Digjam Textiles

Sumana D.
Baliga Financial Management

101202139
Company
Profile
1
Sumana D.Baliga Financial Management
101202139
Digjam Textiles
About Digjam:-
DIGJAM Limited, an S K Birla Group Company, began its activites nearly 60 years
back in Jamnagar, Gujarat. Since then, it has been catering to the ever-growing demands of
the Clothing and Fashion industry, in the domestic as well as the international markets.
Digjam Limited is a leading textile company in India, manufacturer of fabrics for suiting
and casual wear. In recent years, the company restructured its business portfolios to focus as
a textile company manufacturing and marketing fabrics and ready-to-wear clothing under its
own brands.
A complete vertically integrated plant, Digjam has ultra modern production facilities to convert
wool tops to finished fabrics through different processes of Dyeing, Spinning, Weaving and
Finishing using state-of-the-art machinery imported from France, Germany, Switzerland and
Italy. Stringent quality checks at every stage and process enabled Digjam to bag the
prestigious ISO 9001 certification. Keeping pace with the complex requirements of the
industry, Digjam expanded its production capacity to over 5 million meters, of which 35%-40%
(approximately) is exported to major countries across the globe. The present study deals
with the Study of Liquidy,Productivity viz a viz. Financial Efficiency of Birla Group of
Companies, which are mainly engaged in production of Cement,
Textiles, Automobile, Alluminium Products, Engineering, Tea,Agri Products and Paper
etc. This study is aimed at exploring theliquidity, productivity viz a viz-financial
efficiency of Birla Group of Companies. The Birla Group of Companies played an
important and Multi dimensional role of uplifting and taking our country out of
lamentable state of industries we experienced soon after independence. Our overall
progress and around prosperity owe agreat deal to the multifaced role performed by
some of very important Birla companies. The aim is to know how the BirlaGroup’ s
have utilized their resources and to study liquidity,
productivity, financial efficiency, and to make the analysis of activity and financial
structure and their contribution to the upliftment and betterment of the society.Digjam
Limited is an India-based textile company. The Company is engaged in manufacturing of
fabrics for suiting and casual wear. The Company operates in the worsted textile segment and
runs a composite mill manufacturing worsted fabrics at Jamnagar, Gujarat. The Company's
products include woven fabric of combed wool or combed fine animal hair mixed mainly or
solely with manmade staple fiber, woolen and worsted weaving yarn, and men's and ladies
garments. During the fiscal year ended September 30, 2010, the Company produced
53,38,020 meters of cloth, 23958 pieces of blankets and shawls and 11,175 kilogram of yarn
for sale. As of September 30, 2010, the Company had an installed capacity of 14,800 worsted
spindles, 98 looms and 13,05,000 kilogram wool combing per annum. Its clients include Aditya
Birla Nuvo, Airport Authority of India, Assam Rifles, Bombay Hospital, Gujarat State Fertilizer
Corporation, Birla Institute of Technology and Tata Timken Ltd.
2
101202139
3
101202139
RATIO
ANALYSIS
Introduction to Ratio Analysis:-

The Balance Sheet and the Statement of Income are essential, but they are only the starting point for successful
financial management. Apply Ratio Analysis to Financial Statements to analyze the success, failure, and
progress of your business. Therefore investors and business analysts use ratio analysis to evaluate the
performance and financial position of ta company and to forecast the future performance in order to value the
equity of the company
Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance
and condition with the average performance of similar businesses in the same industry. To do this compare your
ratios with the average of businesses similar to yours and compare your own ratios for several successive years,
watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important
early warning indications that allow you to solve your business problems before your business is destroyed by
them. Ratios analysis is the process of determining and presenting in arithmetical terms the relationships figures
and groups of figures drawn from these statements. A ratio expresses the results on the basis of comparison of
two figures in numerical terms.A ratio is a statistical yardstick that provides a measure of relationshipbetween two
accounting figures. According to Batty “Accounting ratios describe the significant relationship which exists
between figures shows on a balance sheet in a profit and loss account in a budgetary control system or in
CONCEPTUAL FRAMEWORK any other part of accounting organization.”
Advantages of Ratio Analysis:-
Ratio analysis is an important tool for the financial statement analysis.. In this assignment, we are going to
analyse the financial status of the Digjam Textiles Industries ltd. The five year financial data of the company has
been taken into consideration and the ratios for all the years have been calculated. The four major categories of
4
101202139
ratios that are: liquidity ratios, leverage ratios, activity ratios and profitability ratios are calculated for the last five
year’s financial data.
The financial status of the company is evaluated by understanding the meaning, caution, narration and
interpretation of the ratios.
The Du-Pont analysis and Multiple Discriminant analysis have been done to know the profitability of the
company.
The ratios will help the company the ability to meet its current obligations, the extent to which the firm has used
its long-term solvency by borrowing funds, the efficiency with which the firm is utilizing its assets in generating
sales, revenues, and the overall operating efficiency and performance of the firm.
This assignment help us how to know the financial status of any company and shows how important the financial
ratios are. By using this method we can know the strengths and weakness of any company and helps the traders,
investors and shareholders to know about the financial performance of the company
Balance Sheet Ratio Analysis
Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay its bills as they come
due) and leverage (the extent to which the business is dependent on creditors' funding). They include the
following ratios:
Liquidity Ratios
These ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, and
Working Capital.
Current Ratios
The Current Ratio is one of the best known measures of financial strength. It is figured as shown below:
Current Ratio = Total Current Assets / Total Current Liabilities
The main question this ratio addresses is: "Does your business have enough current assets to meet the payment
schedule of its current debts with a margin of safety for possible losses in current assets, such as inventory
shrinkage or collectable accounts?" A generally acceptable current ratio is 2 to 1. But whether or not a specific
ratio is satisfactory depends on the nature of the business and the characteristics of its current assets and
liabilities. The minimum acceptable current ratio is obviously 1:1, but that relationship is usually playing it too
close for comfort.
If you feel your business's current ratio is too low, you may be able to raise it by:
• Paying some debts.
• Increasing your current assets from loans or other borrowings with a maturity of more than one year.
• Converting non-current assets into current assets.
• Increasing your current assets from new equity contributions.
• Putting profits back into the business.
Quick Ratios
The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figured
as shown below:
Quick Ratio = Cash + Government Securities + Receivables / Total Current Liabilities
The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it
concentrates on the really liquid assets, with value that is fairly certain. It helps answer the question: "If all sales
revenues should disappear, could my business meet its current obligations with the readily convertible `quick'
funds on hand?"
5
101202139
An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets" are in accounts
receivable, and the pattern of accounts receivable collection lags behind the schedule for paying current
liabilities.
Working Capital
Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive
number. It is calculated as shown below:
Working Capital = Total Current Assets - Total Current Liabilities
Bankers look at Net Working Capital over time to determine a company's ability to weather financial crises. Loans
are often tied to minimum working capital requirements.
A general observation about these three Liquidity Ratios is that the higher they are the better, especially if you
are relying to any significant extent on creditor money to finance assets.
Leverage Ratio
This Debt/Worth or Leverage Ratio indicates the extent to which the business is reliant on debt financing (creditor
money versus owner's equity):
Debt/Worth Ratio = Total Liabilities / Net Worth
Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business, making it
correspondingly harder to obtain credit.
Income Statement Ratio Analysis
The following important State of Income Ratios measure profitability:

