project report ratio analysis

8/3/2019 project report ratio analysis

1/69

Summer Internship Report

On

FINANCIAL ANALYSIS

OF

BENGAL PACKERS

Submitted for the partial fulfillment for the award of the degree of Masters in

Business Administration

Of

LINGAYAS UNIVERSITY, FARIDABAD

Session 2011-12

Under the Guidance of: Submitted By

Ms. Suman Arora Name: Shweta Gupta

Roll No: 10 MBA32

Lingayas University, Foundation CampusNachauli Jasana Road, Old Faridabad, Haryana

Website:www.Lingayasuniversity.org
http://www.lingayasuniversity.org/http://www.lingayasuniversity.org/http://www.lingayasuniversity.org/http://www.lingayasuniversity.org/


2/69

TABLE OF CONTENTS

CONTENTS PARTICULARS PAGE

NO.

Declaration by student

Certificate of the project guide

Acknowledgement

CHAPTER-

1

INTRODUCTION:

1.0 Executive summary

1.2 Objective

1.2.Research methodology

CHAPTER-

2

COMPANIES PROFILE [IN BRIEF]

2.0 Introduction

2.1Organisation Structure

2.2 List Of Key Management Personnel


3/69

CONTENTS PARTICULARS PAGE

NO.

2.3Current Sales

2.4 Product Mix

2.5 Direct Competitor

2.6 Future Plans

CHAPTER-

3

STUDYCASH MANAGEMNT

3.1 Introduction of Financial management

3.2 Introduction of cash management

3.3Strategies of cash management

3.4 Cash planning and control and its tools

3.5 Cash flow statement of Escort ltd.

CHAPTER-4

ANALYSIS AND INTERPRETATION

4.1 Change in sales

4.2 Change in contribution per tractor

4.3 Shareholding pattern

4.4 Lquidity of share

4.5 Statistics of dividend payment

CHAPTER-

5

5.1 Recommendations

5.2 Suggestions


4/69

5.3 Annexure

5.4 Bibliography

5.5 Questionaires

DECLARATION BY THE CANDIDATE

I hereby declare that the work, which is being present in this Project, entitled

STUDY OF FINANCIAL STATEMENT OF BENGAL JUTE TRADER

USING RATIO ANALYSIS is an authentic record of my own work carried

out by me under the Supervision and Guidance of Mr. AMIT SINGLA,

Executive Director.

This Project was undertaken as a Summer Training Project in the Fourth

Semester of MBA Degree as per the Curriculum of Lingayas university,

Faridabad.

I have not submitted the matter embodied here in this Project for the award

of any other Degree/Diploma.

Name: SHWETA GUPTA

Roll No.: 10 MBA 32MBA IV Semester


5/69

Acknowledgement

On the completion of my training at Bengal Packers. I like to thank the

management of the firm for the opportunity to work with them and the guidance

throughout the course of this project.

I would like to thank Mr. Manish singla, Accounts Officer, Finance Department

and Mr. Amit, Planning Manager, Replenishment Department for their continuous

guidance and encouragement. I am very grateful to Mr. Ramesh, Manager, and

Finance Department for giving me the required work exposure. I also acknowledge

that all other staff of Bengal Packers was really co-operative too.

Lastly, I am very thankful to my project guide MS. SUMAN ARORA for her

suggestions ,which led to the completion of this projecto.

SHWETA GUPTA


6/69

EXECUTIVE SUMMARY

The main purpose of taking this project was to gain a firsthand knowledge about

the structure and the functioning of the finance department and to develop and

disseminate comparative financial indicator of BENGAL PACKERS using ratio

analysis. A literature view has analyzed the use of 4 important ratios i.e. Liquidity,

Solvency, Activity and Profitability ratios that have proven useful for assessing the

financial condition.

The project helped to see the applicability and usability of theory which have been

taught during the MBA programme. Results of the project showed that over 3years

since 2006, BANGAL PACKERS have become more profitable however looking

at the past data trends it can be conferred that the management of the firm have

been exercising a policy by increasing the debt component in the capital structure

and introducing private capital equity as major source of capital.


7/69

OBJECTIVE OF THE STUDY

The above study aimed at:

To gain the overall idea about the organization and to gain a firsthand

knowledge about the structure and the functioning of the finance department and

enabling the financial analyst to take different decisions regarding the operations

of the firm.

To find out the importance of finance in business, financial performance of the

organization the future requirement of finance in business and to study the

investment decisions based on the return.


8/69

SCOPE OF STUDY

To know the ability of the firm to meet the current obligation.

To know the extent to which firm has used its long term solvency by borrowing funds

To know the efficiency to which firm is utilizing its assets in generating sales revenue.

To know whether the firm is utilizing the overall operating efficiency .

To know the performance of the firm.


9/69

RESEARCH METHODOLOGY

Plan of study:-

A proper and systematic approach is essential in any project work. Proper planning

should be conducting the data collection, completion and presentation of the project.

