A STUDY ON

RATIO ANALYSIS WITH SPECIAL

REFERENCE TO
“ANVITA HONDA SHOW ROOM ”
VIJAYAWADA”
A PROJECT WORK SUBMITTED TO
KRISHNA UNIVERSITY, MACHILIPATNAM.

In partial fulfillment of the requirement for the

award of the degree of
BACHELOR OF BUSINESS ADMINISTRATION
Submitted by
MANJEERA VELIKANTI
Under the guidance of

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 (Affiliated to KRISHNA
UNIVERSITY)
GVR Towers, opp: Vinayak Theatre,
Vijayawada.
KRISHNAVENI DEGREE COLLEGE
OF BUSINESS MANAGEMENT
VIJAYAWADA – 08

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 CERTIFICATE

This is to certify that the project work entitled “A

STUDY ON RATIO ANALYSIS WITH
SPECIAL REFERENCE AT “ANVITA
HONDA SHOW ROOM” VIJAYAWADA” is
being submitted by V.MANJEERA bearing
register number Y166194022 student of 3rd year,
belongs to department of Business Management
studies, KRISHNAVENI DEGREE COLLEGE,
Vijayawada under my guidance in partial
fulfillment of award for the Degree in Bachelor of
Business Management for the period 2016-2019

(Project Guide)

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 DECLARATION

I “MANJEERA VELIKANTI” hereby

declare that this project titled “A STUDY ON
RATIO ANALYSIS WITH SPECIAL
REFERENCE AT “ANVITA HONDA SHOW
ROOM, VIJAYAWADA” has been prepared by
me in partial fulfillment of the requirement for the
award of Degree of BACHELOR OF BUSINESS
ADMINISTRATION.

I also declare that this project report is my original

work and that it has not been submitted to any
other University for the award of any degree or
diploma
SIGNATURE
MANJEERA VELIKANTi

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 ACKNOWLEDGEMENT

I feel immense pleasure & proud to be a part of

Westin College Of Business Management that has
nurtured me to the present state and I feel grateful
towards it.

I would like to thank our college Director, Mr.

Durga Prasad and also
Mr.P.Chandrashekar Principal of Westin
College of Business Management

I express my sincere thanks to “ANVITA

HONDA”,VIJAYAWADA, for allowing me to
undertake a project in their company. I was under
the continuous and valuable guidance of SHYAM
PRASAD, General Manager that I was able to
complete the work entrusted to me.

Lastly I would like to thank my project guide

Mrs.UMA RAJYA LAXMI,(MBA, PhD,
HRM)who was a constant source of
encouragement.

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 TABLE OF CONTENTS

S. NO PARTICULARS PAGE NUMBERS

7-14
1 INTRODUCTION

2 COMPANY DETAILS
15-34

3 REVIEW OF LITERATURE
35 -80

4 DATA ANALYSIS AND INTERPRETATION

81-94

5 SUMMARY AND CONCLUSION

95

6 BIBILOGRAPHY
96-106

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INTRODUCTION
We know business is mainly concerned with the

financial activities. In order to ascertain the

financial status of the business every enterprise

prepares certain statements, known as financial

statements. Financial statements are mainly

prepared for decision making purposes. But the

information as is provided in the financial

statements is not adequately helpful in drawing a

meaningful conclusion. Thus, an effective analysis

and interpretation of financial statements is

required.

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TITLE OF THE PROJECT:
A Study On “RATIO ANALYSIS WITH
REFERENCE TO ANVITA HONDA SHOW
ROOM.”

NEED FOR THE STUDY:

 The need of the study is to analyze the existing

situation of the company.

 The study is necessitated to make aware of the

practical knowledge on financial management.

 The study gives a clear cut picture of the

company regarding their liquidity and

profitability position.

 The study also helps the company to find out

its solvency position.

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OBJECTIVES OF THE STUDY:
The primary objective is to assess the existing
financial position of “RATIO ANALYSIS
WITH REFERENCE TO ANVITA HONDA
SHOW ROOM.”
1. . during the study period.

To analyze the financial position of the (ANVITA

HONDA VIJAYAWADA.)

2. . during the study period by using ratio analysis.

3. To know the credit worthiness of the company.

4. To analyze the trends of various items which

appear in financial statements.