Gross Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the cost of goods sold from net sales. It
measures the percentage of sales dollars remaining (after obtaining or manufacturing the goods sold) available to
pay the overhead expenses of the company.
Comparison of your business ratios to those of similar businesses will reveal the relative strengths or
weaknesses in your business. The Gross Margin Ratio is calculated as follows:
Gross Margin Ratio = Gross Profit / Net Sales
Reminder: Gross Profit = Net Sales - Cost of Goods Sold
Net Profit Margin Ratio
This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold and all expenses, except
income taxes. It provides a good opportunity to compare your company's "return on sales" with the performance
of other companies in your industry. It is calculated before income tax because tax rates and tax liabilities vary
from company to company for a wide variety of reasons, making comparisons after taxes much more difficult.
The Net Profit Margin Ratio is calculated as follows:
Net Profit Margin Ratio = Net Profit Before Tax / Net Sales
Management Ratios
Other important ratios, often referred to as Management Ratios, are also derived from Balance Sheet and
Statement of Income information.
Inventory Turnover Ratio
This ratio reveals how well inventory is being managed. It is important because the more times inventory can be
turned in a given operating cycle, the greater the profit. The Inventory Turnover Ratio is calculated as follows:
6
101202139
Inventory Turnover Ratio = Net Sales / Average Inventory at Cost

Accounts Receivable Turnover Ratio
This ratio indicates how well accounts receivable are being collected. If receivables are not collected reasonably
in accordance with their terms, management should rethink its collection policy. If receivables are excessively
slow in being converted to cash, liquidity could be severely impaired. Getting the Accounts Receivable Turnover
Ratio is a two step process and is is calculated as follows:
Daily Credit Sales = Net Credit Sales Per Year / 365 (Days)
Accounts Receivable Turnover (in days) = Accounts Receivable / Daily Credit Sales
Return on Assets Ratio
This measures how efficiently profits are being generated from the assets employed in the business when
compared with the ratios of firms in a similar business. A low ratio in comparison with industry averages indicates
an inefficient use of business assets. The Return on Assets Ratio is calculated as follows:
Return on Assets = Net Profit Before Tax / Total Assets
Return on Investment (ROI) Ratio
The ROI is perhaps the most important ratio of all. It is the percentage of return on funds invested in the business
by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been
worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings
account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the
daily struggles of small business management. The ROI is calculated as follows:
Return on Investment = Net Profit before Tax / Net Worth
These Liquidity, Leverage, Profitability, and Management Ratios allow the business owner to identify trends in a
business and to compare its progress with the performance of others through data published by various sources.
The owner may thus determine the business's relative strengths and weaknesses.
7
101202139
Balance
Sheet
8
101202139
P& L
Account
Calculated
Ratios
Balane Sheet
Year Sep Mar Mar Mar Mar
9
101202139
10 09 08 07 06
SOURCES OF FUNDS :
Share Capital 95.26 88.76 68.76 68.76 43.76
- - -
137.5 125.9 117.8
Reserves Total -93.41 3 7 6 -95.17
Equity Share Warrants 0 0 0 0 0
Equity Application Money 0 0 0 0 0
- - -
Total Shareholders Funds 1.85 48.77 57.21 -49.1 51.41
127.8 133.0 138.8 211.9
Secured Loans 53.15 4 2 4 3
Unsecured Loans 23.1 18.82 29.15 26.54 30.59
146.6 162.1 165.3 242.5
Total Debt 76.25 6 7 8 2
104.9 116.2 191.1
Total Liabilities 78.1 97.89 6 8 1
APPLICATION OF FUNDS :
248.9 249.7 252.0 257.6
Gross Block 3 8 251.4 5 3
193.9 187.3 184.2 178.1 173.0
Less : Accumulated Depreciation 6 7 1 9 9
Less:Impairment of Assets 0.12 0.23 0.23 0.23 0
Net Block 54.85 62.18 66.96 73.63 84.54
Lease Adjustment 0 0 0 0 0
Capital Work in Progress 0.05 0.28 0.08 0 0.08
Investments 0 4.41 4.42 4.42 70.9
Current Assets, Loans & Advances
Inventories 38.7 39.85 45.01 43.71 40.75
Sundry Debtors 24.88 31.57 26.42 24.54 24.6
Cash and Bank 2.13 0.61 2.21 4.34 29.3
Loans and Advances 13.87 13.92 14.5 13.79 21.24
115.8
Total Current Assets 79.58 85.95 88.14 86.38 9
Less : Current Liabilities and
Provisions
Current Liabilities 52.53 50.06 50.18 44.01 64.02
Provisions 3.85 4.87 4.46 4.14 16.28
Total Current Liabilities 56.38 54.93 54.64 48.15 80.3
Net Current Assets 23.2 31.02 33.5 38.23 35.59
Miscellaneous Expenses not written
off 0 0 0 0 0
Deferred Tax Assets 0 0 0 0 0
Deferred Tax Liability 0 0 0 0 0
10
101202139
Net Deferred Tax 0 0 0 0 0

104.9 116.2 191.1
Total Assets 78.1 97.89 6 8 1
Contingent Liabilities 0.06 0.82 0.84 0.83 13.49
http://www.capitaline.com
Industry :Textiles - Worsted Fabric
(Rs in Crs)
Sep Mar Mar Mar Mar
Year 10(18) 09(12) 08(12) 07(12) 06(3)
INCOME :
181.0 136.9 107.8 105.8
Sales Turnover 9 1 1 1 29.35
Excise Duty 0 0 0 0 0
181.0 136.9 107.8 105.8
Net Sales 9 1 1 1 29.35
Other Income 68.52 5.92 15.29 7.4 4.38
Stock Adjustments -1.89 -3.28 2.31 3.08 1.42
247.7 139.5 125.4 116.2
Total Income 2 5 1 9 35.15
EXPENDITURE :
Raw Materials 84.11 61.68 48.65 41.2 9.85
Power & Fuel Cost 22.53 15.59 12.45 13.34 3.15
Employee Cost 25.71 18.02 19.07 20.03 4.36
Other Manufacturing Expenses 19.59 14.01 13.31 14.23 4.36
Selling and Administration Expenses 28.91 22.66 21.48 19.47 5.34
Miscellaneous Expenses 0 0 0 0 0
Less: Pre-operative Expenses
Capitalised 0 0 0 0 0
182.8 117.6
Total Expenditure 8 133.8 9 121.9 30.31
Operating Profit 64.84 5.75 7.72 -5.61 4.84
Interest 13.28 11.69 9.22 9.71 2.69
Gross Profit 51.56 -5.94 -1.5 -15.32 2.15
Depreciation 7.66 5.42 6.37 7.22 1.91
Profit Before Tax 43.9 -11.36 -7.87 -22.54 0.24
Tax -0.22 0 0 0 0
Fringe Benefit tax 0 0.2 0.24 0.15 0.06
Deferred Tax 0 0 0 0 0
Reported Net Profit 44.12 -11.56 -8.11 -22.69 0.18
11
101202139
Extraordinary Items 60.39 1.15 9.28 -11.03 -0.6

Adjusted Net Profit -16.27 -12.71 -17.39 -11.66 0.78
Adjst. below Net Profit 0 0 0 0 0
- - -
137.5 125.9 117.8
P & L Balance brought forward 3 7 6 -95.17 -366.1
Statutory Appropriations 0 0 0 0 0
-
270.7
Appropriations 0 0 0 0 5
- - -
137.5 125.9 117.8
P & L Balance carried down -93.41 3 7 6 -95.17
Dividend 0 0 0 0 0
Preference Dividend 0 0 0 0 0
Equity Dividend % 0 0 0 0 0
Earnings Per Share-Unit Curr 4.28 0 0 0 0.55
Earnings Per Share(Adj)-Unit Curr
Book Value-Unit Curr -3.58 -10 -8.32 -7.14 -63.04
http://www.capitaline.com
DIGJAM TEXTILES
"Balance Sheet Summary"
Particulars 2010 2009 2008 2007 2006
Share Capital 95.26 88.76 68.76 68.76 43.76
- - -
Reserves -93.41 137.53 125.97 117.86 -95.17
Net worth 1.85 -48.77 -57.21 -49.1 -51.41
long term debt 76.25 146.66 162.17 165.38 242.52
104.9 116.2
Capital Employed 78.1 97.89 6 8 191.11
"Balance Sheet Summary"

