A STUDY ON RATIO ANALYSIS IN LUCAS INDIAN SERVICE LIMITED, CHENNAI

Project report submitted to the BHARATHIDASAN UNIVERSITY, Trichy In partial fulfillment of the requirement for the award of the degree of MASTER OF BUSINESS ADMINISTRATION By Jaya.S Reg.No: 10290590 Under the guidance of Prof. N. Rajesh, M.Com., M.phil., M.B.A., PGDCA., Lecturer, Bharath Institute of Management

Department of Management Studies BHARATH COLLEGE OF SCIENCE AND MANAGEMENT (Affiliated to Bharathidasan University) THANJAVUR 613 005 AUGUST 2011

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DECLARATION
I hereby declare that the project entitled, A STUDY ON RATIO ANALYSIS IN LUCAS INDIAN SERVICE LIMITED, CHENNAI. Submitted to the
Bharathidasan University,

Trichy in partial fulfillment for the award of the degree of Master of Business Administration is my original work and no part of this project has been submitted for the award of any other Degree, Diploma, Fellowship or other similar title.

Signature of the Candidate Place : Thanjavur Date : (JAYA.S)

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Acknowledgement
First of all, I thank the Almighty for being instrumental to the successful completion of this project. Then, I obliged to thank my parents who always care about me and scarify for me. I hope, everything is possible in my life with their blessings. I express my honorable salute to Prof. N. Ganesan, founder, Bharath Group of Institutions. I also wish my heartfelt thanks to Mrs. Punitha Ganesan, Secretary, Bharath Group of Institutions. I also wish my special thanks to Mr. Balasundaram, Chairman, Bharath Group of Institutions. I thank Prof. S. Sivapunniyam, Prinicipal, Bharath College of Science and Management who by virtue of his profound knowledge and vast experience has really been a source of inspiration and excellent support to me in this venture. I extend my thanks to Prof. A. Ramachandran, Dean, Bharath College of Science and Management. I Convey my regards to Dr. R.Rajasekaran, Director, M.Com., M.phil., B.Ed, ph.D for his support and whole-hearted encouragement for completing this project report suceessfully. I extent my sincere gratitude to Prof. N. Rajesh, M.Com., M.phil., M.B.A., PGDCA., Lecturer, Bharath Institute of Management for his valuable guidance. I extent my thanks to the Faculty Members of Department of Management Studies, Bharath Institute of Management for their useful suggestion and assistance for this project work.

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I would like to thank Mr. K. Suresh Babu, Vice President Finance & Mr. S. Ganesh Kumar, Deputy Manager Accounts, LUCAS INDIAN SERVICE LIMITED, CHENNAI. For having given me this privilege of working under him and completing this study. Finally, it gives me great pleasure to acknowledge the efforts of all those who have helped me in completing this project.

(JAYA.S)

TABLE OF CONTENTS
Chapter No. 1 2 3 4 5 6 7 8 9 10 11 Title Introduction Research Methodology, Review of Literature and Concepts Used Company profile Ratio analysis Balance sheet Types of ratio Objectives Importance Advantages & Limitations Conclusion Bibliography Pg No 5 8 15 21 25 30 48 50 52 55 57

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Chapter 1 Introduction
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Chapter 1 Introduction

Financial ratios are widely used for modeling purposes both by practitioners and researchers. The firm involves many interested parties, like the owners, management, personnel, customers, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement analysis in their evaluations. Practitioners use financial ratios, for instance, to forecast the future success of companies, while the researchers' main interest has been to develop models exploiting these ratios. Many distinct areas of research involving financial ratios can be discerned. Historically one can observe several major themes in the financial analysis literature. There is overlapping in the observable themes, and they do not necessarily coincide with what theoretically might be the best founded areas. Financial statements are those statements which provide information about profitability and financial position of a business. It includes two statements, i.e., profit & loss a/c or income statement and balance sheet or position statement. The income statement presents the summary of the income earned and the expenses incurred during a financial year. Position statement presents the financial position of the business at the end of the year.

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Before understanding the meaning of analysis of financial statements, it is necessary to understand the meaning of analysis and financial statements. Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial statements, we mean two statements- (1) profit & loss a/c (2) balance sheet. These are prepared at the end of a given period of time. They are indicators of profitability and financial soundness of the business concern. Thus, analysis of financial statements means establishing meaningful relationship between various items of the two financial statements, i.e., income statement and position statement
Parties interested in analysis of financial statements :

Analysis of financial statement has become very significant due to widespread interest of various parties in the financial result of a business unit. The various persons interested in the analysis of financial statements are: Short- term creditors They are interested in knowing whether the amounts owing to them will be paid as and when fall due for payment or not. Long term creditors They are interested in knowing whether the principal amount and interest thereon will be paid on time or not. Shareholders They are interested in profitability, return and capital appreciation. Management The management is interested in the financial position and performance of the enterprise as a whole and of its various divisions. Trade unions

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They are interested in financial statements for negotiating the wages or salaries or bonus agreement with management. Taxation authorities These authorities are interested in financial statements for determining the tax liability. Researchers They are interested in the financial statements in undertaking research in business affairs and practices. Employees They are interested as it enables them to justify their demands for bonus and increase in remuneration.

Chapter 2 Research Methodology

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, Review of Literature and Concepts Used

Research Methodology, Review of Literature and Concepts Used
Research Methodology:
This part narrates the sources of data, research design, period of study, tools of analysis and limitation of study.

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 Sources of Data :
This research study is based on secondary data, means data that are already available i.e. the data which have been already collected and analyzed by some one else. Secondary data are used for the study of Ratio analysis of this company. To collect the data I have refer Company annual report, annual magazine, last 5 year balance sheet, and cash flow statements. Secondary Data Sources : Internal Sources - Procedure Manuals , Annual Reports, Other Reports External Sources - World Wide Web, Reference Books Another source of secondary data was in the form of reference books and Literature Review published by third parties but available to the public. The World Wide Web (Internet) was also an important source of information related to inventory management.

Research Design:
A research design is the specification of method and procedure for accruing the information needed. It is overall operational pattern of frame work of project that stipulates what information is to be collected for source by that procedures. Descriptive Research design is appropriate for this study. Descriptive study is used to study the situation. This study helps to describe the situation. A detail descriptive about present and past situation can be found out by the descriptive study. In this involves the analysis of the situation using the secondary data.

Problem Statement:
How to measure the financial position of the company with the help of ratio analysis?

Objective of Study:
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 To know the financial condition of the company. Interpret the financial statement so that the strength and weakness of a firm Historical performance and current financial condition can be determined. To analyze the liquidity position of the company. Throw light on a long term solvency of a firm.