5. To know the company’s liquidity and

profitability position by ratios.

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6. To offer suggestions for improving financial

position of the company, if require.

SCOPE OF THE STUDY:

 The study undertaken consists of 4 financial

years i.e., from 2011-2012 to 2014-2015.
The study is made with the techniques of

comparative, common size, trend and ratios for

evaluating the financial performance of (ANVITA

HONDA VIJAYAWADA.)

 The study aims at understanding the various

financial issues of the concern.

DATA COLLECTION:
PRIMARY DATA:

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The primary data related to the study has been

collected from

• Mr.SHYAM PRASAD(GENERAL MANAGER)

• Mr.SUNEEL (SALES MANAGER)

SECONDARY DATA:
The data collected for making my study on

Financial Statement Analysis is secondary data;

the various sources of secondary data are as

follows:

http://www.investopedia.com/

https://www.indiamart.com/

www.scribd.com

PERIOD OF STUDY:

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The duration of the study is 90 days based on the

annual reports of the company(ANVITA HONDA

VIJAYAWADA.)

LIMITATIONS OF STUDY:

Availability of information is a constraint in

analysis part of the project.

A study mainly carried out on the secondary data

provided in the financial statements of (ANVITA

HONDA VIJAYAWADA.)

The financial analysis is confined to 4 years

published data of the company.

Time factor is also another limitation in the

study of the project.

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HISTORY&ESTABLISHMENT OF THE
GROUP AND ORGANISATION

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REVIEW OF LITERATURE

MEANING OF FINANCE

Finance may be defined as the art and science of managing money. It includes

financial service and financial instruments. Finance also is referred as the

provision of money at the time when it is needed. Finance function is the

procurement of funds and their effective utilization in business concerns.

The concept of finance includes capital, funds, money, and amount. But

each word is having unique meaning. Studying and understanding the concept

of finance become an important part of the business concern.

DEFINITION OF FINANCE

According to Khan and Jain, “Finance is the art and science of managing

money”.

According to Oxford dictionary, the word ‘finance’ connotes ‘management of

money’.

DEFINITION OF BUSINESS FINANCE

According to the Wheeler, “Business finance is that business activity which

concerns with the acquisition and conversation of capital funds in meeting

financial needs and overall objectives of a business enterprise”.

According to the Guthumann and Dougall, “Business finance can broadly be

defined as the activity concerned with planning, raising, controlling,

administering of the funds used in the business”.

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TYPES OF FINANCE

Finance is one of the important and integral part of business concerns, hence, it

plays a major role in every part of the business activities. It is used in all the

area of the activities under the different names.

Finance can be classified into two major parts:

Private Finance, which includes the Individual, Firms, Business or Corporate

Financial activities to meet the requirements.

Public Finance which concerns with revenue and disbursement of Government

such as Central Government, State Government and Semi-Government

Financial matters.

DEFINITION OF FINANCIAL MANAGEMENT

Financial management is an integral part of overall management. It is concerned

with the duties of the financial managers in the business firm. The term

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financial management has been defined by Solomon, “It is concerned with the

efficient use of an important economic resource namely, capital funds”.

Howard and Upton: Financial management “as an application of general

managerial principles to the area of financial decision-making.

Weston and Brigham: Financial management “is an area of financial decision-

making, harmonizing individual motives and enterprise goals”.

Thus, Financial Management is mainly concerned with the effective funds

management in the business. In simple words, Financial Management as

practiced by business firms can be called as Corporation Finance or Business

Finance.

SCOPE OF FINANCIAL MANAGEMENT

Financial management is one of the important parts of overall management,

which is directly related with various functional departments like personnel,

marketing and production. Financial management covers wide area with

multidimensional approaches. The following are the important scope of

financial management.

1. Financial Management and Economics

Economic concepts like micro and macroeconomics are directly applied with

the financial management approaches. Investment decisions, micro and macro

environmental factors are closely associated with the functions of financial

manager. Financial management also uses the economic equations like money

value discount factor, economic order quantity etc. Financial economics is one

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of the emerging area, which provides immense opportunities to finance, and

economical areas.

2. Financial Management and Accounting

Accounting records includes the financial information of the business concern.