Particulars 2010 2009 2008 2007 2006
Net fixed asset 0.24 0.24 0.23 0.23 0.24
Investments 54.9 66.87 71.46 78.05 155.52
Net Current Asset 23.2 31.02 33.5 38.23 35.59
Miscellaneous expenses 0 0 0 0 0
105.1 116.5
Net Asset 78.34 98.13 9 1 191.35
12
101202139
Total Current Assets 79.58 85.95 88.14 86.38 115.89

Net Current Assets 23.2 31.02 33.5 38.23 35.59
"Income Statement Summary"

Particulars 2010 2009 2008 2007 2006
PBDIT 64.84 5.75 7.72 -5.61 4.84
Less Depreciation 7.66 5.42 6.37 7.22 1.91
Less others written off 0 0 0 0 0
PBIT 57.18 0.33 1.35 -12.83 2.93
Less Interest 13.28 11.69 9.22 9.71 2.69
PBT 43.9 -11.36 -7.87 -22.54 0.24
Tax -0.22 0 0 0 0
PAT 44.12 -11.36 -7.87 -22.54 0.24
NET SALES 181.09 136.91 107.81 105.81 29.35
Dupont Analysis
Particulars 2010 2009 2008 2007 2006
RONA=PBIT/Net Asset 0.73 0.00 0.01 -0.11 0.02
RONA=(PBIT/Sales)*(Sales/Net Asset) 0.73 0.00 0.01 -0.11 0.02
ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00

ROE=Sales/NA*PBIT/Sales*(PAT/PBIT*N
A/Networth 23.85 0.23 0.14 0.00 0.00
Leverage/Solvency Ratio
Particulars 2010 2009 2008 2007 2006
Debt-Equity Ratio= total debt/net asset 0.97 1.49 1.54 1.42 1.27
Debt ratio=Debt/Capital Employed 0.98 1.50 1.55 1.42 1.27
Interest coverage=PBDIT/Interest 4.88 0.49 0.84 -0.58 1.80
capital-equity ratio 76.25 146.66 162.17 165.38 242.52
Turnover Ratio
Particulars 2010 2009 2008 2007 2006
Current asset turnover = Net Sales/
Total current assets 2.28 1.59 1.22 1.22 0.25
Net current asset turnover= Net Sales/ 7.81 4.41 3.22 2.77 0.82
13
101202139
Net current assets

Assets turnover= Net sales/Net Assests 2.31 1.40 1.02 0.91 0.15
Fixed asset turnover= Net sales/ Net
fixed assets 754.54 570.46 468.74 460.04 122.29
Net assets turnover= Net sales/ Capital
employed 2.32 1.40 1.03 0.91 0.15
2.3186 1.3986 1.0271 0.9099 0.153576
Total Assets=Sales/Total Assets 94 11 53 59 474
Profitability Ratio
Particulars 2010 2009 2008 2007 2006
Gross Margin(PBIT/NET SALES) 0.32 0.00 0.01 0.00 0.10
Net Margin(PAT/NET SALES) 0.24 -0.08 -0.07 0.00 0.01
ROI(before tax) PBDIT/NET ASSET 0.83 0.06 0.07 -0.05 0.03
Return on equity (PAT/NET WORTH) 23.85 0.23 0.14 0.46 0.00
Equity-Related Ratio
Particulars 2010 2009 2008 2007 2006
477220 477220 477220 477220 4772200
No of ordinary shares 00 00 00 00 0
Divdends 0 0 0 0 0
Market value 1.41 0.72 2.83 0.86 0.75
EPS (in Rs.) 4.28 0 0 0 0.55

DPS 0.00 0.00 0.00 0.00 0.00
Payout Ratio=DPS/EPS 0.00 0.00 0.00 0.00 0.00
Payout ratio=Dividends/PAT 0.00 0.00 0.00 0.00 0.00
Dividend yield= DPS/Market Value 0.000 0.000 0.000 0.000 0.000
Earnings Yield= EPS/Market Value 3.035 0.000 0.000 0.000 0.733
#DIV/0 #DIV/0 #DIV/0
P/E Ratio= market value/EPS 0.329 ! ! ! 1.364
Book value per share(in Rs.)= Net
worth/ No. of ordinary shares 0.00 0.00 0.00 0.00 0.00
M/B value= market value/ book value -0.39 -0.07 -0.34 -0.12 -0.01
SHORT TERM SOLVENCY OR LIQUIDITY RATIOS

PARTICULARS 2010 2009 2008 2007 2006
CURRENT RATIO=CURRENT 1.4114 1.5647 1.6131 1.7939 1.443212
ASSETS/CURRENT LIABILITIES 93 19 04 77 951
QUICK RATIO=CURRENT ASSET- 78.843 85.153 87.243 85.386 115.2534
INVENTORY/CURRENT LIABILITIES 28 96 03 82 802
CASH RATIO=CASH/CURRENT 0.0405 0.0121 0.0440 0.0986 0.457669
14
101202139
LIABILITIES 48 85 41 14 478
NET WORKING CAPITAL TO TOTAL
ASSTES=NET WORKING CAPITAL/TOTAL 78.907 85.438 87.661 86.001 115.5550
ASSET 4 61 91 52 097
INTERVAL MEASURE=CURRENT 0.4351 0.6423 0.7489 0.7086 3.823490
ASSET/AVG DAILY OPERATING COST 49 77 17 14 597
PBIT 43.9 -11.36 -7.87 -22.54 0.24

INTEREST 13.28 11.69 9.22 9.71 2.69
- - -
3.3057 0.9717 0.8535 2.3213 0.089219
inTEREST Coverage= PBIT/INTERESR 23 7 8 2 331
Inventory Turnover Ratio=COGS/Avg 179.75 137.05 107.84 106.16 29.29723

Inv 77 91 33 05 926
Debtors Turnover Ratio=Net Credit 7.2785 4.3367 4.0806 4.3117 1.193089

Sales/Avg Debtors 37 12 21 36 431
- - - -
Net Profit Margin=PAT/SALES 136.97 148.27 115.68 128.35 -29.11
- - -
42.345 - 1.8386 2.3729 3.722038
Financial leverage=NA/NW 95 2.0121 6 1 514
2.3115 1.3951 1.0249 0.9081 0.153383
Assets turnover=Sales/Net Asset 91 9 07 62 852
- -
0.7715 34.424 5.8296 1.7568 0.081911
Financial leverage Income= PAT/EBIT 98 2 3 2 263
- - - -
Equity multiplier=Total 42.216 2.0071 1.8346 2.3682 3.717370
Assets/Networth 22 8 4 3 161
-
0.3157 0.0024 0.0125 0.1212 0.099829
Operating profit margin=EBIT/Sales 55 1 22 6 642
Total Cost= 48.24 33.61 31.52 33.37 7.51
103.7 75.69 61.96 55.43 14.21
15
101202139
IM PANDEY
QUESTIONS
16
101202139
LIQUIDITY
ANALYSIS
17
101202139
Liquidity Analysis
Common Financial Ratios:-
Short Term Sovency Ratios:-
As the name suggests groups are intended to
provide information about a firms liquidity and these ratios are
sometimes called liquidity measures.The primary concern is
the firms ability to pay its bills over the short run without
undue stress.One advantages of looking at current assets and
liabilities is that their book values and market values are likely
to be similar.
1.What is the level of current assets relative to current