REVIEW OF LITERATURE :
Ratio-analysis is a concept or technique which is as old as accounting concept. Financial analysis is a scientific tool. It has assumed important role as a tool for appraising the real worth of an enterprise, its performance during a period of time and its pit falls. Financial analysis is a vital apparatus for the interpretation of financial statements. It also helps to find out any cross-sectional and time series linkages between various ratios. Unlike in the past when security was considered to be sufficient consideration for banks and financial institutions to grant loans and advances, nowadays the entire lending is need-based and the emphasis is on the financial viability of a proposal and not only on security alone. Further all business decision contains an element of risk. The risk is more in the case of decisions relating to credits. Ratio analysis and other quantitative techniques facilitate assessment of this risk. Trend ratio involve a comparison of the ratio of a firm over time, that is present ratio are compared with past ratio for the same firm. The comparison of the profitability of a firm, say year 1 though 5 is an illustration of a trend ratio. Trend ratio indicate the direction of change in the performanceimprovement, deterioration or constancy-over the years.

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The Indian Automobile Industry :

In this section, we trace the growth in the Indian auto-component sector and describe the market, cost structure and export performance. The Indian auto-component industrys annual turnover was US $6.73 billion. This is miniscule compared to the global automotive components industry turnover of US $737 billion. However, at a compounded annual growth rate of 20-25 %, the growth in Indias auto-component exports is significantly higher than that of the domestic market in India (10-14%) and markets elsewhere.

A very visible outcome of the transformation of the auto-component sector is therapid growth in cars exported from India. Indian auto OEMs exported 13.1% of their production up from 3.9% The significant growth of exports from India signals that the auto sector is rapidly becoming globally competitive, 1 In many cases, the delivered retail price of a car in India is 50% of the price in China 2 The data for this section has been collected from CMIE Prowess and ICRA particularly in the small car segment. The auto-component industry that helped to enable this transformation caters to three markets: (1) Original equipment manufacturers (OEM) or vehicle manufacturers, who comprise 25% of the total demand. (2) The replacement market that forms 65% of the total demand. (3) Export market that comprises primarily exports to international Tier I suppliers and constitutes 10% of the total demand. The auto-component industry can also be subdivided into six segments: (1) Engine Parts. (2) Electrical Parts. (3) Drive Transmission & Steering Parts. (4) Suspension & Braking Parts. (5) Equipment. (6) Others. The Automotive industry in Indiais one of the largest in the world and one of the fastest growing globally. India manufactures over 17.5 million vehicles (including 2 wheeled and 4 wheeled) and exports about 2.33 million every year.It is the world's second largest manufacturer of motorcycles, with annual sales exceeding 8.5 million in 2009. India's passenger car and commercial vehicle manufacturing industry is the seventh largest in the world, with an annual production of more than 3.7 million units in 2010. [3]According to recent reports, India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the world, growing 16-18 per cent to sell around three million units in the course of 2011-12.[4] In 2009, India emerged as Asia's fourth largest exporter of passenger cars, behind Japan, South Korea, and Thailand.

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As of 2010, India is home to 40 million passenger vehicles and more than 3.7 million automotive vehicles were produced in India in 2010 (an increase of 33.9%), making the country the second fastest growing automobile market in the world.According to the Society of Indian Automobile Manufacturers, annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020.By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads. By 2016 the size of the Indian automobile industry is expected to grow by 13%, to reach a mark of US$ 120-159 billion. Presently, India is the 2nd largest two wheeler market in the world and fourth largest commercial vehicle market worldwide. India is the 11th largest market in the passenger car segment globally which is expected to become the 7th largest market by 2016.

OVERVIEW INDUSTRY IN 2010- 11

OF

PERFORMANCE

OF

THE

INDIAN

AUTOMOBILE

Domestic Sales The cumulative growth of the Passenger Vehicles segment during April 2010 March 2011 was 12.17 percent. Passenger Cars grew by 11.79 percent, Utility Vehicles by 10.57 percent and Multi Purpose Vehicles by 21.39 percent in this period. The Commercial Vehicles segment grew marginally at 4.07 percent. While Medium & Heavy Commercial Vehicles declined by 1.66 percent, Light Commercial Vehicles recorded a growth of 12.29 percent. Three Wheelers sales fell by 9.71 percent with sales of Goods Carriers declining drastically by 20.49 percent and Passenger Carriers declined by 2.13 percent during April- March 2008 compared to the last year. Two Wheelers registered a negative growth rate of 7.92 percent during this period, with motorcycles and electric two wheelers segments declining by 11.90 percent and 44.93 percent respectively. However, Scooters and Mopeds segment grew by 11.64 percent and 16.63 percent respectively.

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Exports Automobile Exports registered a growth of 22.30 percent during the current financial year. The growth was led by two wheelers segment which grew at 32.31 percent. Commercial vehicles and Passenger Vehicles exports grew by 19.10 percent and 9.37 percent respectively. Exports of Three Wheelers segment declined by 1.85 percent

Key statistics :
The production of automobiles has greatly increased in the last decade. It passed the 2 million mark during 2010-2011 and has more than doubled since 1999.
% C ha ng e 54 .8 6 4. 1 9. 99 1. 2 50 .7 4 9 31 Total Vehic les Prodn . 3,536 ,783 2,641 ,550 2,332 ,328 2,253 ,999 2,019 ,808 1,628 ,755 1,511

Year 2010 2009 2008 2007 2006 2005 2004

Car Production 2,814,584 2,175,220 1,846,051 1,713,479 1,473,000 1,264,000 1,178,354

% Cha nge 29. 39 17. 83 7.7 4 16. 33 16. 53 7.2 7 29.

Commer cial 722,199 466,330 486,277 540,250 546,808 362, 755 332,803

% Change 33.89 13.25 3.35 10.39 19.36 7.22 23.13

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78 2003 2002 907,968 703,948 28. 98 7.5 5 26. 37 2.8 5 253,555 190,848

2001 2000 1999

654,557 517,957 533,149

160,054 283,403 285,044

.2 5 32 .8 6 19 .2 4 43 .5 2 0. 58

,157 1,161 ,523 8947 96 8146 11 8013 60 8181 93 22.96 8.96

1.62 -2.1

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KEY DEVELOPMENTS FOR LUCAS INDIAN SERVICE LIMITED

LUCAS Indian Service Limited is a subsidiary of Lucas-TVS Limited. LUCAS Indian Service Limited tied up with Top1 Oil Products Company to introduce the foreign firm's products in India. The company has been appointed as the distributor for Top1 brands in India, has launched lubricants for the motorcycles, passenger cars and heavy duty diesel vehicles segments. Top1 products for motorcycles will be available in the range of INR 285 to INR 750 per litre, while those for passenger cars are priced between INR 285 and INR 1,200 for every litre. The per litre cost of heavy duty diesel vehicles' lubricants will be INR 310 to INR 370.