Hence, we can easily understand the relationship between the financial

management and accounting. In the olden periods, both financial management

and accounting are treated as a same discipline and then it has been merged as

Management

Accounting because this part is very much helpful to finance manager to take

decisions. But nowadays financial management and accounting discipline are

separate and interrelated.

3. Financial Management or Mathematics

Modern approaches of the financial management applied large number of

mathematical and statistical tools and techniques. They are also called as

econometrics. Economic order quantity, discount factor, time value of money,

present value of money, cost of capital, capital structure theories, dividend

theories, ratio analysis and working capital analysis are used as mathematical

and statistical tools and techniques in the field of financial management.

4. Financial Management and Production Management

Production management is the operational part of the business concern, which

helps to multiple the money into profit. Profit of the concern depends upon the

production performance. Production performance needs finance, because

production department requires raw material, machinery, wages, operating

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expenses etc. These expenditures are decided and estimated by the financial

department and the finance manager allocates the appropriate finance to

production department.

The financial manager must be aware of the operational process and finance

required for each process of production activities.

5. Financial Management and Marketing

Produced goods are sold in the market with innovative and modern approaches.

For this, the marketing department needs finance to meet their requirements.

The financial manager or finance department is responsible to allocate the

adequate finance to the marketing department. Hence, marketing and financial

management are interrelated and depends on each other.

6. Financial Management and Human Resource

Financial management is also related with human resource department, which

provides manpower to all the functional areas of the management. Financial

manager should carefully evaluate the requirement of manpower to each

department and allocate the finance to the human resource department as wages,

salary, remuneration, commission, bonus, pension and other monetary benefits

to the human resource department. Hence, financial management is directly

related with human resource management.

APPROACHES TO FINANCIAL FUNCTION

Financial management approach measures the scope of the financial

management in various fields, which include the essential part of the finance.

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Financial management is not a revolutionary concept but an evolutionary. The

definition and scope of financial management has been changed from one

period to another period and applied various innovations. Theoretical points of

view, financial management approach may be broadly divided into two major

parts.

A number of approaches are associated with finance function but for the sake of

convenience, various approaches are divided into two broad categories:

1. The Traditional Approach

2. The Modern Approach

1. The Traditional Approach:

The traditional approach to the finance function relates to the initial stages of its

evolution during 1920s and 1930s when the term ‘corporation finance’ was used

to describe what is known in the academic world today as the ‘financial

management’. According to this approach, the scope, of finance function was

confined to only procurement of funds needed by a business on most suitable

terms.

The utilisation of funds was considered beyond the purview of finance function.

It was felt that decisions regarding the application of funds are taken somewhere

else in the organisation. However, institutions and instruments for raising funds

were considered to be a part of finance function.

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The scope of the finance function, thus, revolved around the study of rapidly

growing capital market institutions, instruments and practices involved in

raising of external funds.

The traditional approach to the scope and functions of finance has now been

discarded as it suffers from many serious limitations:

(i) It is outsider-looking in approach that completely ignores internal decision

making as to the proper utilisation of funds.

(ii) The focus of traditional approach was on procurement of long-term funds.

Thus, it ignored the important issue of working capital finance and

management.

(iii) The issue of allocation of funds, which is so important today, is completely

ignored.

(iv) It does not lay focus on day to day financial problems of an organisation.

2. The Modern Approach:

The modern approach views finance function in broader sense. It includes both

rising of funds as well as their effective utilisation under the purview of finance.

The finance function does not stop only by finding out sources of raising

enough funds; their proper utilisation is also to be considered. The cost of

raising funds and the returns from their use should be compared.

The funds raised should be able to give more returns than the costs involved in

procuring them. The utilisation of funds requires decision making. Finance has

to be considered as an integral part of overall management. So finance

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functions, according to this approach, covers financial planning, rising of funds,

allocation of funds, financial control etc.

The new approach is an analytical way of dealing with financial problems of a

firm. The techniques of models, mathematical programming, simulations and

financial engineering are used in financial management to solve complex

problems of present day finance.

The modern approach considers the three basic management decisions, i.e.,

investment decisions, financing decisions and dividend decisions within the

scope of finance function.