liabilities?Is it reasonable given the nature of the
company’s business?
• Current Ratio
Formulae:-
Current Ratio=Current Asset/Current
Liabilities
Meaning- The current ratio is the measure the Short Term solvency of the firm.
Current Ratio indicates the availability of current assets in rupees for every 1
rupee of current liability. Current ratio explains the firm’s ability to pay off its current liability
out of current assets..it determines the liquidity position of the company.it is a measure of short term
solvency.it represents a margin of safety for creditors.it is the crude and quick measure of
liquidity.Current ratio measures only total rupees worth of current assets and total rupees worth of
current liabilities.it does not measure the quality of assets.
Caution- It is believed that the higher the Current ratio the greater the Margin of
Safety. But Current Ratio is only a test of Quantity but not Quality. The Current
18
101202139
Ratio measures Current assets in terms of Quantity but current assets are subject
to decrease in value, debtors are subject to turn bad debts.
Interpretation:- In Our Digjam Company Current Ratio as

follows
200
PARTICULARS 2010 9 2008 2007 2006
CURRENT RATIO=CURRENT 1.56471 1.6131 1.7939 1.443212
ASSETS/CURRENT LIABILITIES 1.411493 9 04 77 951
It implies that for every one rupee of current liabilities, current assets of one and
half rupees are available to meet them.The interpretation is : in interfirm
comparision the firm with the higher current ratio has better liquidity /short term
solvency.The current ratio though superior to NWC in measuring short term
financial solvency is a rather crude measure of the liquidity of a firm .The
limitation of current ratio arises from the fact that it is a quantitative rather than a
qualitative index of liquidity.The term quantitative refers to the fact that it takes
into account the total current assets without making any distinction between
various types of current assets such as cash inventories and so on.A qualitative
measures takes into account the proportion of various type of current assets to
the total current assets.
19
101202139
The above graph implies that in 2006 the current ratio of Digjam was 1.44which means the company
had 1.44 of current asset for every one rupee of current liability.this was not satisfactory because
company’s quality of debtors and stock was good. In 2007 it went up to 1.79 and after next yea again r
it came down respectively,which means investment in CA reduced after there was a slight increase in
investment in CA which increased the liquidity position of the company.in 2010 company’s investment
in CA reduced and affected the liquidity position. When CL increases it will inturn increases the total
liabilities as a result operating cycle goes up which in turn reduces asset use efficiency and other
variable remaining equal will result in decrease in RONA and ROE and there will be no wealth
maximization of share holders. In 2010 again the company failed to maximize its share holders wealth
because of increase in CL.
2.What is the mix of Current Assets? Is the

proportion of slow moving nventories high?
Quick Ratio:-
Formulae:-Quick Assets/Current Liabilities
Meaning: Quick ratio is also called also acid test ratio.It is the ratio between quick current assets which
can be coverted into cash immediately or at a short notice without diminution of value. Current assets
are 1)Cash and Bank balances 2.)Short term marketable securities 3.)Debtors/receivables.A relatively
severe test of a company's liquidity and its ability to meet short-term obligations. The quick ratio is
calculated by dividing all current assets with the exception of inventory by current liabilities. Inventory
is excluded on the basis that it is the least liquid current asset. A relatively high quick ratio indicates
conservative management and the ability to satisfy short-term obligations.
Caution- A quick Ratio of 1:1or more does not merely imply sound liquid position. As all debtors may
not be liquid and cash may be needed to pay operating expenses and it should be noted that inventories
are not absolutely non liquid. So even if the firm has good quantity of current assets it may not be
qualitative when needed.
Interpretation:-
20
101202139
:- In Our Digjam Company Quick Ratio as follows
PARTICULARS 2010 2009 2008 2007 2006
QUICK RATIO=CURRENT
ASSET- INVENTORY/CURRENT 78.843 85.153 87.243 85.386 115.2534
It is a rigorous measure of a firms ability to service short term liabilities.The usefulness of the ratio lies
in the fact that it is a widely accepted as the best available test of the liquidity position of a firm.
The above graph implies that in 2006 the quick ratio of Digjam was 115.25which means the company
had 115.25 of current asset for every one rupee of current liability. In 2007 again came down to 85.38
but in 2008 went up to 87.24 and after next year again r it came down respectively,which means
investment in CA reduced after there was a slight increase in investment in CA which increased the
liquidity position of the company.
3.)How Promptly does the company pay its creditors?

Creditors Velocity- This ratio measures the number of days in which company is in a position to pay
off its creditors.
In Creditors velocity not given here
4.How far can it stretch payment to creditors without

jeoparadising its relation with them?
Cash Ratio
Formulae:-
Cash Ratio=Cash/Current Liabilities
Meaning- The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some
reason immediate payment were demanded. Trade Investments or marketable securities which are
equivalent to cash are also considered along with cash while calculating Cash ratio. The cash ratio is
21
101202139
the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash
equivalents.
Caution- As the cash ratio contains marketable securities. These marketable securities are subject to
market fluctuations and in time of payment they may not be earn same amount. And in case of cash, it
may be needed to pay operating expenses in the firm so one cannot rely fully on cash and marketable
securities.
Interpretation:-
PARTICULARS 2010 2009 2008 2007 2006

CASH RATIO=CASH/CURRENT 0.0405 0.0121 0.0440 0.0986 0.457669
22
101202139
5)How efficiently and frequently does the company convert

its current assets into cash?
Leverage Ratios
Financial leverage ratios provide an indication of the long-term solvency of the
firm. Unlike liquidity ratios that are concerned with short-term assets and
liabilities, financial leverage ratios measure the extent to which the firm is using
long term debt. As a general rule, there should be an appropriate mix of debt and owners’ equity in
financing the firm’s assets. Leverage ratios include various types of Debt ratios, cap ital equity ratio and
interest coverage ratio.
Total Debt Ratio & Debt Equity ratio

Meaning- Total debt ratio indicates the proportion of interest bearing debt ( also called as funded
debt) in the capital structure of the firm. It is calculated by dividing total debt by capital employed or
Net assets. Total debt includes short term and long term borrowing from financial institutions,
debenture/ bonds bank borrowings.
Meaning- Debt-Equity ratio describes the lender’s contribution for each rupee of the owners’
contribution. This ratio is calculated directly by dividing total debt by net worth. This ratio shows the
relative proportions of debt and equity in financing the assets of a firm.
Formulae:- Debt equity Ratio=Tottal Debt/Total equity
Interpretation:-
Particulars 2010 2009 2008 2007 2006

Debt-Equity Ratio= total
debt/net asset 0.97 1.49 1.54 1.42 1.27
The first of these indicates what proportion of the permanent capital of a firm long consists of
long term debt.Also its measures the share of the total assets financed by outside funds.A low
ratio of debt to total assets is desirable from the point of the creditors/lenders as there is
sufficient margin of safety available to them.
Capital employed to net worth ratio
23
101202139
Meaning- This ratio is alternative way of expressing relationship between debt and equity. Capital
employed to net worth calculates the amount of funds contributed by both lenders and owners for each
rupee of the owner’s contribution.
Caution- If the D/E ratio is high the owners are putting relatively lesser amount of money of their own.
This is a danger signal to creditors. From the point of view of firm as the high proportion of capital
structure will be financed by debt, there would be pressure and interference in management by
creditors. Further it can borrow funds on restrictions, on high interest payments which will ultimately
lead to profits declining. A low D/E is also not favourable, as it will have just opposite implications.
Interest Coverage Ratio:-These ratios are computed from