Chapter 3 Company Profile

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COMPANY PROFILE

LUCAS INDIAN SERVICE LIMITED, CHENNAI - An overview

Company Name: Founded: Head Office: Business Type: Product/Service: Page 17 of 62

Lucas Indian Service Ltd 1930 Mount Road, Chennai Manufacturer Ignition coil,4st switch

Main Markets:

North America South America Western Europe Eastern Europe Eastern Asia Southeast Asia Mid East Africa Oceania

Turnover (as on 31st March 2010 , Amount in Thousands) Foreign Exchange Total Sales (For the year 2010, Amount in Lakhs) Website:

2312644 Earnings Rs 3.64 Lakhs

22223 WWW.lucas-Service.in

About Lucas Indian Service Limited :

Lucas Indian Service (LIS) established in 1930, is a specialist organization in sales and service of "Lucas-TVS" auto electricals and "Delphi-TVS" diesel fuel injection equipment. LIS also manufactures automotive products like ignition coils and solenoid switches in Chennai which are marketed under the brand name "Lucas". LIS distributes "LISPART" range of auto parts and "Lucas" range of automotive batteries through tieups with leading manufacturers. Besides manufacturing, sales and distribution, LIS offers servicing and training in auto electrical and diesel fuel injection equipment. The brand portfolio of LIS consists of leading product brands - "Lucas-TVS" Auto Electricals, "Delphi-TVS" Diesel Fuel Injection Equipment, "LISPART" Auto Parts, and "Lucas" Automotive batteries, Ignition Coils & 4ST Switches. LIS also promotes preventive maintanance services under the brand name

Manufacturing :
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For over five decades, LIS has been manufacturing ignition coils for petrol driven vehicles and enjoys a significant market share with major car manufacturers in the country. LIS has enhanced the production line by adding solenoid switches, which have been well accepted as an original fitment by leading automobile manufacturers. LIS also exports ignition coils to the Middle East, SriLanka, Turkey, Singapore and Indonesia. LIS is also a major share holder in a joint venture company "India Nippon Electricals Limited". The company manufactures electronic ignition systems for two wheelers in collaboration with Kokusan Denki, of Hitachi Group, Japan.

Distribution :
LIS extensively covers the country through its 4 regional offices located at the main metros and 20 branches equipped with warehousing facilities. The widespread distribution network of LIS reaches 650 towns and cities. LIS has established a network of over 1500 dealers. The company also maintains close bonds with a large number of institutional clients, State Transport Undertakings, Coal fields, Public Sector Undertakings and Defence Establishments.

Service
LIS has over a period of eight decades, built expertise in servicing auto electrical system and diesel fuel injection equipment. In addition to its 40 company owned workshops located at all major branches, LIS has established a dedicated network of over 500 service dealerships. Comprehensive training provided to service dealers contributes to the success of LIS in the industry. Specialized training in fault diagnosis and repairs is provided on a continuous basis. Training is also extended to the dealers of vehicle manufacturers, state transport undertakings, fleet operators, defence personnel and other such institutional clients. LIS has developed and made available a wide range of tools and test equipment for effectively meeting the service requirements. LIS has introduced a mobile workshop facility designed to handle both auto electrical
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and diesel fuel injection system repairs. The mobile workshop is also equipped with training facilities.

Customer Segments:
Sale and Services Dealers State Transport Undertaking Fleet operators Vehicles Manufacturers Defence Establishments Public and Private Sector Industries Coal Fields Government Projects Exports

LIS is one of the pioneers in introducing a solution based approach, which focuses on preventing breakdowns through regular maintenance checks, for leading brands of passenger cars. This preventive service concept branded as is designed to optimize vehicle performance and prevent breakdowns.

Products :

Products

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Lucas -TVS

DELPH I-TVS

Lucas Batteries

LISPART

Inverters

Lucas inverter/ automoti ve batteries

Ignition Coils & 4st Coils

Lucas Care Benefits & Features :

Lucas Indian Service Limited (a subsidary of Lucas TVS) is a specialist organization, providing solutions for auto electrical and diesel fuel injection equipment. With over seven decades of expertise in the automobile industry, They know how important your car is to you. Lucas Indian Service Limited provides you wih a unique preventive maintenance program "Lucas Care" which optimizes your car's performance and helps to prevent breakdowns.

Future Plans :
Lucas Indian Services, a unit of Lucas-TVS Group, has tied-up with the US-based TOP1 Oil Products Company to market high-end automobile and synthetic blend lubricants in India. "Lucas Indian Services will be our marketing partner in India. We see huge potential in this market," said Frank Ryan, vice-president for sales and marketing of TOP1 Oil Products Company.

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Currently, Indian lubricant market is estimated to be worth nearly Rs 25,000 crore, over Rs 2,000 crore of which is for high quality synthetic and semi-synthetic products. "Entry of TOP1 will further boost the growth of premium lubricants market in India. The company already has a strong presence in the US and other western countries and we are targeting for the same in India also," said Abbi.

VITAL INFORMATION ABOUT COMPANY :

BOARD OF DIRECTORS

T K BALAJI S NARAYANAN K SESHADRI J S CHOPRA ARVIND BALAJI - Whole-time Director SANDEEP ABBI

PRESIDENT VICE PRESIDENT FINANCE COMPANY SECRETARY AUDITORS BANKERS REGISTERED OFFICE BRANCHES AT

K SURESH BABU

S RENGARAJAN Messrs Delolite Haskins & Sells Bank of Baroda 11, Patullos Road, Chennai 600 002 Ahmedabad, Bangaluru, Bhubaneshwar, Chennai Ghaziabad, Goa, Gurgaon, Guwahati, Hyderabad, Indore Jaipur,Jalandhar, Kolkata, Lucknow, Mumbai, Nagpur, New Delhi, Patna, Pune, Raipur and Ranchi

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Chapter 4 Ratio Analysis

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Ratio Analysis
Meaning of Ratio:- A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions. According to Accountants Handbook by Wixon, Kell and Bedford, a ratio is an expression of the quantitative relationship between two numbers. Ratio Analysis:- Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication. It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgement, otherwise complex situations. Ratio analysis can represent following three methods. Ratio may be expressed in the following three ways :

Pure Ratio or Simple Ratio :- It is expressed by the simple division of one number by another. For example , if the current assets of a business are Rs. 200000 and its current liabilities are Rs. 100000, the ratio of Current assets to current liabilities will be 2:1. Rate or So Many Times :- In this type , it is calculated how many times a figure is, in comparison to another figure. For example , if a firms credit sales during the year are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison to debtors. Percentage :- In this type, the relation between two figures is expressed in hundredth. For example, if a firms capital is Rs.1000000 and its profit is Rs.200000 the ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%

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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. 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. Importance of financial statement analysis in an organization. In our money-oriented economy, Finance may be defined as provision money at the time it is needed. To everyone responsible for provision funds, it is problem of securing importance to so adjust his resources as provide for a regular outflow of expenditure in face of an irregular inflow income.. 1. The profit and loss account (Income Statement). 2. The balance sheet In companies, these are the two statements that have been prescribed and their contents have been also been laid down by law in most countries including India. There has been increasing emphasis on Giving information to the shareholder in such a manner as to enable them to grasp it easily. Giving much more information e.g. funds flow statement, again with a view to facilitating easy understanding and to place a year results in perspective through comparison with post year results. The directors report being quite comprehensive to cover the factors that have been operating and are likely to operate in the near future as regards to the various functions of production,
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of of to of

marketing, finance, labour, government policies, environment in general.