OBJECTIVES OF FINANCIAL MANAGEMENT

Effective procurement and efficient use of finance lead to proper utilization of

the finance by the business concern. It is the essential part of the financial

manager. Hence, the financial manager must determine the basic objectives of

the financial management. Objectives of Financial Management may be broadly

divided into two parts such as:

1. Profit maximization

2. Wealth maximization.

1. PROFIT MAXIMIZATION

Main aim of any kind of economic activity is earning profit. A business concern

is also functioning mainly for the purpose of earning profit. Profit is the

measuring techniques to understand the business efficiency of the concern.

Profit maximization is also the traditional and narrow approach, which aims at,

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maximizes the profit of the concern. Profit maximization consists of the

following important features.

1. Profit maximization is also called as cashing per share maximization. It leads

to maximize the business operation for profit maximization.

2. Ultimate aim of the business concern is earning profit; hence, it considers all

the possible ways to increase the profitability of the concern.

3. Profit is the parameter of measuring the efficiency of the business concern.

So it shows the entire position of the business concern.

4. Profit maximization objectives help to reduce the risk of the business.

FavourableArguments for Profit Maximization

The following important points are in support of the profit maximization

objectives of the business concern:

(i) Main aim is earning profit.

(ii) Profit is the parameter of the business operation.

(iii) Profit reduces risk of the business concern.

(iv)Profit is the main source of finance.

Unfavourable Arguments for Profit Maximization

The following important points are against the objectives of profit

maximization:

(i) Profit maximization leads to exploiting workers and consumers.

(ii) Profit maximization creates immoral practices such as corrupt practice,

unfair trade practice, etc.

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(iii) Profit maximization objectives leads to inequalities among the stake holders

such as customers, suppliers, public shareholders, etc.

Drawbacks of Profit Maximization

Profit maximization objective consists of certain drawback also:

(i) It is vague: In this objective, profit is not defined precisely or correctly. It

creates some unnecessary opinion regarding earning habits of the business

concern.

(ii) It ignores the time value of money: Profit maximization does not consider

the time value of money or the net present value of the cash inflow. It leads

certain differences between the actual cash inflow and net present cash flow

during a particular period.

(iii) It ignores risk: Profit maximization does not consider risk of the business

concern. Risks may be internal or external which will affect the overall

operation of the business concern.

2. WEALTH MAXIMIZATION

Wealth maximization is one of the modern approaches, which involves latest

innovations and improvements in the field of the business concern. The term

wealth means shareholder wealth or the wealth of the persons those who are

involved in the business concern. Wealth maximization is also known as value

maximization or net present worth maximization. This objective is a universally

accepted concept in the field of business.

Favourable Arguments for Wealth Maximization

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(i) Wealth maximization is superior to the profit maximization because the main

aim of the business concern under this concept is to improve the value or wealth

of the shareholders.

(ii) Wealth maximization considers the comparison of the value to cost

associated with business operation. It provides extract value of the business

concern.

(iii) Wealth maximization considers both time and risk of the business concern.

(iv)Wealth maximization provides efficient allocation of resources.

(v) It ensures the economic interest of the society.

Unfavourable Arguments for Wealth Maximization

(i)Wealth maximization leads to prescriptive idea of the business concern but it

may not be suitable to present day business activities.

(ii)Wealth maximization is nothing, it is also profit maximization, it is the

indirect name of the profit maximization.

(iii)Wealth maximization creates ownership-management controversy.

(iv)Management alone enjoys certain benefits.

(v) The ultimate aim of the wealth maximization objectives is to maximize the

profit.

(vi)Wealth maximization can be activated only with the help of the profitable

position of the business concern.

SCOPE OR CONTENT OF FINANCE FUNCTION/FINANCIAL

MANAGEMENT

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The main objective of financial management is to arrange sufficient finance for

meeting short-term and long-term needs. With these things in mind, a Financial

Manager will have to concentrate on the following areas of finance function.

1. Estimating Financial Requirements:

The first task of a financial manager is to estimate short-term and long-term

financial requirements of his business for this purpose, he will prepare a

financial plan for present as well as for future. The amount required for

purchasing fixed assets as well as needs of funds for working capital will have

to be ascertained.