information available I the profit and loss account.For a normal firm in the
ordinary course of business the claims of creditors are not met out of the
sale proceeds of the permanent assets of the firm.The obligations of a firm
are normally met out of the earnings or operating profits.Claims consists of
interest on loans,preference dividend ,amortisation of principal or
repayment.
Formulae:-
Interest Coverage ratios=EBIT/Interest
PARTICULARS 2010 2009 2008 2007 2006
- - -
inTEREST Coverage= 3.3057 0.971 0.853 2.321 0.089219
PBIT/INTERESR 23 77 58 32 331
24
101202139
Asset Utilisation
The measures in this section are sometimes called asset management or utilization ratios.The specific
ratios are sometimes called asset management or utilization ratios.An indicator of how rapidly a firm
converts various accounts into cash or sales.In general, the sooner management can convert assets into
sales or cash, themore effectively the firm is being run. Activity ratio can be calculated with help of
Inventory turnover ratio, debtor turnover ratio, Asset turnover ratio and collection period
1.)How effectively does a company utilise it assets in generating Sales?
Activity ratios-Ratios of activity are calculated to measure how effectively the firm’s assets are being
managed or in other words how effectively assets are converted into cash through sales. In general, the
sooner management can convert assets into sales or cash, the more effectively the firm is being run
Asset Turnover-
The relationship between sales and assets is called as assets turnover ratio. One can calculate Total
assets turnover, Net asset turnover and Fixed and current asset turnover. The above query can be
answered through Net Asset Turnover. The firm can calculate net asset turnover by dividing sales by
Net asset were, Net assets is Current Assets minus Current liabilities. This ratio is also called as Capital
Employed Ratio.
Net Asset Turnover:-The firm may wish to know its

efficiency of utilising assets separately
Formulae:-Sales/Net Assets Turnover
Caution:-
The problem in interpreting this ratio is that firm tries to maximize its ratio by using older assets
because their accounting value is lower than newer assets. Firms with relative small
investments in fixed assets like retail &wholesale trade firms, tend to have high ratios of total
asset turnover when compared to large firms as manufacturing firms.The Net asset turnover
should be interpreted cautiously. The net asset in the denominator includes fixed assets net of
depreciation, thus older assets with lower book (depreciated) values may create a mislead
impression on higher turnover without any improvement in sales.
25
101202139
Interpretation:-
Particulars 2010 2009 2008 2007 2006
Net asset turnover 7.81 4.41 3.22 2.77 0.82
Interpretation:-
In the year 2010 there was rise in asset turnover from 0.82 to 7.81 with comparison to year 2006. The
reasons for the growth is the investment in Current assets was decreased which led to decrease in Net
assets. Increase in accumulated depreciation also led to raise in ratio. As there was increase in sales it
led to increase in RONA ..
2.)Are the levels of debtors and inventories relative to sales reasonable given the
firms competitive and operating characterestics?
Turnover Ratio- An indicator of how rapidly a firm converts various accounts into cash or sales. In
general, the sooner management can convert assets into sales or cash, the more effectively the firm is
being run. Activity ratios are also called as turnover ratios, because they indicate the speed with which
asset are being converted or turned over into sales.
Inventory Turnover Ratio:-
Inventory turnover
Meaning- A measure indicating the number of times a firm sells and replaces its inventory during a
given period and calculated by dividing the cost of goods sold by the average inventory level.
26
101202139
Formulae:-
Inventory Turnover Ratio=Cost Of Goods Sold/Inventory
The COGS means sales-gross profit .The average inventory refers to the simple aveage of the opening
and closing inventory.
Caution- A low inventory turnover implies excessive inventory levels than warranted by production
and sales activities, or a slow moving or obsolete inventory. A high level of sluggish inventory amounts
to unnecessary tie up of funds, reduced profit & increased cost. If the obsolete inventory is written off it
will adversely affect to working capital and liquidity of firm.
An indicator of how rapidly a firm converts various accounts into cash or sales.
In general, the sooner management can convert assets into sales or cash, the
more effectively the firm is being run. Activity ratio can be calculated with help of Inventory turnover
ratio, debtor turnover ratio, Asset turnover ratio and collection period.
Interpretation:-
PARTICULARS 2010 2009 2008 2007 2006

Inventory Turnover 179.75 137.05 107.84 106.16 29.29723
Ratio=COGS/Avg Inv 77 91 33 05 926
Debt Turnover Ratio:-
Meaning- Debtors Turnover indicates the number of times debtors turnover each year. It is calculated
by dividing credit sales by average debtors. Generally the higher value refers more efficient
management of credit. This ratio reveals the firms credit policy of firm.
DTO is calculated by dividing the net credit sales by average debtors outstanding during the year. This ratio shows
how rapidly debts are collected. The higher the DTO, the better it is for the organization.
Formulae:-
Debt Turnover Ratio=Net Credit Sales/Avg Debtors
Interpretation:-
Debtors turnover indicates the number of times debtors turnover each year. Higher the value more
efficient is the management of credit.
27
101202139
This graph implies that debtors were 1.93? of sales in 2006.in 2007 debtors increased to 4.3% which
means the company was facing the risk of bad debts. But from the DCP we can infer that even though
the debtors increased the quality of debtors was good.in the year 2008 debtors were 4.9 % of sales
which means company was very efficient in its credit management.but when we compare the collection
period of 2008 the quality of debtors was low compared to previous year. In 2009 and 2010 the debtors
were 4.33% and 7.27% repectively, which means debtors were significant part of company’s sales.
So to conclude when compared to debtors turnover ratio of over 5 years we can argue that company had
a good credit management policy. The company’s debtors were relative to sales in almost all the five
years
3.What are the trends in collection period inventory turnover and fixed assets turnover?
Inventory Turnover Ratio:-
Inventory turnover
Meaning- A measure indicating the number of times a firm sells and replaces its inventory during a
given period and calculated by dividing the cost of goods sold by the average inventory level.
Formulae:-
Inventory Turnover Ratio=Cost Of Goods Sold/Inventory
The COGS means sales-gross profit .The average inventory refers to the simple aveage of the opening
and closing inventory.
Caution- A low inventory turnover implies excessive inventory levels than warranted by production
and sales activities, or a slow moving or obsolete inventory. A high level of sluggish inventory amounts
to unnecessary tie up of funds, reduced profit & increased cost. If the obsolete inventory is written off it
will adversely affect to working capital and liquidity of firm.
An indicator of how rapidly a firm converts various accounts into cash or sales.
In general, the sooner management can convert assets into sales or cash, the
more effectively the firm is being run. Activity ratio can be calculated with help of Inventory turnover
ratio, debtor turnover ratio, Asset turnover ratio and collection period.
Interpretation:-
PARTICULARS 2010 2009 2008 2007 2006
28
101202139
Inventory Turnover 179.75 137.05 107.84 106.16 29.29723