Financial statements are being made use of increasingly by parties like Bank, Governments, Institutions, and Financial Analysis etc. The statement should be sufficiently informative so as to serve as wide a curia as possible. The financial statement is prepared by accounts based on the activities that take place in production and non-production wings in a factory. The accounts convert activities in monetary terms to the help know the position.

Uses of Financial Statement Analysis :

The main uses of accounting statements for; Executives : - To formulate policies. Bankers : - To establish basis for Granting Loans. Institutions \ Auditors : - To extend Credit facility to business. Investors : - To assess the prospects of the business and to know whether they can get a good return on their investment. Accountants : - To study the statement for comparative purposes. Government Agencies: - To study from an angle of tax collection duty levee etc.

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Chapter 5 Balance Sheet

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 Balance Sheet : The Balance sheet shows the financial status of a business. The registered companies are to follow part 1 of schedule VI of companys \ act 1956 for recording Assets and Liabilities in the Balance Sheet. Format of Balance Sheet as prescribed by companies Act. Liabilities Share Capital Reserve &Surplus Secured loans Unsecured Loans Current Liabilities & provision Assets Fixed Assets Investments Current Assets, Loan Advances Misc. Expenditures Losses &

Liabilities: Liabilities defined very broadly represent what the business entity owes to other. Share capital: There are two type of share capital: Equity Capital Preference Capital Equity Capital represents the contribution of the owners of the firm.
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Preference capital represents the contribution of preference shareholders and the dividend rate payable on it is fixed. Reserve & Surplus: Reserve & Surplus are profits, which have been retained by the firm reserves, are two types, revenue Reserve and Capital Reserve. Revenue Reserve represents accumulated retained earnings from the profits of normal business operations.

Capital reserve arises out of gains, which are not related to normal business operations. Surplus is the balance in the profit and loss account, which has not been appropriated to any particular reserve account. Reserve and surplus along with equity capital represent Owner s equity. Secured Loans: These denote borrowings of the firm against which specific securities have been provided. The important components of secured loans are debentures, loans from financial institutions and loans from commercial banks. Unsecured Loans: These are borrowing of the firm against which no specific security has been provided. The major components of unsecured loans are fixed deposits, loans and advances from Promoters, Inter-Corporate borrowings and unsecured loans from Banks. Current Liabilities and Provision: Current Liabilities and Provision as per the classification under the companies Act, Consists of the Following amounts due to the suppliers of goods and services brought on credit, Advance payments received, accrued expenses. Unclaimed dividends, Provisions for taxed, Dividends, Gratuity, Pension etc. Assets: Assets have been acquired at a specific monetary cost by the firm for the conduct of its operation.
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Fixed Assets: These assets have two characteristics. They are acquired for use over relatively long period for carrying on the operations of the firm and they are ordinarily not meant for resale. Examples for fixed assets are land, building, plant, Machinery, patent & Copyrights.

Investments: These are financial securities owned by the firm. Some investments represent long-term commitments of funds. Usually those are the equity shares of other firms held for income and control purpose. Other investments are short term in nature and are rightly classified under current assets for managerial purpose.

Current Assets, Loans and Advances: This category consists of cash and other resources, which get converted into cash during the operating cycle of the firm current assets, are held for a short period of time as against fixed assets, which are held for relatively longer periods. The major component of current Assets are: cash, debtors, inventories, loans and advances and pre-paid expenses.

Miscellaneous expenditure and losses: The consist of two items miscellaneous expenditure and losses miscellaneous expenditure represent outlays such as preliminary expenses and pre-operative expenses, which outlays such as preliminary expenses

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which have not written off loss is shown on the right hand side (Assets side) of the balance sheet

BALANCE SHEET (Rs in Lakhs) S.N o SOURCES OF FUNDS 1) Shareholder's Funds: A) Capital B) Reserves and Surplus As at March 2010 As at March 2009

1 2

400.00 7526.8 7926. 80

400.00 6873.81 7273. 81

2)Loan Funds A)Secured Loans B)Un Secured Loans 3 4 31.54 567.09 598.6 3 8525. 43 5 3876.23 1507.49 2368.74 Page 31 of 62 3342.13 1358.38 1983.75

501.71 501.7 1 7775. 52

Application of Funds 1)Fixed Assets A)Gross Block B)Less : Depreciation C)Net Block

D)Capital Work in Progress (Including Capital Advances)

0.45 2369. 19 4324. 14 23.14

151.23 2134. 98 2535. 47 15.06

2)Investments 3)Deferred Tax Asset (Net) 4)Current Assets, Loans and Advances A)Inventories B)Sundry Debtors C)Cash and Bank Balances D)Loans and Advances Less : Current Liabilities & Provisions A)Liabilities B)Provisions

7 8 9 10

3396.04 1864.56 689.09 385.16 6334.79

2955.37 2296.49 776.64 369.9 6398.4

11 12

4245.99 280.11 4526.10 1808. 69 8525. 43

3244.14 64.25 3308.39 3090. 01 7775. 52

Net Current Assets Significant Accounting Policies Notes on accounts

S.No Denotes Schedule Number

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Chapter 6 Types of Ratio

Types of Ratio
Ratio may be classified into the four categories as follows: A. Liquidity Ratio
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a. b. B. a. b. c. d. e. f. C. a. b. c. d. e. f. g. D.

Current Ratio Quick Ratio or Acid Test Ratio Leverage or Capital Structure Ratio Debt Equity Ratio Debt to Total Fund Ratio Proprietary Ratio Fixed Assets to Proprietors Fund Ratio Capital Gearing Ratio Interest Coverage Ratio Activity Ratio or Turnover Ratio Stock Turnover Ratio Debtors or Receivables Turnover Ratio Average Collection Period Creditors or Payables Turnover Ratio Average Payment Period Fixed Assets Turnover Ratio Working Capital Turnover Ratio Profitability Ratio or Income Ratio

(A) Profitability Ratio based on Sales : a. Gross Profit Ratio b. Net Profit Ratio c. Operating Ratio d. Expenses Ratio

(B) Profitability Ratio Based on Investment : I. II. Return on Capital Employed Return on Shareholders Funds :
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a. b. c. d. e. f. g.