Each and every step must be so planned that it leads to the next step automatically.

This systematic approach is a blend a planning and organization and major emphasis

is given to independences of various steps.

The plan of this study is as follows:

Research purpose

The purpose of the research is to find out the criteria on which investment of the

company is raised every year and a favorable rate of return is arrived at, increasing the

net result of the company as per their budget.


10/69

RESEARCH DESIGN:

The research methodology used in this study isDescriptive research because it will

ensure the minimization of bias and maximization of reliability of data collected.

The information already available through financial statements of earlier years was

taken and analyzed to make critical evaluation of the available material. Hence by

making the type of the research conducted to be both Descriptive and Analytical

in nature.

SOURCES OF DATA COLLECTION:

The required data for the study are basically secondary in nature and the data

are collected from the audited reports of the company.

The information was collected from various sources which are listed below:-

1 From the official document.

2 From records and manuals of different departments of the organizations.

3 From a close observation of the functioning of various departments of the

Organizations.

4 Last but not least, knowledge, both negative and positive precipitated through

informal discussions with the employees of different departments.

The sources of data are from the annual reports of the company from the year

2006to 2009


11/69

Sample Size

The sample size selected is of three years.

Software tools used for the data analysis :

The software tools used for data analysis is MS WORD & MS EXCEL


12/69

INTRODUCTION OF THE COMPANY

Established in the year 1995,BENGAL PACKERS , are a sole proprietorship

firm engaged in manufacturing and supplying corrugated boxes, sheets and rolls.

We perfectly utilize the procured raw material, so that the products are produced as

per the international quality standards. Known for high load bearing capacity, these

products are durable, high in strength and are utilized mainly in food,

pharmaceutical and cosmetic industries.

Facilitated with hi-tech manufacturing unit and advanced in-house designing unit,

we are proficient in catering to the specific needs of our clients. Clients are the axis

of our organization and therefore, we make sure that they do not face any problem

while dealing with us. Therefore, we ensure timely delivery of products andprovide them with numerous payment modes such as cash, cheque, Our large

network of loyal clients in India speaks volumes for our success in this domain.

MISSION STATEMENT OF A COMPANY

The firm is producing fine quality boxes and providing satisfaction to theircustomer.

VISION STATEMENT OF THE COMPANY

The firm vision is to attain a global leadership in manufacturing of high quality

corrugated box and sheet board.


13/69

Strength of the firm

We manufacture products using the top quality Kraft papers. These are available in

many more designs, patterns, sizes, and also in customized choices. Following are

the characteristics of our products that bring us a countless number of reputed

customers across the world:

* Attractive packaging.

* Eco-friendly materials.

* Strength

* Durability

* Timely Delivery* Customers Satisfaction

* Easy Mode of Payment

* Professional Team of Workers

* Maintaining the Standard Thickness of the Wall.


14/69

About the product

Corrugated sheet boxes protect the contents against hazards of shipping and

transporting and preserve the taste, moisture or dryness, appearance and original

form. They prevent contamination of any kind. They can be handled easily,forming, filling, closing and loading into stripping containers. Corrugated board is

used for making corrugated boxes which find application in packing a wide variety

of consumer products like cosmetics, drugs, households goods,

electrical/electronic goods, cigarettes, textiles, beverages, chemicals, hardware, tea

and coffee. It is one of the important packaging media for various light weight

goods. They are made from corrugated board consisting of two flat parallel sheets

of craft paper board with a centrally fluted corrugated sheet between them

Manufacture of corrugated box is being done in small scale as well as large scale

industries. India imports fine quality corrugated boards and also manufacture

some. There is vase use of these boxes, 40 % being used for TV, radio, bulbs and

tubes, electronic goods, 10 % used by dairy products. There is great demand with a

good marketing setup. There is very bright scope for entrepreneur as these are

being accepted for export business also.


15/69

LITERATURE REVIEW

Introduction of ratio analysis

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm and establishing relationship between the items of

the balance sheet and profit & loss account.

Financial ratio analysis is a fascinating topic to study because it can teach

us so much about accounts and businesses. When we use ratio analysis we

can work out how profitable a business is, we can tell if it has enough

money to pay its bills and we can even tell whether its shareholders should

be happy!

Ratio analysis can also help us to check whether a business is doing better

this year than it was last year; and it can tell us if our business is doing

better or worse than other businesses doing and selling the same things. In

addition to ratio analysis being part of an accounting and business studies

syllabus, it is a very useful thing to know anyway!


16/69

Ratio analysis

Ratio analysis is one of the techniques of financial analysis to evaluate the

financial condition and performance of a business concern. According to

Myers , Ratio analysis of financial statements is a study of relationship

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

statements and a study of trend of these factors as shown in a series of

statements."

Advantages and Uses of Ratio Analysis

To workout the profitability: Accounting ratio help to measure the

profitability of the business by calculating the various profitability ratios. It

helps the management to know about the earning capacity of the business

concern. In this way profitability ratios show the actual performance of the

business.