Ratio=COGS/Avg Inv 77 91 33 05 926
Fixed Asset Turnover:-
Meaning:-
The FAT ratio measures the net sales per rupee of investment in fixed assets. This ratio measures the efficiency with
which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization while a low
ratio reflects an inefficient use of assets.
Caution : When the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover ratio tends
to be high (because the denominator of the ratio is very low).
Interpretation:-
Overall trend in Fixed asset turnover was affected by accumulated depreciation only very small amount
of investment was made in Fixed assets and variation in sales.
From the above graph we can infer that company generated 122.29 rupees of sale for one rupee
investment in fixed assets in 2006 which consistently increased till 2010 also. When we look at a
current asset turnover ratio there was inconsistency in the sales generated from these assets all 5 years.
This indicates that the ability of current assets to generate sale has declined.when we come to net asset
turnover it firm generated 122.29 rupee of sale from one rupee investment in NA and even it declined
over years.
So we can imply that Digjam turns over its fixed assets faster than current asssets and net assets. Also
fixed asssets are more effectively utilized to generate sales when compared to current assets. So the
company should concentrate on utilising its current assets to generate higher sales.
Collection Period:-
Meaning- The average collection period measures the quality of debtors since it indicates the speed of
Debtors collection. The shorter the average collection period the better the quality of the debtors, since
average collection period implies prompt payment.
29
101202139
Caution- The firm should take utmost care while deciding the Collection period. An excessively long
collection period implies a very liberal & inefficient credit & collection period, which delays the
collection of cash and will impair firms liquidity. This also increases chances of Bad debt losses. On
other hand, a low collection period is not favourable. Itindicates restrictive credit policy which will lead
to decrease in sales and overall profits.
The average collection period represents the number of day's worth of credit sales that is blocked with the debtors
(accounts receivable). The ACP can be compared with the firm's credit terms to judge the efficiency of credit
management.
30
101202139
4.)Is the improvement in the fixed assets turnover due to
depreciated book value of fixed asset?
Sale of some fixed asset?
If high accumulated then depreciation also be high .If fixed asset same then also deprecation
value will be high then turnover will increase automatically.
Fixed Asset Turnover:-
Meaning:-
The FAT ratio measures the net sales per rupee of investment in fixed assets. This ratio measures the efficiency with
which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization while a low
ratio reflects an inefficient use of assets.
Caution : When the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover ratio tends
to be high (because the denominator of the ratio is very low).
Interpretation:-
Overall trend in Fixed asset turnover was affected by accumulated depreciation only very small amount
of investment was made in Fixed assets and variation in sales.
From the above graph we can infer that company generated 122.29 rupees of sale for one rupee
investment in fixed assets in 2006 which consistently increased till 2010 also. When we look at a
current asset turnover ratio there was inconsistency in the sales generated from these assets all 5 years.
This indicates that the ability of current assets to generate sale has declined.when we come to net asset
turnover it firm generated 122.29 rupee of sale from one rupee investment in NA and even it declined
over years.
So we can imply that Digjam turns over its fixed assets faster than current asssets and net assets. Also
fixed asssets are more effectively utilized to generate sales when compared to current assets. So the
company should concentrate on utilising its current assets to generate higher sales.
31
101202139
Profitability
32
101202139
Analysis
Profitability Analysis
1.How Profitable is the Company?What accounting policies and practises followed by the
company?Are they Stable?
Profitability analysis of Digjam Textiles
The efficiency of the company in term of profits can be calculated with the help of Profitability Ratios.
The ratios are as follows Gross Margin, Net Margin, PAT to EBIT ratio, ROE & ROI.
Profitability Ratio - Profitability Ratios show how successful a company is in terms of generating
returns or profits on the Investment that it has made in the business. If a business is liquid and efficient
it should also be Profitable.
Net profit margin
Net profit margin ratio establishes a relationship between net profit and sales and indicates
management’s efficiency in manufacturing,administering and selling the products.it is the overall
measure of the firm’s ability to turn each rupee sale into net profit.
If the net margin is inadequate the firm will fail to achieve satisfactory return on shareholder’s funds.
Particulars 2010 2009 2008 2007 2006

PBDIT 64.84 5.75 7.72 -5.61 4.84
Less others written
off 0 0 0 0 0
-
PBIT 57.18 0.33 1.35 12.83 2.93
Less Interest 13.28 11.69 9.22 9.71 2.69
- -
PBT 43.9 11.36 -7.87 22.54 0.24
Tax -0.22 0 0 0 0
PAT 44.12 -11.36 -7.87 -22.54 0.24
33
101202139
181.0 136.9 107.8 105.8

NET SALES 9 1 1 1 29.35
Net Profit Margin=PAT/Sales
- - -
- 148. 115. 128.
Net Profit Margin=PAT/SALES 136.97 27 68 35 -29.11
Here Values are negatively.. there was decrease in sales because the amount of expenses were
controlled by the company and it was able to maximize shareholder’s wealth.
So to conclude even though the company saw fluctuations in its profit margin which was the result of
both external and internal factors,the company was able to uphold the interest of shareholders and
maximize the wealth of shareholders and generate more funds from the public.
34
101202139
2.Is the Profitability (RONA) of the company high/low/average? Is it due to
Profit/Margin
Assets Utilisation
Non operating Income
Window Dressing
Chaange in Accounting Policy
Inflationary Conditions?
The profitability of the firm can be analysed using DuPont Analysis. DuPont integrates important ratios
to analyse a firm’s profitability. This can be done in two ways
a) DuPont Identity
b) DuPont Chart.
Caution-
The main drawback of DuPont analysis it does not reveal anything about the liquidity of the firm nor it
does about the expenses of the firm. Therefore the firms take advantage of DuPont to flag potential
problem areas when one or more ratios are out of line.
RONA is affected by quality of the assets as it affects Asset turnover. Therefore while Interpreting
RONA we should give importance to Asset turnover or in other words asset utilization.
RONA:- RONA is a measure of firm’s operating performance.it indicates firm’s earning power.it is
a product of asset turnover,gross profit margin and operating leverage.
35
101202139
ROE AND ROA here the difference between these two profitability measures reflects the use of debt
financing or financial leverage.
ROA:-
The profitability ratio is measured in terms of the relationship between net profits and assets.
The ROA may also be called profit – to- asset ratio. There are various possible approaches to
define net profits and assets, according to the purpose and intent of the calculation of the ratio.
200
Particulars 2010 2009 2008 2007 6
ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00

ROE=Sales/NA*PBIT/Sales*(PAT/PBIT*NA/
Networth 23.85 0.23 0.14 0.00 0.00
Depending upon how these two terms and defined many variations of ROA are possible.
RONA Chart:-
The above graph implies that the RONA of the firm saw a consistent increase from 2006 to 2010even
though there was constant gross margin and variating assets turnover Here after year declined slightly
which may be because of the external factor i.e global recission which might have adversely affected
company’s performance.
So we can argue that the company that much profitable even during the recission which indicates the
firm’s ability. RONA increases ROE which inturn will maximize wealth of share holders.
ROE.
• ROE
Meaning:- Common or ordinary shareholders are entitled to the residual profits. The rate of
dividend is not fixed. The earning may be distributed to shareholders or retained in the
business. The Return on shareholders’ equity is calculated to see the profitability of
owners’ investment.ROE indicates how well firm has used the resource owners.The earning of a
36
101202139
satisfactory return is the most desirable objective of a business.this ratio is of great interest to the
present as well as the prospective shareholders and also of great concern to the management,which has
200
Particulars 2010 2009 2008 2007 6
ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00
Networth 23.85 0.23 0.14 0.00 0.00
the responsibility of maximizing the owner’s welfare.
From the above graph we can imply that the company’s ROE has seen a consisitent increase from 2006
to 2010,this increase is because of increase in sales which inturn increased profitability which will lead
to increase in RONA which results in increase in ROE and ultimately share holder’s wealth is
maximized.but in 2010 DIGJAM’s ROE saw a decline trend which is because of decline in operating
leverage and financial leverage which inturn resulted for decline in RONA and lead to decline in
ROE.So to conclude we can argue that the company was profitable in 2010 only .
RONA is affected by quality of the assets as it affects Asset turnover. Therefore while Interpreting
RONA we should give importance to Asset turnover or in other words asset utilization. RONA is also
affected by operating efficiency of the firm. Return on Net assets in the year 2007 it has comparatively
increased with respect to 2006. This is because of asset utilization and operating efficiency of the firm.
In the subsequent year even sales and assets turnover has increased, RONA has drastically decreased
because of operating inefficiency of the firm. In the year 2009 due to operating efficiency of the firm
RONA is increasing. So we can say the profitability (RONA) depends upon operating efficiency.
37
101202139
Opening Profit=EBIT/Sales
company recovered from the down fall and again saw a growth in its operating leverage which in turn
increased profitability which will lead to increase in RONA which will result in high ROE and thus
objective of share holders wealth maximization is achieved.
Is the Profitability (RONA) of the company average?

