of reaching its goals.” by J.F.Bradlery.

SREE VENKATESHWARA COLLEGE OF SCIENCE AND MANAGEMENT STUDIES

(f) IMPORTANCE OF FINANCIAL MANAGEMENT

finance is essential for both profit and non-profit oriented

spending, measuring costs and inventory control, accounts

 Financial management also help in ascertaining how the company would

(g) FINANCIAL ANALYSIS

the firm. It is done by establishing relationships between the items of financial

finance-related entities to determine their suitability for investment. Typically,

SREE VENKATESHWARA COLLEGE OF SCIENCE AND MANAGEMENT STUDIES

statement. In addition, one key area of financial analysis involves extrapolating t he

company's past performance into an estimate of the company's future performance.

(h) FINANCIAL ANALYST

A financial analyst, securities analyst, research analyst, equity analyst, or investment

core part of the job.

(i) DEFINITION OF FINANCIAL ANALYSIS

According to Myers , “ Financial Analysis is largely a study of the relationship among

the various financial factors in a business as disclosed by a single set of statements

and a s t ud y of t ren d of t hese fact ors a s shown i n a seri es of st at em ent ”.

(j) OBJECTIVES OF FINANCIAL ANALYSIS

1. Assessment of Past Performance

Past performance is a good indicator of future performance. Investors or creditors are

management's past performance and are possible indicators of future performance.

SREE VENKATESHWARA COLLEGE OF SCIENCE AND MANAGEMENT STUDIES

2. Assessment of current position

3. Prediction of profitability and growth prospects

alternatives and other users in judging earning potential of business enterprise.

4. Prediction of bankruptcy and failure

Financial statement analysis is an important tool in assessing and p redicting

bankruptcy and probability of business failure.

5. Assessment of the operational efficiency

Financial statement analysis helps to assess the operational efficiency of the

indicator of efficiency of the management.

(k) TOOLS OF FINANCIAL ANALYSIS

 Comparative Financial Statement

SREE VENKATESHWARA COLLEGE OF SCIENCE AND MANAGEMENT STUDIES

Comparative Financial Statement

Comparative study of financial statements is the comparison of the financial

identification of weak points and applying corrective measures. Practically, two

comparative form for analysis purposes.

comparative statement lines up a section of the income statement, balance sheet or

the trend in the financials.

COMMON SIZE FINANCIAL STATEMENT

A company financial statement that displays all items as percentages of a common

companies or between time periods of a company. A common size balance sheet

statement expresses each income statement Category as a percentage of total sales

SREE VENKATESHWARA COLLEGE OF SCIENCE AND MANAGEMENT STUDIES

TREND ANALYSIS FUND FLOW STATEMENT

Trend Analysis is the practice of collecting information and attempting to spot a

pattern, or trend, in the information. Trend analysis is the process of comparing