To workout the solvency: With the help of solvency ratios, solvency ofthe company can be measured. These ratios show the relationship between

the liabilities and assets. In case external liabilities are more than that of

the assets of the company, it shows the unsound position of the business. In

this case the business has to make it possible to repay its loans.


17/69

Helpful in analysis of financial statement: Ratio analysis help the

outsiders just like creditors, shareholders, debenture-holders, bankers to

know about the profitability and ability of the company to pay them

interest and dividend etc.

Helpful in comparative analysis of the performance: With the help of

ratio analysis a company may have comparative study of its performance

to the previous years. In this way company comes to know about its weak

point and be able to improve them.

To simplify the accounting information: Accounting ratios are very

useful as they briefly summarize the result of detailed and complicated

computations.

Limitations of Ratio Analysis

In spite of many advantages, there are certain limitations of the ratio

analysis techniques and they should be kept in mind while using them in

interpreting financial statements.


18/69

The following are the main limitations of accounting ratios:

Limited Comparability: Different firms apply different accountingpolicies. Therefore the ratio of one firm cannot always be compared with

the ratio of other firm. Some firms may value the closing stock on LIFO

basis while some o

ther firms may value on FIFO basis. Similarly there may be difference in

providing depreciation of fixed assets or certain of provision for doubtful

debts etc.

False Results: Accounting ratios are based on data drawn from

accounting records. In case that data is correct, then only the ratios will be

correct. For example, valuation of stock is based on very high price, the

profits of the concern will be inflated and it will indicate a wrong financial

position. The data therefore must be absolutely correct.

Effect of Price Level Changes: Price level changes often make the

comparison of figures difficult over a period of time. Changes in price

affect the cost of production, sales and also the value of assets. Therefore,

it is necessary to make proper adjustment for price-level changes before

any comparison.


19/69

Qualitative factors are ignored: Ratio analysis is a technique of

quantitative analysis and thus, ignores qualitative factors, which may be

important in decision making. For example, average collection period may

be equal to standard credit period, but some debtors may be in the list of

doubtful debts, which is not disclosed by ratio analysis.

Effect of window-dressing: In order to cover up their bad financial

position some companies resort to window dressing. They may record the

accounting data according to the convenience to show the financial

position of the company in a better way.

CLASSIFICATION OF RATIOS :

Ratios may be classified in a number of ways to suit any particular

purpose. Different kinds of ratios are selected for different types of

situations. Mostly, the purpose for which the ratios are used and the kind of

data available determine the nature of analysis. The various accounting

ratios can be classified as follows:

IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE

1. Liquidity ratio

2. Leverage ratio

3. Activity ratio

4. Profitability ratio


20/69

CLASSIFICATION OF RATIOS :

A. Liquidity ratios :

1 Current ratio

2 Liquid /Acid test / Quick ratio

B. Leverage ratios or long term solvency ratios :

1 Debt equity ratio

2 Proprietary or Equity ratios

C. Activity ratios:

1. Working capital turnover ratio

2. Fixed assets turnover ratio

D. Profitability ratios :

1 Net profit ratio

2 Gross profit ratios

3 Return on investments


21/69

1. LIQUIDITY RATIOS:

Liquidity refers to the ability of a concern to meet its current

obligations as & when there becomes due. The short term obligations of a firm can

be met only when there are sufficient liquid assets. The short term obligations are

met by realizing amounts from current, floating (or) circulating assets The current

assets should either be calculated liquid (or) near liquidity. They should be

convertible into cash for paying obligations of short term nature. The sufficiency

(or) insufficiency of current assets should be assessed by comparing them with

short-term current liabilities. If current assets can pay off current liabilities, then

liquidity position will be satisfactory.

To measure the liquidity of a firm the following ratios can be

calculated

Current ratio Quick (or) Acid-test (or) Liquid ratio


22/69

(a) CURRENT RATIO:

Current ratio may be defined as the relationship between current assets and current

liabilities. This ratio is also known as "working capita l ratio ". It is a measure of

general liquidity and is most widely used to make the analysis for short term

financial position or liquidity of a firm. It is calculated by dividing the total of the

current assets by total of the current liabilities.

Current assets

Current ratio =

Current liabilities

Components:

The two basic components of this ratio are current assets and current

liabilities. Current assets include cash and those assets which can be easily

converted into cash within a short period of time, generally, one year, such

as marketable securities or readily realizable investments, bills receivables,

sundry debtors, (excluding bad debts or provisions), inventories, work in

progress, etc. Prepaid expenses should also be included in current assets

because they represent payments made in advance which will not have to

be paid in near future. Current liabilities are those obligations which are

payable within a short period of tie generally one year and include

outstanding expenses, bills payable, sundry creditors, bank overdraft,


23/69

accrued expenses, short term advances, income tax payable, dividend

payable, etc. However, sometimes a controversy arises that whether

Overdraft should be regarded as current liability or not. Often an

arrangement with a bank may be regarded as permanent and therefore, it

may be treated as long term liability. At the same time the fact remains that

the overdraft facility may be cancelled at any time.