Return on Total Shareholders Funds Return on Equity Shareholders Funds Earning Per Share Dividend Per Share Dividend Payout Ratio Earning and Dividend Yield Price Earning Ratio

LIQUIDITY RATIO (A) Liquidity Ratio:- It refers to the ability of the firm to meet its current liabilities. The liquidity ratio, therefore, are also called Short-term Solvency Ratio. These ratio are used to assess the short-term financial position of the concern. They indicate the firms ability to meet its current obligation out of current resources. In the words of Saloman J. Flink, Liquidity is the ability of the firms to meet its current obligations as they fall due. Liquidity ratio include two ratio :a. b. Current Ratio Quick Ratio or Acid Test Ratio

a. Current Ratio:- This ratio explains the relationship between current assets and current liabilities of a business. Formula: Current Ratio = Current Assets/ Current Liabilities

Current Assets:-Current assets includes those assets which can be converted into cash with in a years time. Current Assets = Cash in Hand + Cash at Bank + B/R + Short Term Investment + Debtors(Debtors Provision) + Stock(Stock of Finished Goods + Stock of Raw Material + Work in Progress) + Prepaid Expenses. Current Liabilities :- Current liabilities include those liabilities which are repayable in a years time. Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation + Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans Payable with in a Year.
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Significance :- According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio. It means that current assets of a business should, at least , be twice of its current liabilities. The higher ratio indicates the better liquidity position, the firm will be able to pay its current liabilities more easily. If the ratio is less than 2:1, it indicate lack of liquidity and shortage of working capital. The biggest drawback of the current ratio is that it is susceptible to window dressing. This ratio can be improved by an equal decrease in both current assets and current liabilities. b. Quick Ratio:- Quick ratio indicates whether the firm is in a position to pay its current liabilities with in a month or immediately. Formula: Quick Ratio = Liquid Assets/ Current Liabilities Liquid Assets means those assets, which will yield cash very shortly. Liquid Assets = Current Assets Stock Prepaid Expenses Significance :- An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better. This ratio is a better test of short-term financial position of the company. LEVERAGE OR CAPITAL STRUCTURE RATIO (B) Leverage or Capital Structure Ratio :- This ratio disclose the firms ability to meet the interest costs regularly and Long term indebtedness at maturity. These ratio include the following ratios : a. Debt Equity Ratio:- This ratio can be expressed in two ways:

First Approach : According to this approach, this ratio expresses the relationship between long term debts and shareholders fund. Formula: Debt Equity Ratio=Long term Loans/Shareholders Funds or Net Worth Long Term Loans:- These refer to long term liabilities which mature after one year. These include Debentures, Mortgage Loan, Bank Loan, Loan from Financial institutions and Public Deposits etc.

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Shareholders Funds :- These include Equity Share Capital, Preference Share Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and Credit Balance of Profit & Loss Account. Second Approach : According to this approach the ratio is calculated as follows:Formula: Debt Equity Ratio=External Equities/internal Equities Debt equity ratio is calculated for using second approach. Significance :- This Ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally, debt equity ratio of is considered safe. If the debt equity ratio is more than that, it shows a rather risky financial position from the long-term point of view, as it indicates that more and more funds invested in the business are provided by long-term lenders. The lower this ratio, the better it is for long-term lenders because they are more secure in that case. Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders. b. Debt to Total Funds Ratio : This Ratio is a variation of the debt equity ratio and gives the same indication as the debt equity ratio. In the ratio, debt is expressed in relation to total funds, i.e., both equity and debt. Formula: Debt to Total Funds Ratio = Long-term Loans/Shareholders funds + Longterm Loans Significance :- Generally, debt to total funds ratio of 0.67:1 (or 67%) is considered satisfactory. In other words, the proportion of long term loans should not be more than 67% of total funds. A higher ratio indicates a burden of payment of large amount of interest charges periodically and the repayment of large amount of loans at maturity. Payment of interest may become difficult if profit is reduced. Hence, good concerns keep the debt to total funds ratio below 67%. The lower ratio is better from the long-term solvency point of view. c. Proprietary Ratio:- This ratio indicates the proportion of total funds provide by owners or shareholders. Formula:

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Proprietary Ratio = Shareholders Funds/Shareholders Funds + Long term loans Significance :- This ratio should be 33% or more than that. In other words, the proportion of shareholders funds to total funds should be 33% or more. A higher proprietary ratio is generally treated an indicator of sound financial position from long-term point of view, because it means that the firm is less dependent on external sources of finance. If the ratio is low it indicates that long-term loans are less secured and they face the risk of losing their money. d. Fixed Assets to Proprietors Fund Ratio :- This ratio is also know as fixed assets to net worth ratio. Formula: Fixed Asset to Proprietors Fund Ratio = Fixed Assets/Proprietors Funds (i.e., Net Worth) Significance :- The ratio indicates the extent to which proprietors (Shareholders) funds are sunk into fixed assets. Normally , the purchase of fixed assets should be financed by proprietors funds. If this ratio is less than 100%, it would mean that proprietors fund are more than fixed assets and a part of working capital is provided by the proprietors. This will indicate the long-term financial soundness of business. e. Capital Gearing Ratio:- This ratio establishes a relationship between equity capital (including all reserves and undistributed profits) and fixed cost bearing capital. Formula: Capital Gearing Ratio = Equity Share Capital+ Reserves + P&L Balance/ Fixed cost Bearing Capita Whereas, Fixed Cost Bearing Capital = Preference Share Capital Debentures + Long Term Loan +