The estimations should be based on sound financial principles so that neither

there are inadequate nor excess funds with the concern. The inadequacy of

funds will adversely affect the day-today working of the concern whereas

excess funds may tempt a management to indulge in extravagant spending or

speculative activities.

2. Deciding Capital Structure:

The capital structure refers to the kind and proportion of different securities for

raising funds. After deciding about the quantum of funds required it should be

decided which type of securities should be raised. It may be wise to finance

fixed assets through long-term debts. Even here if gestation period is longer,

then share capital may be most suitable. Long-term funds should be employed

to finance working capital also, if not wholly then partially. Entirely depending

upon overdrafts and cash credit for meeting working capital needs may not be

suitable.

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A decision about various sources for funds should be linked to the cost of

raising funds. If cost of raising funds is very high then such sources may not be

useful for long. A decision about the kind of securities to be employed and the

proportion in which these should be used is an important decision which

influences the short-term and long-term financial planning of an enterprise.

3. Selecting a Source of Finance:

After preparing a capital structure, an appropriate source of finance is selected.

Various sources, from which finance may be raised, include: share capital,

debentures, financial institutions, commercial banks, public deposits, etc. If

finances are needed for short periods then banks, public deposits and financial

institutions may be appropriate; on the other hand, if long-term finances are

required then share capital and debentures may be useful.

If the concern does not want to tie down assets as securities then public deposits

may be suitable source. If management does not want to dilute ownership then

debentures should be issued in preference to shares. The need, purpose, object

and cost involved may be the factors influencing the selection of a suitable

source of financing.

4. Selecting a pattern of investment:

When funds have been procured then a decision about investment pattern is to

be taken. The selection of an investment pattern is related to the use of funds. A

decision will have to be taken as to which assets are to be purchased? The funds

will have to be spent first on fixed assets and then an appropriate portion will be

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retained for working capital. Even in various categories of assets, a decision

about the type of fixed or other assets will be essential. While selecting a plant

and machinery, even different categories of them may be available. The

decision-making techniques such as Capital Budgeting, Opportunity Cost

Analysis etc. may be applied in making decisions about capital expenditures.

While spending or various assets, the principles. One may not like to invest on a

project which may be risky even though there may be more profits.

5. Proper Cash Management:

Cash management is also an important task of finance manager. He has to

assess various cash needs at different times and then make arrangements for

arranging cash. Cash maybe required to (a) purchase raw materials, (b) make

payments to creditors, (c) meet wage bills; (d) meet day-to-day expenses. The

usual sources of cash may be: (a) cash sales, (b) collection of debts, (c) short-

term arrangements with banks etc. The cash management should be such that

neither there is a shortage of it and nor it is idle An shortage of cash will

damage the creditworthiness of the enterprise. The idle cash with the business

will mean that it is not properly used. It will be better if Cash Flow Statement is

regularly prepared so that one is able to find out various sources and

applications. If cash is spent on avoidable expenses then such spending may be

curtailed. A proper idea on sources of cash inflow may also enable to assess the

utility of various sources. Some sources may not be providing that much cash

which we should have thought. All this information will help in efficient

management of cash.

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6. Implementing Financial Controls:

An efficient system of financial management necessitates the use of various

control devices. Financial control devices generally used are: (a) Return on

investment, (b) Budgetary Control, (c) Break Even Analysis, (d) Cost Control,

(e) Ratio Analysis (f) Cost and Internal Audit. Return on investment is the best

control device to evaluate the performance of various financial policies. The

higher this percentage better may be the financial performance. The use of

various control techniques by the finance manager will help him in evaluating

the performance in various areas and take corrective measures whenever

needed.

7. Proper Use of Surpluses:

Theutilization of profits or surpluses also an important factor in Financial

Management. A judicious use of surpluses is essential for expansion and

diversification plans and also in protecting the interests shareholders. The

ploughing back of profits is the best policy of further financing but it clashes

with the interests of shareholders. A balance should be struck in using funds for

paying dividend and retaining earnings for financing expansion plans, etc. The

market value of shares will also be influenced by the declaration of dividend

and expected profitability in future.

A finance manager should consider the influence of various factor, such as:

a) Trends of earning of the enterprises,

(b) Expected earnings in future,

(c) Market value of shares,

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(d) Need for funds for financing expansion, etc.