Accordingly, because of this reason and the need for conversion in

interpreting a situation, it seems advisable to include overdrafts in current

liabilities.

Significance:

This ratio is a general and quick measure of liquidity of a firm. It represents

the margin of safety or cushion available to the creditors. It is an index of the

firms financial stability.

It is also an index of technical solvency and an index of the strength of

working capital.

A relatively high current ratio is an indication that the firm is liquid and has

the ability to pay its current obligations in time and when they become due.

On the other hand, a relatively low current ratio represents that the liquidity

position of the firm is not good and the firm shall not be able to pay its

current liabilities in time without facing difficulties. An increase in the

current ratio represents improvement in the liquidity position of the firm

while a decrease in the current ratio represents that there has been

Deterioration in the liquidity position of the firm.

The current ratio measures the quantity of the current assets and not the

quality of the current assets. If a firm's current assets include debtors which


24/69

are not recoverable or stocks which are slow-moving or obsolete, the current

ratio may be high but it does not represent a good liquidity position.

Limitations of Current Ratio:

This ratio is measure of liquidity and should be used very carefully because

it suffers from many limitations. It is, therefore, suggested that it should not

be used as the sole index of short term solvency.

1. It is crude ratio because it measures only the quantity and not the quality

of the current assets.

2. Even if the ratio is favorable, the firm may be in financial trouble, because

of more stock and work in process which is not easily convertible into cash,

and, therefore firm may have less cash to pay off current liabilities


25/69

(b) Liquid or Liquidity or Acid Test or Quick Ratio: -

Definition:

Liquid ratio is also termed as "Liquidity Ratio, Acid Test Ratio " or

"Quick Ratio ". It is the ratio of liquid assets to current liabilities. The true

liquidity refers to the ability of a firm to pay its short term obligations as and

when they become due.

Components:

The two components of liquid ratio (acid test ratio or quick ratio) are liquid

assets and liquid liabilities. Liquid assets normally include cash, bank,

sundry debtors, bills receivable and marketable securities or temporary

investments. In other words they are Ratio current assets minus inventories

(stock) and prepaid expenses. Inventories cannot be termed as liquid assets

because it cannot be converted into cash immediately without a

loss of value. In the same manner, prepaid expenses are also excluded from

the list of liquid assets because they are not expected to be converted into

cash. Similarly, Liquid liabilities means current liabilities i.e., sundry

creditors, bills payable, outstanding expenses, short term advances, income

tax payable, dividends payable, and bank overdraft (only if payable on

demand). Some time bank overdraft is not included in current liabilities, on

the argument that bank overdraft is generally permanent way of

Financing and is not subject to be called on demand. In such cases overdraft

will be excluded from current liabilities.


26/69

Formula of Liquidity Ratio

Quick or liquid assets

Quick ratio =

Current liabilities

Significance:

The quick ratio/acid test ratio is very useful in measuring the liquidity

position of a firm.

It measures the firm's capacity to pay off current obligations immediately

and is more rigorous test of liquidity than the current ratio. It is used as a

complementary ratio to the current ratio. Liquid ratio is more rigorous test of

liquidity than the current ratio because it eliminates inventories and prepaid

expenses as a part of current assets. Usually a high liquid ratio an indication

that the firm is liquid and has the ability to meet its current or

liquid liabilities in time and on the other hand a low liquidity ratio represents

that the firm's liquidity position is not good. As a convention, generally, a

quick ratio of "one to one" (1:1) is considered to be satisfactory.

Although liquidity ratio is more rigorous test of liquidity than the current

ratio, yet it should be used cautiously and 1:1 standard should not be used

blindly. A liquid ratio of 1:1 does not necessarily mean satisfactory liquidity

position of the firm if all the debtors cannot be realized and cash is needed

immediately to meet the current obligations. In the


27/69

same manner, a low liquid ratio does not necessarily mean a bad liquidity

position as inventories are not absolutely non-liquid. Hence, a firm having a

high liquidity ratio may not have a satisfactory liquidity position if it has

slow-paying debtors. On the other hand, a firm having a low liquid ratio may

have a good liquidity position if it has a fast moving inventory. Though this

ratio is definitely an improvement over current ratio, the

Interpretation of this ratio also suffers from the same limitations as of

current ratio.

II. LEVERAGE RATIOS

(a) PROPRIETORY RATIO :-Definition:

This is a variant of the debt-to-equity ratio. It is also known as equity ratio or net

worth to total assets ratio. This ratio relates the shareholder's funds to total assets.

Proprietary / Equity ratio indicates the long-term or future solvency position of the

business.