Significance:- If the amount of fixed cost bearing capital is more than the equity share capital including reserves an undistributed profits), it will be called high capital gearing and if it is less, it will be called low capital gearing. The high gearing will be beneficial to equity shareholders when the rate of interest/dividend payable on fixed cost bearing capital is lower than the rate of return on investment in business. Thus, the main objective of using fixed cost bearing capital is to maximize the profits available to equity shareholders.
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f. Interest Coverage Ratio:- This ratio is also termed as Debt Service Ratio. This ratio is calculated as follows: Formula: Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest Charges Significance :- This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges. This ratio measures the margin of safety for long-term lenders. This higher the ratio, more secure the lenders is in respect of payment of interest regularly. If profit just equals interest, it is an unsafe position for the lender as well as for the company also , as nothing will be left for shareholders. An interest coverage ratio of 6 or 7 times is considered appropriate. ACTIVITY RATIO OR TURNOVER RATIO (C) Activity Ratio or Turnover Ratio :- These ratio are calculated on the bases of cost of sales or sales, therefore, these ratio are also called as Turnover Ratio. Turnover indicates the speed or number of times the capital employed has been rotated in the process of doing business. Higher turnover ratio indicates the better use of capital or resources and in turn lead to higher profitability. It includes the following : a. Stock Turnover Ratio:- This ratio indicates the relationship between the cost of goods during the year and average stock kept during that year. Formula: Stock Turnover Ratio = Cost of Goods Sold / Average Stock Here, Cost of goods sold = Net Sales Gross Profit Average Stock = Opening Stock + Closing Stock/2 Significance:- This ratio indicates whether stock has been used or not. It shows the speed with which the stock is rotated into sales or the number of times the stock is turned into sales during the year. The higher the ratio, the better it is, since it indicates that stock is selling quickly. In a business where stock turnover ratio is high, goods can be sold at a low margin of profit and even than the profitability may be quit high. b. Debtors Turnover Ratio :- This ratio indicates the relationship between credit sales and average debtors during the year :
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Formula: Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R While calculating this ratio, provision for bad and doubtful debts is not deducted from the debtors, so that it may not give a false impression that debtors are collected quickly. Significance :- This ratio indicates the speed with which the amount is collected from debtors. The higher the ratio, the better it is, since it indicates that amount from debtors is being collected more quickly. The more quickly the debtors pay, the less the risk from bad- debts, and so the lower the expenses of collection and increase in the liquidity of the firm. By comparing the debtors turnover ratio of the current year with the previous year, it may be assessed whether the sales policy of the management is efficient or not. c. Average Collection Period :- This ratio indicates the time with in which the amount is collected from debtors and bills receivables. Formula: Average Collection Period = Debtors + Bills Receivable / Credit Sales per day Here, Credit Sales per day = Net Credit Sales of the year / 365 Second Formula :Average Collection Period = Average Debtors *365 / Net Credit Sales Average collection period can also be calculated on the bases of Debtors Turnover Ratio. The formula will be: Average Collection Period = 12 months or 365 days / Debtors Turnover Ratio Significance :- This ratio shows the time in which the customers are paying for credit sales. A higher debt collection period is thus, an indicates of the inefficiency and negligency on the part of management. On the other hand, if there is decrease in debt collection period, it indicates prompt payment by debtors which reduces the chance of bad debts. D. Creditors turnover ratio :- this ratio indicates the relationship between credit purchases and average creditors during the year . Formula:Creditors turnover ratio = net credit purchases / average creditors + average b/

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Note :- If the amount of credit purchase is not given in the question, the ratio may be calculated on the bases of total purchase. Significance :- This ratio indicates the speed with which the amount is being paid to creditors. The higher the ratio, the better it is, since it will indicate that the creditors are being paid more quickly which increases the credit worthiness of the firm. d. Average Payment Period :- This ratio indicates the period which is normally taken by the firm to make payment to its creditors. Formula:Average Payment Period = Creditors + B/P/ Credit Purchase per day This ratio may also be calculated as follows : Average Payment Period = 12 months or 365 days / Ratio Creditors Turnover

Significance :- The lower the ratio, the better it is, because a shorter payment period implies that the creditors are being paid rapidly. d. Fixed Assets Turnover Ratio :- This ratio reveals how efficiently the fixed assets are being utilized. Formula:- Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets Here, Net Fixed Assets = Fixed Assets Depreciation Significance:- This ratio is particular importance in manufacturing concerns where the investment in fixed asset is quit high. Compared with the previous year, if there is increase in this ratio, it will indicate that there is better utilization of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not been used as efficiently, as they had been used in the previous year. e. Working Capital Turnover Ratio :- This ratio reveals how efficiently working capital has been utilized in making sales. Formula :Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital Here, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock Working Capital = Current Assets Current Liabilities

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Significance :- This ratio is of particular importance in non-manufacturing concerns where current assets play a major role in generating sales. It shows the number of times working capital has been rotated in producing sales. A high working capital turnover ratio shows efficient use of working capital and quick turnover of current assets like stock and debtors. A low working capital turnover ratio indicates under-utilisation of working capital. Profitability Ratios or Income Ratios (D) Profitability Ratios or Income Ratios:- The main object of every business concern is to earn profits. A business must be able to earn adequate profits in relation to the risk and capital invested in it. The efficiency and the success of a business can be measured with the help of profitability ratio. Profitability ratio can be determined on the basis of either sales or investment into business. (A) Profitability Ratio Based on Sales :

a) Gross Profit Ratio : This ratio shows the relationship between gross profit and sales. Formula : Gross Profit Ratio = Gross Profit / Net Sales *100 Here, Net Sales = Sales Sales Return Significance:- This ratio measures the margin of profit available on sales. The higher the gross profit ratio, the better it is. No ideal standard is fixed for this ratio, but the gross profit ratio should be adequate enough not only to cover the operating expenses but also to provide for deprecation, interest on loans, dividends and creation of reserves. b) Net Profit Ratio:- This ratio shows the relationship between net profit and sales. It may be calculated by two methods: Formula: Net Profit Ratio = Net Profit / Net sales *100 Operating Net Profit = Operating Net Profit / Net Sales *100

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Here, Operating Net Profit = Gross Profit Operating Expenses such as Office and Administrative Expenses, Selling and Distribution Expenses, Discount, Bad Debts, Interest on short-term debts etc. Significance :- This ratio measures the rate of net profit earned on sales. It helps in determining the overall efficiency of the business operations. An increase in the ratio over the previous year shows improvement in the overall efficiency and profitability of the business. (c) Operating Ratio:- This ratio measures the proportion of an enterprise cost of sales and operating expenses in comparison to its sales. Formula: Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100 Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock Operating Expenses = Office and Administration Exp. + Selling and Distribution Exp. + Discount + Bad Debts + Interest on Short- term loans. Operating Ratio and Operating Net Profit Ratio are inter-related. Total of both these ratios will be 100. Significance:- Operating Ratio is a measurement of the efficiency and profitability of the business enterprise. The ratio indicates the extent of sales that is absorbed by the cost of goods sold and operating expenses. Lower the operating ratio is better, because it will leave higher margin of profit on sales. (d) Expenses Ratio:- These ratio indicate the relationship between expenses and sales. Although the operating ratio reveals the ratio of total operating expenses in relation to sales but some of the expenses include in operating ratio may be increasing while some may be decreasing. Hence, specific expenses ratio are computed by dividing each type of expense with the net sales to analyse the causes of variation in each type of expense. The ratio may be calculated as : (a) Material Consumed Ratio = Material Consumed/Net Sales*100 (b) Direct Labour cost Ratio = Direct labour cost / Net sales*100 (c) Factory Expenses Ratio = Factory Expenses / Net Sales *100 (a), (b) and (c) mentioned above will be jointly called cost of goods sold ratio. It may be calculated as:
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Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales*100 (d) Office and Administrative Expenses Ratio = Office and Administrative Exp./ Net Sales*100 (e) Selling Expenses Ratio = Selling Expenses / Net Sales *100 (f) Non- Operating Expenses Ratio = Non-Operating Exp./Net sales*100