A judicious policy for distributing surpluses will be essential for maintaining

proper growth of the unit.

FUNCTIONS OF FINANCIAL MANAGEMENT

Executive functions of financial management are:

1. Raising the Funds Required,

2. Assessing Total Capital Requirement,

3. Deciding the Capital Structure,

4. Estimating the Cost of capital,

5. Management of Fixed Capital,

6. Management of Working Capital,

7. Control of Funds,

8. Allotment of Excess Profit,

9. Planning Tax,

10.Performance Evaluation,

11.Helps Management.

Executive functions of financial management are discussed in brief:

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1. Raising the Funds Required

Executive functions of financial management are raising the required funds.

Funds can be raised from various sources like issue of shares, debentures, fixed

deposits, bonds, borrowings, etc. The finance executive has to decide the

proportion in which the different sources should be raised.

2. Assessing Total Capital Requirement

Executive functions of financial management are assessing the total capital

requirement. The basic responsibility of the financial executive is to prepare the

monetary plan of the company. At the promotion stage, every firm must

estimate its capital needs. Funds may be required for working capital,

promotional capital and development capital. To avoid over-capitalization and

under-capitalization the finance executive has to access these needs of funds

properly.

3. Deciding the Capital Structure

Capital Structure refers to the composition of different securities that comprises

the capital of the business. There should be a proper composition of various

securities to avoid an imbalance in capital structure.

4. Estimating the Cost of capital

Executive functions of financial management are estimating the cost of capital.

Cost of capital is the rate at which an organization may pay to the suppliers of

capital for the use of their funds. For E.g. It is expected to pay dividend on

equity shares, etc.

5. Management of Fixed Capital

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Executive functions of financial management are managing the fixed capital.

Investments should be made in those assets which would satisfy the present as

well as future needs of the company. For proper, a replacement of fixed assets,

convenient depreciation policies should be adopted.

6. Management of Working Capital

The finance executive has to ensure that the company maintain adequate

working capital. Inadequate working capital may bring work of the company to

a standstill. Excessive amount in working capital will block the funds.

7. Control of Funds

Executive functions of financial management are controlling the funds. The

finance executive has to ensure that cash is utilized as per the plan and in case

of any deviation, corrective measures should be taken.

8. Allotment of Excess Profit

In distribution of Excess Profit, a firm has two options: To pay dividend or to

retain earnings for expansion and diversification. A firm must strike a balance

between the two choices else distribute the surplus.

9. Planning Tax

Executive functions of financial management are proper planning of taxes. In

every budget, different schemes are announced, which offer tax rebates,

deductions, etc. In order to reduce the tax liability the finance executive has to

properly-study the schemes and then invests accordingly.

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10. Performance Evaluation

Evaluating the financial performance is vital executive functions of financial

management. For evaluation, the finance executive may use techniques like

ratio analysis, fund flow statements, etc.

11. Helps Management

The finance executive helps the management in decision-making as he is well

experienced with the financial aspects of the company.

Routine Functions of Financial Management: Routine functions are clerical

functions. They help to perform the executive functions of financial

management Routine

1. Maintaining various books of accounts of the companies.

2. Administration of Cash receipts and payments.

3. Maintaining cash balances of the company.

4. Routine functions of financial management are to preserving of securities,

insurance policies and other valuable papers.

5. Preparing of final accounts.

6. Interacting with banks.

7. Keeping record and reporting.

8. Assisting a finance executive in the performance of their roles.

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FUNCTIONS OF FINANCE MANAGER:

Finance function is one of the major parts of business organization, which

involves the permanent and continuous process of the business concern. Finance

is one of the interrelated functions which deal with personal function, marketing

function, production function and research and development activities of the

business concern.

At present, every business concern concentrates more on the field of finance

because, it is a very emerging part which reflects the entire operational and

profit ability position of the

concern.

Deciding the proper financial function is the essential and ultimate goal of the

business organization. Finance manager is one of the important role players in

the field of finance function. He must have entire knowledge in the area of

accounting, finance, economics and management. His position is highly critical

and analytical to solve various problems related

to finance. A person who deals finance related activities may be called finance

manager.