Formula of Proprietary/ Equity Ratio:


28/69

Components:

Shareholder's funds include equity share capital plus all reserves and surpluses

items. Total assets include all assets, including Goodwill. Some authors exclude

goodwill from total assets. In that case the total shareholder's funds are to be

divided by total tangible assets. As the total assets are always equal to total

liabilities, the total liabilities, may also be used as the denominator in the above

formula.

Significance:

This ratio throws light on the general financial strength of the company. It is also

Regarded as a test of the soundness of the capital structure. Higher the ratio or the

share of shareholders in the total capital of the company better is the long-term

solvency position of the company. A low proprietary ratio will include greater risk

to the creditors.


29/69

(b). DEBT- EQUITY RATIO :

Definition:

Debt-to-Equity ratio indicates the relationship between the external equities or

outsiders funds and the internal equities or shareholders funds. It is also known as

external internal equity ratio. It is determined to ascertain soundness of the long

term financial policies of the company.

Formula of Debt to Equity Ratio:

Following formula is used to calculate debt to equity ratio

1. DEBT-EQUITY RATIO = DEBT(long-term loans)/EQUITY

Components:

The two basic components of debt to equity ratio are outsiders funds i.e. external

Equities and share holders funds, i.e., internal equities. The outsiders funds

include all debts / liabilities to outsiders, whether long term or short term or

whether in the form of debentures, bonds, mortgages or bills. The shareholders

funds consist of equity share capital, preference share capital, capital reserves,

revenue reserves, and reserves representing accumulated profits and surpluses like

reserves for contingencies, sinking funds, etc. The accumulated losses and deferred

expenses, if any, should be deducted from the total to find out shareholder's funds

some writers are of the view that current liabilities do not reflect long term


30/69

commitments and they should be excluded from outsider's funds. There are some

other writers who suggest that current liabilities should

also be included in the outsider's funds to calculate debtequity ratio for the reason

that like long term borrowings, current liabilities also represents firm's obligations

to outsiders and they are an important determinant of risk. However, we advise that

to calculate debt equity ratio current liabilities should be included in outsider's

funds. The ratio calculated on the basis outsider's funds excluding liabilities may

be termed as ratio of long-term debt to share holders funds. It means that for every

four dollars worth of the creditors investment the shareholders have invested six

dollars. That is external debts are equal to 0.66% of shareholders funds.

Significance of Debt to Equity Ratio:

Debt to equity ratio indicates the proportionate claims of owners and the outsiders

against the firms assets. The purpose is to get an idea of the cushion available to

outsiders on the liquidation of the firm. However, the interpretation of the ratio

depends upon the financial and business policy of the company. The owners want

to do the business with maximum of outsider's funds in order to take lesser risk of

their investment and to increase their earnings (per share) by paying a lower fixed

rate of interest to outsiders.

The outsiders creditors) on the other hand, want that shareholders (owners) should

invest and risk their share of proportionate investments. A ratio of 1:1 is usually

considered to be satisfactory ratio although there cannot be rule of thumb or

standard norm for all types of businesses. Theoretically ifthe owners interests are

greater than that of creditors, the financial position is highly solvent. In analysis of

the long-term financial position it enjoys the same importance as the current ratio

in the analysis of the short-term financial position.


31/69

3. ACTIVITY RATIOS:-

(a). Working Capital Turnover Ratio:

Definition:

Working capital turnover ratio indicates the velocity of the utilization of

net working capital. This ratio represents the number of times the

working capital is turned over in the course of year and is calculated as

follows:

Formula of Working Capital Turnover Ratio:

The two

components of the ratio are cost of sales and the net working capital. If

the information about cost of sales is not available the figure of sales may

be taken as the numerator. Net working capital is found by deduction

from the total of the current assets the total of the current liabilities.

Significance:

The working capital turnover ratio measures the efficiency with which the working

capital is being used by a firm. A high ratio indicates efficient utilization of

working capital and a low ratio indicates otherwise. But a very high working

capital turnover ratio may also mean lack of sufficient working capital which is not

a good situation.


32/69

(b). Fixed Assets Turnover Ratio: Definition:

Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio

measures the efficiency and profit earning capacity of the concern. Higher the

ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-

utilization of fixed assets.

The ratio is calculated by using following formula:

Formula of Fixed Assets Turnover Ratio:


33/69

IV. PROFITABILITY RATIOS

(a) NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit (after tax)and sales and indicates the efficiency of the management in manufacturing, selling

administrative and other activities of the firm.

Net profit after tax

Net profit ratio=

Net sales

Net Profit after Tax = Net Profit () Depreciation () Interest () Income Tax

Components of net profit ratio:

The two basic components of the net profit ratio are the net profit and sales. The

net profits are obtained after deducting income-tax and, generally, non-operating

expenses and incomes are excluded from the net profits for calculating this ratio.

Thus, incomes such as interest on investments outside the business, profit on sales

of fixed assets and losses on sales of fixed assets, etc are excluded.