Significance:- Various expenses ratio when compared with the same ratios of the previous year give a very important indication whether these expenses in relation to sales are increasing, decreasing or remain stationary. If the expenses ratio is lower, the profitability will be greater and if the expenses ratio is higher, the profitability will be lower. (B) Profitability Ratio Based on Investment in the Business:These ratio reflect the true capacity of the resources employed in the enterprise. Sometimes the profitability ratio based on sales are high whereas profitability ratio based on investment are low. Since the capital is employed to earn profit, these ratios are the real measure of the success of the business and managerial efficiency. These ratio may be calculated into two categories: I. Return on Capital Employed II. Return on Shareholders funds I. Return on Capital Employed :- This ratio reflects the overall profitability of the business. It is calculated by comparing the profit earned and the capital employed to earn it. This ratio is usually in percentage and is also known as Rate of Return or Yield on Capital. Formula: Return on Capital Employed = Profit before interest, tax and dividends/ Capital Employed *100 Where, Capital Employed = Equity Share Capital + Preference Share Capital + All Reserves + P&L Balance +Long-Term Loans- Fictitious Assets (Such as Preliminary Expenses OR etc.) Non-Operating Assets like Investment made outside the business. Capital Employed = Fixed Assets + Working Capital
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Advantages of Return on Capital Employed:

Since profit is the overall objective of a business enterprise, this ratio is a barometer of the overall performance of the enterprise. It measures how efficiently the capital employed in the business is being used. Even the performance of two dissimilar firms may be compared with the help of this ratio. The ratio can be used to judge the borrowing policy of the enterprise. This ratio helps in taking decisions regarding capital investment in new projects. The new projects will be commenced only if the rate of return on capital employed in such projects is expected to be more than the rate of borrowing. This ratio helps in affecting the necessary changes in the financial policies of the firm. Lenders like bankers and financial institution will be determine whether the enterprise is viable for giving credit or extending loans or not. With the help of this ratio, shareholders can also find out whether they will receive regular and higher dividend or not.

II. Return on Shareholders Funds :Return on Capital Employed Shows the overall profitability of the funds supplied by long term lenders and shareholders taken together. Whereas, Return on shareholders funds measures only the profitability of the funds invested by shareholders. These are several measures to calculate the return on shareholders funds: (a) Return on total Shareholders Funds :For calculating this ratio Net Profit after Interest and Tax is divided by total shareholders funds. Formula: Return on Total Shareholders Funds = Net Profit after Interest and Tax / Total Shareholders Funds Where, Total Shareholders Funds = Equity Share Capital + Preference Share Capital + All Reserves + P&L A/c Balance Fictitious Assets Significance:- This ratio reveals how profitably the proprietors funds have been utilized by the firm. A comparison of this ratio with that of similar firms will throw light on the relative profitability and strength of the firm. (b) Return on Equity Shareholders Funds:-

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Equity Shareholders of a company are more interested in knowing the earning capacity of their funds in the business. As such, this ratio measures the profitability of the funds belonging to the equity shareholders. Formula: Return on Equity Shareholders Funds = Net Profit (after int., tax & preference dividend) / Equity Shareholders Funds *100 Where, Equity Shareholders Funds = Equity Share Capital + All Reserves + P&L A/c Balance Fictitious Assets Significance:- This ratio measures how efficiently the equity shareholders funds are being used in the business. It is a true measure of the efficiency of the management since it shows what the earning capacity of the equity shareholders funds. If the ratio is high, it is better, because in such a case equity shareholders may be given a higher dividend. (c) Earning Per Share (E.P.S.) :- This ratio measure the profit available to the equity shareholders on a per share basis. All profit left after payment of tax and preference dividend are available to equity shareholders. Formula: Earning Per Share = Net Profit Dividend on Equity Shares Preference Shares / No. of

Significance:- This ratio helpful in the determining of the market price of the equity share of the company. The ratio is also helpful in estimating the capacity of the company to declare dividends on equity shares. (d) Dividend Per Share (D.P.S.):- Profits remaining after payment of tax and preference dividend are available to equity shareholders. But of these are not distributed among them as dividend . Out of these profits is retained in the business and the remaining is distributed among equity shareholders as dividend. D.P.S. is the dividend distributed to equity shareholders divided by the number of equity shares.

Formula: D.P.S. = Dividend paid to Equity Shareholders / No. of Equity Shares *100 (e) Dividend Payout Ratio or D.P. :- It measures the relationship between the earning available to equity shareholders and the dividend distributed among them. Formula:
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D.P. = Dividend paid to Equity Shareholders/ Total Net Profit belonging to Equity Shareholders*100 OR D.P. = D.P.S. / E.P.S. *100 (f) Earning and Dividend Yield :- This ratio is closely related to E.P.S. and D.P.S. While the E.P.S. and D.P.S. are calculated on the basis of the book value of shares, this ratio is calculated on the basis of the market value of share (g) Price Earning (P.E.) Ratio:- Price earning ratio is the ratio between market price per equity share & earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company & is widely used by investors to decide whether or not to buy shares in a particular company. Significance :- This ratio shows how much is to be invested in the market in this companys shares to get each rupee of earning on its shares. This ratio is used to measure whether the market price of a share is high or low.