200
Particulars 2010 2009 2008 2007 6
ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00

Networth 23.85 0.23 0.14 0.00 0.00
of ROA are possible.
RONA Chart:-
38
101202139
company’s performance. Return on Net Assets provides the foundation necessary for a company to
delever a good return on equity. A company without good RONA finds it almost impossible to generate
satisfactory ROE. This ratio measures how well management uses all the assets in the business to
generate operating surplus. It is calculated as follows,PBIT/NA
ROE.
3.)Is the ROE high/low/average?Is it due to ROI,FinanicingMix,Capitalisation of reserves?
• ROE
the responsibility of maximizing the owner’s welfare
Formulae:-
ROE= Assets turnover × margin × leverage
This equation implies that ROE is affevted by 3 things, i.e. operating efficiency, asset use efficiency and
financial leverage.It is the most important ratio in business finance. It measures the absolute return
deleveried to share holders. High ROE will result in high share prices and makes it easy to attract new
funds. A good return on equity will keep in place financial framework for a thriving, growing
enterprise.
maximizing the owner’s welfare.
39
101202139
200
Particulars 2010 2009 2008 2007 6
ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00
Networth 23.85 0.23 0.14 0.00 0.00
ROE indicates how well firm has used. the resource owners. The earning of a
satisfactory return is the most desirable objective of a business .this ratio is of great
interest to the present as well as the prospective shareholders and also of great
concern to the management, which has the responsibility of maximizing the owner’s
welfare.
Interpretation :-
As ROE is affected by financial leverage and debt equity ratio, a firm will try to convert RONA into an
impressive ROE through financial efficiency. So even if the ROE is high it may not be because of
profitable investment decision but it may be because of leverage. In the year 2007 ROE has increased
40
101202139
when compared to ROE of 2006. But Leverage has decreased and RONA has increased. The increase in
RONA has led to the increase in ROE. Further RONA decreased in year 2008which led to same in case
of ROE. In the last year ROE has increased because of both RONA and leverage.
As all the firms try to convert RONA into impressive ROE, analysist should give importance to RONA while
interpreting ROE.
41
101202139
4.)What is the trend in Profitability? Is it improving because better utilisation of resources or

curtailment ofexpenses of strategic importance?What is the impact of the cyclical factors on
profitability trend?
The trend in profitability can be an be analysed with help of Return on Equity, Return on Net assets,
Net-profit margin, Asset efficiency and operating efficiency. We can illustrate these ratios in form of
histogram as below-
200
Particulars 2010 2009 2008 2007 6
ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00

Networth 23.85 0.23 0.14 0.00 0.00
of ROA are possible.
RONA Chart:-
company’s performance. Return on Net Assets provides the foundation necessary for a company to
delever a good return on equity. A company without good RONA finds it almost impossible to generate
42
101202139
satisfactory ROE. This ratio measures how well management uses all the assets in the business to
generate operating surplus. It is calculated as follows,PBIT/NA
ROE.
ROE
the responsibility of maximizing the owner’s welfare
Formulae:-
ROE= Assets turnover × margin × leverage
This equation implies that ROE is affevted by 3 things, i.e. operating efficiency, asset use efficiency and
financial leverage.It is the most important ratio in business finance. It measures the absolute return
deleveried to share holders. High ROE will result in high share prices and makes it easy to attract new
funds. A good return on equity will keep in place financial framework for a thriving, growing
enterprise.
200
Particulars 2010 2009 2008 2007 6
ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00
Networth 23.85 0.23 0.14 0.00 0.00
maximizing the owner’s welfare.
43
101202139
ROE indicates how well firm has used. the resource owners. The earning of a
satisfactory return is the most desirable objective of a business .this ratio is of great
interest to the present as well as the prospective shareholders and also of great
concern to the management, which has the responsibility of maximizing the owner’s
welfare.
Net profit margin
Net profit margin ratio establishes a relationship between net profit and sales and indicates
management’s efficiency in manufacturing,administering and selling the products.it is the overall
measure of the firm’s ability to turn each rupee sale into net profit.
If the net margin is inadequate the firm will fail to achieve satisfactory return on shareholder’s funds.
Particulars 2010 2009 2008 2007 2006

PBDIT 64.84 5.75 7.72 -5.61 4.84
Less others written
off 0 0 0 0 0
-
PBIT 57.18 0.33 1.35 12.83 2.93
Less Interest 13.28 11.69 9.22 9.71 2.69
PBT 43.9 - -7.87 - 0.24
44
101202139
11.36 22.54
Tax -0.22 0 0 0 0
PAT 44.12 -11.36 -7.87 -22.54 0.24
181.0 136.9 107.8 105.8
NET SALES 9 1 1 1 29.35
Net Profit Margin=PAT/Sales
- - -
- 148. 115. 128.
Net Profit Margin=PAT/SALES 136.97 27 68 35 -29.11
Here Values are negatively.. there was decrease in sales because the amount of expenses were
controlled by the company and it was able to maximize shareholder’s wealth.So to conclude even
though the company saw fluctuations in its profit margin which was the result of both external and
internal factors,the company was able to uphold the interest of shareholders and maximize the wealth of
shareholders and generate more funds from the public
In the year 2006 Sales was 29.35 cr and in the same year total expenditure amounted 30.31. In
comparison to 2007 in the becoming year sale went to profit. Asset turnover also contributed for the
increase.
45
101202139
5.)Can the company sustain itsimpressive profitability or improve its profitability given
the companies and other environmental solutions?
To answer the above we can analyse the impact of Budget 2011 on Petrochemical Industries.
Post budget impact analysis: textile sector news
26 February 2010
46
101202139
Background
Textile industry is one of the biggest employers in the country, with a share of around 4% in the GDP and
around 11.5% in foreign exchange earnings.
Export quota abolition by the US and Europe in January 2005 provided huge export opportunities to India.
Exports grew from US$13.5 billion in FY2004 to US$22.13 billion in FY2008 with a growth of 15.59% in
FY08 alone. However, global economic slowdown translated into a decline in exports in FY09. As per the
provisional data published by the Directorate General of Commercial Intelligence and Statistics, Kolkata,
India's textiles exports declined by 5.45% to US$20.94 billion during FY09 as compared to US$22.15
billion during FY08. Exports amounted to US$9.43 billion during April-September 2009; recording a steep
fall of 15.5% period as compared to same period last year.
Projects worth Rs.557 billion were sanctioned under Technology Up-gradation Fund Scheme (TUFS) in
FY09, significantly higher as compared to Rs.199 billion in FY08. However, in the first six months of
FY10, projects worth only Rs.70 billion were sanctioned under TUFS as compared to Rs.186 billion
sanctioned during the same period last year. Weak demand, high leverage and paucity of funds translated
into slowdown in expansion and modernization projects by the industry.
Improvement in demand from domestic market has, however, led to increase in production across the textile
product categories during April-December 2009 period as compared to the same period in the previous year.
Man-made fibre, man made filament yarn and spun yarn production increased by 22.3 per cent, 10.3 per
cent and 5.1 per cent, respectively while the total cloth production ( excluding Khadi, wool and silk)
increased by about 10.1 per cent during the said period.
Budget Proposals
1.Interest subvention of 2% on pre shipment credit extended upto March 31, 2011 from the existing
deadline of March 31, 2010.
2.One-time grant of Rs.200 crore to Government of Tamil Nadu towards the cost of installation of zero
liquid discharge system at Tirupur to sustain knitwear industry.
SUMMARY OF FINANCIAL ACCOUNTING RATIO