Significance:

NP ratio is used to measure the overall profitability and hence it is very useful

Proprietors. The ratio is very useful as if the net profit is not sufficient, the firm

shall not be able to achieve a satisfactory return on its investment. This ratio also

indicates the firm's capacity to face adverse economic conditions such as price


34/69

competition, low demand, etc. Obviously, higher the ratio the better is the

profitability. But while interpreting the ratio it should be kept in minds that the

performance of profits also is seen in relation to investments or capital of the firm

and not only in relation to sales.

(b) Gross profit ratio (GP ratio):-

Gross profit ratio is the ratio of gross profit to net sales expressed as a percentage.

It expresses the relationship between gross profit and sales.

Formulae:

Significance:

Gross profit ratio may be indicated to what extent the selling prices of goods per

unit may be reduced without incurring losses on operations. It reflects efficiency

with which a firm produces its products. As the gross profit is found by deducting

cost of goods sold from net sales, higher the gross profit better it is. There is no

standard GP ratio for evaluation.

It may vary from business to business. However, the gross profit earned should be

sufficient to recover all operating expenses and to build up reserves after paying all

fixed interest charges and dividends.

Hence, an analysis of gross profit margin should be carried out in the light of the

information relating to purchasing, mark-ups and markdowns, credit and

collections as well as merchandising policies.


35/69

(c) Return on shareholders investment:-

It is the ratio of net profit to share holder's investment. It is the relationship

between net profit (after interest and tax) and share holder's/proprietor's fund. This

ratio establishes the profitability from the share holders' point of view. The ratio is

generally calculated in percentage.

Components:

The two basic components of this ratio are net profits and shareholder's funds.

Shareholder's funds include equity share capital, (preference share capital) and all

reserves and surplus belonging to shareholders. Net profit means net income after

payment of interest and income tax because those will be the only profits available

for share holders.

Formula of return on shareholder's investment or net worth Ratio:

Net profit (after interest and tax)

Return on shareholders investment =

Shareholders funds


36/69

Significance:

This ratio is one of the most important ratios used for measuring the overall

efficiency of a firm. As the primary objective of business is to maximize its

earnings, this ratio indicates the extent to which this primary objective of

businesses being achieved. This ratio is of great importance to the present and

prospective shareholders as well as the management of the company.

ANALYSISAND

INTERPRETATION

OF DATA


37/69

LIQUIDITY RATIOS

CURRENT RATIO

Current ratio =current assets/current liabilities

Year 2007-08 2008-09 2009-10

Current assets 59, 09,348.61 39, 98,435.35 42, 86,280.29

Current liabilities 13, 15,901.44 6, 28,723.51 7, 86,028.60

Current ratio 4.49:1 6.36:1 5.45:1


38/69

CURRENT RATIO

0

1

2

3

4

5

6

7

2007-08 2008-09 2009-10

Current

ratio


39/69

INTERPRETATION

The current ratio with 2:1 (or) more is considered as satisfactory position of thefirm. The company has achieved the current ratio of 4.49, 6.36, 5.45 during the

years 2007-08, 2008-09, 2009-10 respectively. The current ratio for the firm is

favorable and shows that there has been an increase in the capacity of the firm to

pay its short term liabilities. Cash and Bank balance has increased. The ratio is

maximum in 2008-09 and dropped in 2009-10 as the liability has increased

because company has taken up some new projects. The company has less current

liabilities as compared to the assets but now the organization has increased the

proportion of short term loans as compared to the previous years still they are able

to maintain a good liquid position. The company has high liquidity because of high

value of current ratio and a slight decline in the current assets or increase in the

liabilities will not affect the ability of the firm to meet its liabilities. The company

can easily fulfill the short term liability. For a creditor the company is less risky.

The higher the ratio the less risky is the firm.


40/69

QUICK RATIO

Quick ratio = quick assets /current liabilities

Year 2007-08 2008-09 2009-10

Quick asset 5553048.61 36, 72,035.35 4118680.29

Current liabilities 13, 15,901.44 6, 28,723.51 7, 86,028.60

Quick ratio 4.22:1 5.84:1 5.24:1


41/69

QUICK RATIO

0

1

2

3

4

5

6

7

2007-08 2008-09 2009-10

Quick

ratio


42/69

INTERPRETATION:

The quick ratio is an alternative measure of liquidity that does not include

inventory in the current assets .As a conventional rule a quick ratio of 1:1 is

considered satisfactory. The company has achieved the quick ratio of 4.22, 5.84,

5.24 during the years 2007-08, 2008-09, 2009-10 respectively. The ratio is

maximum in year 2008-09and then decreased due to increase in the current

liabilities in 2009-10.The Company has high liquidity because of high value of

current ratio. The company doesnt have much inventory so there is less difference

in quick and current ratio .so the firm the capacity to pay off current obligations

immediately (the short term liability).

For a creditor the firm is favorable.