CALCULATION OF KEY RATIOS - LUCAS INDIAN SERVICES LIMITED : Gross Profit Ratio = Gross Profit / Net Sales *100

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 Gross Profit 1432 (in Lakhs) Net Sales 14608 (in Lakhs) Gross Profit Ratio = 1432 / 14608 *100 = 7.82 %

Earning Per Share = Net Profit Dividend on Preference Shares / No. of Equity Shares
Net Profit 1097 Dividend on Preference Shares 400 No. of Equity Shares 10

Earning Per Share = 1097 400 / 10 = 27.43 %

Current Ratio =

Current Assets/ Current Liabilities

Current Assets 6358 Current Liabilities 5125

Current Ratio = 6358 / 5125 = 1.24

Return on Equity Shareholders Funds = Net Profit (after int., tax & preference dividend) / Equity Shareholders Funds *100
Net Profit - 1097 Equity Shareholders Funds 7927

Return on Equity Shareholders Funds = 1097 / 7927 *100 =13.84 %

Return on Capital Employed = Profit before interest, tax and dividends/ Capital Employed *100
Profit before interest, tax and dividends 1576 Capital Employed 7526

Return on Capital Employed = 1576 / 7526 * 100 = 19.88 %

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Dividend Per Share = Dividend paid to Equity Shareholders / No. of Equity Shares *100
Dividend paid to Equity Shareholders 95 No. of Equity Shares 10

Dividend Per Share = 95 /10 = 9.5 %

Lucas Indian Service Ltd. Key Ratios 31.03.0 7 9.80% 8.56% 28.56 24.90 28.39 367074 10.00 158.85 0.00 0.23 15.67% 40.16% 8.56% 7.90% 6.30% 20.38% 6.11% 8.78% 1.26 0.33 1.64 5.88% 168.88% 15.67% 20.34% 21.89% 14.81% 20.35% 22.52% 12.69% 10.09% 31.03. 10 7.82% 6.70% 15.50 27.43 31.47 553591 9.50 198.17 0.00 0.22 13.84% 34.64% 6.70% 6.40% 6.65% 26.31% 3.71% 7.09% 0.58 0.14 1.24 4.74% 219.83% 9.32% 14.40% 16.14% 7.42% -25.94% 4.49% 330.05 % 13.84% 19.88% 20.82% 21.38% 45.95%

Year ended 31/3 Gross Profit/ Sales Operating Profit/Sales Interest coverage (times) Earnings per share (Rs/share) Cash EPS (Rs/share) Sales per share (Rs/share) Dividend per share (Rs/share) Book value of share (Rs/share) Debt equity ratio (times) Gross Profit/ total funds employed RONW (%) Pay out Ratio (%) Operating profit margin Profit after tax / Total revenue Employee costs / Total revenue Tax / Profit before tax Other Income / Total revenue Cash profit / Total revenue Acid test ratio

31.03.08 9.39% 8.18% 45.32 25.54 29.96 420671 10.50 172.50 0.00 0.23 14.81% 41.11% 8.18% 7.72% 6.44% 25.83% 4.06% 8.71% 1.06 0.23 1.54

31.03.09 6.57% 5.58% 31.33 16.95 20.81 454951 6.50 181.85 0.00 0.17 9.32% 38.34% 5.58% 5.32% 6.84% 33.51% 3.47% 6.12% 0.91 0.20 1.68 -

Cash & cash equivalents / Current liabilities Current ratio Debt - Equity ratio Depreciation for the year / Average gross block Capital expenditure / Depreciation Return on equity Return on capital employed Cash profit / Average net worth Growth in total revenue Growth in net profit ( before taxation )

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Sales / Total assets Cash & cash equivalents / Total revenue Cash & cash equivalents / Total assets Cash earnings per share Dividend per share EPS Growth

349.47% 6.01% 22.79% 28.39 10.00

372.86% 4.93% 19.49% 29.96 10.50 2.57%

391.39% 4.05% 16.63% 20.81 6.50 -33.61%

332.01 % 2.96% 10.29% 31.47 9.50 61.76%

Chapter 7
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Objectives
OBJECTIVES Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. For that there are some objectives which are described as under. 1. EARNING CAPACITY OR PROFITABILITY The overall objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest and dividend. 2. COMPARATIVE POSITION IN RELATION TO OTHER FIRMS The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms engaged in similar business. Such comparison also helps the management to study the position of their firm in respect of sales expenses, profitability and using capital.etc. 3. EFFICIENCY OF MANAGEMENT The purpose of financial statement analysis is to know that the financial policies adopted by the management are efficient or not. Analysis also helps the management in preparing budgets by forecasting next years profit on the basis of past earnings. It also helps the management to find out

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shortcomings of the business so that remedial measures can be taken to remove these shortcomings. 4. FINANCIAL STRENGTH The purpose of financial analysis is to assess the financial potential of business. Analysis also helps in taking decisions; (a) Whether funds required for the purchase of new machinery and equipments are provided from internal resources of business or not. (b) How much funds have been raised from external sources. 5.SOLVECNY OF THE FIRM The different tools of analysis tells us whether the firm has suffucient funds to meet its short-term and long-term liabilities or not.

Chapter 8
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IMPORTANCE

IMPORTANCE Ratio analysis is an important technique of financial analysis. It is a means for judging the financial health of a business enterprise. It determines and interprets the liquidity,solvency,profitability,etc. of a business enterprise. It becomes simple to understand various figures in the financial statements through the use of different ratios. Financial ratios simplify, sumarise, and systemise the accounting figures presented in financial statements. With the help of raito analysis, comparision of profitability and financial soundness can be made between one industry and another. Similarly comparision of current year figures can also be made with those of previous years with the help of ratio analysis and if some weak points are located, remidial masures are taken to correct them.
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If accounting ratios are calculated for a number of years, they will reveal the trend of costs, sales, profits and other important facts. Such trends are useful for planning. Financial ratios, based on a desired level of activities, can be set as standards for judging actual performance of a business. For example, if owners of a business aim at earning profit @ 25% on the capital which is the prevailing rate of return in the industry then this rate of 25% becomes the standard. The rate of profit of each year is compared with this standard and the actual performance of the business can be judged easily. analysis discloses the position of business with different viewpoint. It discloses the position of business with liquidity viewpoint, solvency view point, profitability viewpoint, etc. with the help of such a study, we can draw conclusion regardings the financial health of business enterprise.

Ratio

Chapter 9
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ADVANTAGES & LIMITATIONS

ADVANTAGES Ratio analysis is an important and age-old technique of financial analysis. The following are some of the advantages of ratio analysis: 1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business. 2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and
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unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. 3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications. 4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future. 5. Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.

LIMITATIONS The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations. 1. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, nonfinancial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements.

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2. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations. 3. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. 4. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. 5. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. 6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpret and different people may interpret the same ratio in different way. 7. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

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Chapter 10
CONCLUSION

CONCLUSION

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Ratios make the related information comparable. A single figure by itself has no meaning, but when expressed in terms of a related figure, it yields significant interferences. Thus, ratios are relative figures reflecting the relationship between related variables. Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not of much use.

Ratio analysis has a major significance in analysing the financial performance of a company over a period of time. Decisions affecting product prices, per unit costs, volume or efficiency have an impact on the profit margin or turnover ratios of a company. Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decisionmaker insights into the financial performance of a company. The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firms position and performance. The first task of financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation. Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis.

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Chapter -11
BIBLIOGRAPHY

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 BIBLIOGRAPHY
Web Sites: http://www.lucas-service.in/

Books Referred:
Basic Financial Management- M Y Khan P K Jain Financial Management- Prasanna Chandra

Annual Reports

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