SUMMARY OF FINANCIAL ACCOUNTING RATIO
PROFITABILITY RATIO:
Financial Ratio Formula Measurements
Return on Total Operating profit before income Measures rate of return
47
101202139
earned through
tax + interest expense/ Average operating total assets
Assets
total assets provided by both
creditors and owners
Operating profit & extraordinary

Return on ordinary items after income tax minus Measures rate of return
shareholders’ Preference dividends / earned on assets
equity Average ordinary shareholders’ provided by owners
equity
Profitability of trading
Gross Profit Margin Gross Profit / Net Sales
and mark-up
Measures net
Operating profit after income
Profit Margin profitability of each
tax / Net Sales Revenue
dollar of sales
MARKET BASED FINANCIAL RATIO:
Operating profits after income

tax less Preference dividends / Measures profit earned
Earnings per share
Weighted average number of on each ordinary share
ordinary shares issued
Market price per ordinary Measures the amount

Price-earnings ratio share / Earnings per ordinary investors are paying for
share a dollar of earnings
Earning Yield Earnings per ordinary share / Measures the return to

Market price per ordinary share an investor purchasing
48
101202139
shares at the current

market price.
Measures the rate of

Annual dividend per ordinary
return to shareholders
Dividend Yield share / Market price per
based on current
ordinary share
market price.
Measures the
Total dividend per ordinary
percentage of profits
Dividend Payout share / Market price per
paid out to ordinary
ordinary share
shareholders
Net Asset Backing Ordinary shareholders’ Measure the assets

(NTA) equity / No of ordinary shares backing per share
LIQUIDITY RATIO:
A measure of short-
term liquidity. Indicates
Current Assets / Current the ability of entity to
Current Ratio
liabilities meet its short-term
debts from its current
assets
Quick Ratio Current Assets less inventory / A more rigorous

Current liabilities measure of short-term
liquidity. Indicates the
ability of the entity to
meet unexpected
demands from liquid
49
101202139
current asses
ASSET MANAGEMENT/UTILISATION/ACTIVITY RATIOS:
Measures the
effectiveness of
Receivables Net sales revenue / Average collections; used to
turnover receivables balance evaluate whether
receivables balance is
excessive
Measures the average

Average collection Average receivables balance x number of days taken
period 365 / Net sales revenue by an entity to collect
its receivables
Indicates the liquidity

of inventory. Measures
Cost of goods sold / Average the number of times
Inventory turnover
inventory balance inventory was sold on
the average during the
period
Measures the
effectiveness of an
Total Asset Net sales revenue / Average
entity in using its
turnover ratio total assets
assets during the
period.
Turnover of Fixed Net Sales / Fixed Assets Measure the efficiency

Assets of the usage of fixed
50
101202139
assets in generating
sales
GEARING/FINANCIAL STABILITY RATIO:
Measures percentage
of assets provided by
Debt ratio Total Liabilities / Total assets
creditors and extent of
using gearing
Measures percentage
Equity ratio or Total shareholders’ equity / of assets provided by
Proprietary ratio Total assets shareholders and the
extent of using gearing
The reciprocal of the

Total assets / Total equity ratio and thus
Capitalization ratio
shareholders’ equity measures the same
thing
Measures the ability of

Operating profit before income
Times interest the entity to meet its
tax + Interest expense / Interest
earned interest payments out
expense + Interest capitalized
of current profits.
CASH SUFFICIENCY RATIO:
Cash flow adequacy Cash from operations / Measures the entity’s

Long-term debt paid + ability to cover its main
51
101202139
Assets acquired +
cash requirements
Dividends paid
Measures the entity’s

Long-term debt
Long-term debt ability to cover its long-
repayments / Cash
repayment term debt out of cash
from operations
from operations

Dividends paid / Cash
Dividend payment ability to cover its
from operations
dividend payment

Non-current asset ability to pay for its
Reinvestment payments / Cash from non-current assets out
operations of cash from
operations
Measures the payback

Total long-term debt /
Debt coverage period for coverage of
Cash from operations
long-term debt.
CASH FLOW EFFICIENCY RATIO:
Measures ability to
Cash from operations /
Cash flow to sales convert sales revenue
Net sales revenue
into cash flows
Operation index Cash from operations / An index measuring

Operating profit after the relationship
income tax between profit from
52
101202139
operations and
operating cash flows
Cash from operation + Measures the

Cash flow return on Tax paid + Interest operating cash flow
assets paid / Average total return on assets before
assets interest and tax
Conclusion
This assignment shows how to make the financial decisions for the managers. It shows how important the
financial ratios are to derive the financial conclusions about the company. .
53

Digjam Textiles

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Digjam Textiles

Uploaded by

Copyright:

Available Formats

Sumana D.

Baliga Financial Management

Introduction to Ratio Analysis:-

The following important State of Income Ratios measure profitability:

Inventory Turnover Ratio = Net Sales / Average Inventory at Cost

Return on Assets Ratio

Deferred Tax Liability 0 0 0 0 0

Net Deferred Tax 0 0 0 0 0

Industry :Textiles - Worsted Fabric

Extraordinary Items 60.39 1.15 9.28 -11.03 -0.6

"Balance Sheet Summary"

Total Current Assets 79.58 85.95 88.14 86.38 115.89

"Income Statement Summary"

ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00

Net current assets

EPS (in Rs.) 4.28 0 0 0 0.55

SHORT TERM SOLVENCY OR LIQUIDITY RATIOS

PBIT 43.9 -11.36 -7.87 -22.54 0.24

Inventory Turnover Ratio=COGS/Avg 179.75 137.05 107.84 106.16 29.29723

Debtors Turnover Ratio=Net Credit 7.2785 4.3367 4.0806 4.3117 1.193089

1.What is the level of current assets relative to current

Interpretation:- In Our Digjam Company Current Ratio as

2.What is the mix of Current Assets? Is the

:- In Our Digjam Company Quick Ratio as follows

PARTICULARS 2010 2009 2008 2007 2006

3.)How Promptly does the company pay its creditors?

4.How far can it stretch payment to creditors without

PARTICULARS 2010 2009 2008 2007 2006

5)How efficiently and frequently does the company convert

Total Debt Ratio & Debt Equity ratio

Formulae:- Debt equity Ratio=Tottal Debt/Total equity

Particulars 2010 2009 2008 2007 2006

Capital employed to net worth ratio

Interest Coverage Ratio:-These ratios are computed from

1.)How effectively does a company utilise it assets in generating Sales?

Net Asset Turnover:-The firm may wish to know its

Inventory Turnover Ratio:-

PARTICULARS 2010 2009 2008 2007 2006

Debt Turnover Ratio:-

Debt Turnover Ratio=Net Credit Sales/Avg Debtors

Inventory Turnover Ratio:-

PARTICULARS 2010 2009 2008 2007 2006

Inventory Turnover 179.75 137.05 107.84 106.16 29.29723

Fixed Asset Turnover:-

4.)Is the improvement in the fixed assets turnover due to

depreciated book value of fixed asset?

Sale of some fixed asset?

Fixed Asset Turnover:-

Profitability analysis of Digjam Textiles

Net profit margin

Particulars 2010 2009 2008 2007 2006

181.0 136.9 107.8 105.8

Net Profit Margin=PAT/Sales

2.Is the Profitability (RONA) of the company high/low/average? Is it due to

Non operating Income

Chaange in Accounting Policy

ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00

Is the Profitability (RONA) of the company average?

ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00

of ROA are possible.

3.)Is the ROE high/low/average?Is it due to ROI,FinanicingMix,Capitalisation of reserves?

4.)What is the trend in Profitability? Is it improving because better utilisation of resources or

ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00