43/69

SOLVENCY RATIO

PROPERITORY RATIO

PROPERITORY RATIO=Share holder fund/ total assets

YEAR 2007-08 2008-09 2009-10

Shareholder fund 58, 1453.08 793823.04 920547.51

Total assets 6,233,629.61 4,607,499.35 5,522,505.29

Proprietor ratio 0.09 0.17 0.16


44/69

PROPERITORY RATIO

INTERPRETATION:

This ratio indicates the extent to which the shareholders fund has been used to

finance the total assets of the firm. In the initial year 2007-08 the level of share

holders fund was less that is 0.09 which rises in the year 2008-09 to 0.17, and it

slightly decrease in year 2009-10 to 0.16 , but the increase in the total asset hasbeen proportionately more than the rise in shareholders fund. The company was

using other sources of funds to finance major part of the assets. Higher the ratio

better is the long term solvency of the firm and involves less risk for the credit.

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

2007-08 2008-09 2009-10

Properitory

Ratio


45/69

DEBT EQUITY RATIO

DER = Debt /Equity

year 2007-08 2008-09 2009-10

Debt 4550137.11 3377408.29 4030789.16

Equity 581453.08 793823.04 920547.51

Debt equity 7.83:1 4.25:1 4.38:1ratio


46/69

DEBT EQUITY RATIO

0

1

2

3

4

5

6

7

8

9

2007-08 2008-09 2009-10

Debt Equity

Ratio


47/69

INTERPRETATION:

This ratio is calculated to assess the ability of the firm to meet its long term

liabilities.

As 2:1 considered safe ratio.

The company has achieved the debt equity ratio of 7.83, 4.25, 4.38 during the years

2007-08, 2008-09, 2009-10 respectively. We can easily point out that there is a

sharp decline in the debt-equity ratio from 2007-08 to 2008-09 From the above

data we conclude in the year 2008-09 the proportion of shareholders fund has

been increased without much changing the debt so the ratio declined in 20008-09

Company should raise more funds from shareholders(private equity).

In 2009-10 lower proportion of debt initially and the proportion of debt was

increased over the year that leads to the increase in the ratio. Its Debt as well as

equity is increased which increases its ratio.


48/69

ACTIVITY RATIO

WORKING CAPITALTURNOVER RATIO

WC Turnover ratio = sales/ wc

Working capital turnover ratio = (sales / WC)

YEAR 2007-08 2008-09 2009-10

Sales 10653085.54 7422199.00 7569877.50

Working

Capital 4593447.17 3369711.84 3500251.69

Working

Capital

Turnover ratio 2.31 2.20 2.16


49/69

WORKING CAPITALTURNOVER RATIO

2.05

2.1

2.15

2.2

2.25

2.3

2.35

2007-08 2008-09 2009-10

Working

capital

turnover

ratio


50/69

INTERPRETATION

The working capital turnover ratio measures the efficiency with which the working

capital is being used by a firm. The ratio is acceptable level in all the year that is

2.31, 2.20, 2.16 in year 2007-08, 2008-09 and 2009-10 respectively. The company

should pay more attention for proper utilization of the working capital (an effective

working capital utilization strategy) and further raise the level of returns.The

efficiency with which the working capital is being used by a firm is good and

improving.


51/69

FIXED ASSETS TURNOVER RATIO

Fixed assets turnover ratio = Cost of sales/Net Fixed Assets

YEAR 2007-08 2008-09 2009-10

Sales 10,653,085.54 7,422,199.00 7,569,877.50

Fixed assets 3, 24,281.00 6, 09, 064.00 12,36,225.00

Ratio 32.85 12.18 6.12


52/69


53/69

INTERPRETATION:

A high ratio indicates efficient utilization of fixed assets in generating sales. Theratio was 32.85 in the year 2007-2008,which had gone to12.1 8in 2008-2009 and

the ratio further decrease to 6.12 in year 2009-10 this sudden decline was because

a major part of fixed asset during 2008-09and 2009-10 was in work in progress

category


54/69

PROFITABILITY RATIO

GROSS PROFIT RATIO

GPR = Gross profit / Net Sales *100

YEAR 2007-08 2008-09 2009-10Gross Profit 1636251.82 1214958.65 1245335.84

Net Sales 10653085.54 7422199.00 7569877.50

Gross profit ratio 15.36% 16.37% 16.45%


55/69

GROSS PROFIT RATIO

14.80%

15.00%

15.20%

15.40%

15.60%

15.80%

16.00%

16.20%

16.40%

16.60%

2007-08 2008-09 2009-10

G.P


56/69

INTERPRETATION:

The ratio measures the margin of profit available on sales. Higher the profit it will

be good for the company.

As the gross profit in year 2007-08 is 15.36%and it is increased in year 2008-09 to16.35% and it further increased in year 2009-10 to 16.45%

The evaluation of gross profit ratio varies from business to business. However, the

gross profit earned should are sufficient to recover all operating expenses and to

build up reserves after paying all fixed interest charges and dividends. The gross

profit of the Business is increasing at a very favorable rate and is able to generate

increasing reserves for the business year after year.

This shows that the risk for the investors is less and the company is able to

generate revenues that could be used to pay dividends.


57/69

NET PROFIT RATIO

NPR =Net profit/Net sales*100

YEAR 2007-08 2008-09 2009-10

Net Profit 213862.22 192455.49 214859.98

Net Sales 10653085.54 7422199.00 7569877.50

NET PROFIT RATIO 2.01% 2.59% 2.84%


58/69

NP RATIO

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2007-08 2008-09 2008-09

N P

RATIO


59/69

INERPREATATION:

The Net profit ratio tells us how much profit a company makes for every Re.1 it

generates in revenue or sales. The ratio is very useful as if the net profit is not

sufficient, the firm shall not be able to achieve a satisfactory return on its

investment. Higher the ratio the better is the profitability

The ratio measures the margin of profit available on sales after deducting all

operating expenses from gross profit.

As the net profit in year 2007-08 is 2.01%and it is increased in year 2008-09 to

2.59% and it further increased in year 2009-10 to 2.84%

As the gross profit is increasing yearly it states that the sales of the company are

increasing. This indicates the firm's capacity to face adverse economic conditions

such as price competition, low demand, etc


60/69

RETRUN ON INVESTMENT RATIO

YEAR 2007-08 2008-09 2009-10

Return on investment 36.78% 24.24% 23.34%


61/69

RETURN ON INVESTMENT RATIO

INTERPRETATION

Return on investment is decreasing every year it states the company is not getting

the profits how much they are investing.

In year 2007-08 the ROI ratio is 36.78% in 2008-09 ratio decreased to 24.24%

and in 2009-10 it further decreased to 23.34

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2007-08 2008-09 2009-10

ROI


62/69


63/69

FINDINGS & SUGGESTIONS

The companys profitability analysis shows the favorable result. The main reason

of favorable condition is Increase in Gross profit, Net Profit, as compare to sales in

the comparative years.

Company also earns profit and comparing to its base year this profit has

increased. Increase in the current asset with increase in the profit is a sign that the

business is expanding.

The return of the following years has again improved and is supposed to

increase further in the years to come when these fixed asset investments will give

returns.

The company has considerable liquidity position that means it is in a better

position to pay of its obligations or liabilities. The lowest current ratio in past three

year was 4.49and that was in 2006-07 since then company has expanded their

business with a rise in the liquidity position.


64/69

We can observe that there has been a gradual increase in the cash and bankbalance and the absolute liquidity of the company is really good that means the

company has cash to meet their short term liabilities.

Company should raise more funds from shareholders (private equity).

The company should pay more attention for proper utilization of the working

capital (an effective working capital utilization strategy) and further raise the level

of returns.


65/69

CONCLUSION

Fundamentally speaking, the firm is undergoing a major growth phase where its

financial condition is improving. The companys profit margin is increasing over

the last few years.

A company with high operating efficiency showing good management practices

and utilization of the assets.

A company with adequate liquidity making it a low risk company for the investors.

The company has considerably increased the proportion of debt in financing the

business. Debt financing helps in magnifying the returns because of tax shield it

provides on the interest which is not tax deductible. The company is lookingforward for more investment via private equity.

Gross profit and net profit of the firm is increasing every year which shows the

better financial position of the firm.


66/69

ANNEXURE


67/69

P & L A/C

OF

YEAR 2009-10

PARTICULAR AMT PARTICULAR AMT

PURCHASE A/C 55,87,490.66 SALES A/C 75,69,877.50

DIRECT EXPENSES 5,78,251.00 CLOSING STOCK 1,67,600.00

G/P 12, 45,335.84

77, 37,477.50 77,37,477.50

INDIRECT EXPENSES 10, 30,475.86 G/P Trf 12,45,335.84

N/P 2, 14,859.98

12,45,335.84 12,45,335.84


68/69

BALANCE SHEET

OF

YEAR 2009-10

MANAGEMENT ACCOUNTING BY KHAN & JAIN. FINANCIAL ANALYSIS BY T.S GREWAL FINANCIAL MANAGEMENT BY I.M PANDEY

LIABLITIES AMT ASSETS AMT

CAPITAL 7,05,687.53 FIXED ASSETS 12,36,225.00

LOAN 40,30,789.16 CURRENT ASSETS 42,86,280.29

CURRENT LIABILITY 7,86,028.60

P&L A/C

OPENING BALANCE 2,14,859.98

CURRENT PEIOD 2,14,859.98

55,22,505.29 55,22,505.29


69/69

Bibliography

Principles of financial Management by R.P Rusta. Financial analysis by T.S Grewal. Financial management by I.M Pandey.

Annual report of Bengal packers

Date post:	06-Apr-2018
Category:	Documents
Upload:	shwetajii
View:	289 times
Download:	0 times

project report ratio analysis

Documents