Finance manager performs the following major functions:

1. Forecasting Financial Requirements

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It is the primary function of the Finance Manager. He is responsible to estimate

the financial requirement of the business concern. He should estimate, how

much finances required to acquire fixed assets and forecast the amount needed

to meet the working capital requirements in future.

2. Acquiring Necessary Capital

After deciding the financial requirement, the finance manager should

concentrate how the finance is mobilized and where it will be available. It is

also highly critical

in nature.

3. Investment Decision

The finance manager must carefully select best investment alternatives and

consider the reasonable and stable return from the investment. He must be well

versed in the field of capital budgeting techniques to determine the effective

utilization of investment. The finance manager must concentrate to principles of

safety, liquidity and profitability while investing capital.

4. Cash Management

Present days cash management plays a major role in the area of finance because

proper cash management is not only essential for effective utilization of cash

but it also helps to meet the short term liquidity position of the concern.

5. Interrelation with Other Departments

Finance manager deals with various functional departments such as marketing,

production, personnel, system, research, development, etc. Finance manager

should

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have sound knowledge not only in finance related area but also well versed in

other areas. He must maintain a good relationship with all the functional

departments of the business organization.

RATIO ANALYSIS

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the

indicated quotient of two mathematical expressions” and “the relationship

between two or more things”.

In financial analysis, a ratio is used as a benchmark for evaluation the financial

position and performance of a firm. The absolute accounting figures reported in

the financial statements do not provide a meaningful understanding of the

performance and financial position of a firm.

An accounting figure conveys meaning when it is related to some other relevant

information. For example, an Rs.5 core net profit may look impressive, but the

firm’s performance can be said to be good or bad only when the net profit

figure is related to the firm’s Investment.

The relationship between two accounting figures expressed mathematically, is

known as a financial ratio (or simply as a ratio).

Ratios help to summarize large quantities of financial data and to make

qualitativejudgment about the firm’s financial performance. For example,

consider currentratio. It is calculated by dividing current assets by current

56
liabilities; the ratio indicates a relationship- a quantified relationship between

current assets and current liabilities.

This relationship is an index or yardstick, which permits a quantitative judgment

to be formed about the firm’s liquidity and vice versa. The point to note is that a

ratio reflecting a quantitative relationship helps to form a qualitative judgment.

Such is the nature of all financial ratios.

Standards of comparison:

The ration analysis involves comparison for a useful interpretation of the

financial statements. A single ratio in itself does not indicate favorable or
unfavorable condition. It should be compared with some standard. Standards
of comparison may consist of:

 Past ratios, i.e. ratios calculated form the past financial statements of
thesame firm;

 Competitors’ ratios, i.e., of some selected firms, especially the
mostprogressive and successful competitor, at the same pint in time;

 Industry ratios, i.e. ratios of the industry to which the firm belongs; and

 Protected ratios, i.e., developed using the protected or proforma,
financial statements of the same firm.

57
In this project calculating the past financial statements of the same firm
does ratio analysis.

1.Theoretical background:

Use and significance of ratio analysis:-

The ratio is one of the most powerful tools of financial analysis.

It is used as a device to analyze and interpret the financial health of enterprise.

Ratio analysis stands for the process of determining and presenting the
relationship of items and groups of items in the financial statements. It is an
important technique of the financial analysis. It is the way by which financial
stability and health of the concern can be judged. Thus ratios have wide
applications and are of immense use today. The following are the main points
of importance of ratio analysis:

a) Managerial uses of ratio analysis:-

1. Helps in decision making:-

Financial statements are prepared primarily for decision-making.

Ratio analysis helps in making decision from the information provided in
these financial Statements.

2. Helps in financial forecasting and planning:-

58
 Ratio analysis is of much help in financial forecasting and planning.
Planning is looking ahead and the ratios calculated for a number of years a
work as a guide for the future. Thus, ratio analysis helps in forecasting and
planning.

3. Helps in communicating:-
The financial strength and weakness of a firm are communicated in a
more easy and understandable manner by the use of ratios. Thus, ratios help
in communication and enhance the value of the financial statements.

4. Helps in co-ordination:-
Ratios even help in co-ordination, which is of at most importance
in effective business management. Better communication of efficiency
and weakness of an enterprise result in better co-ordination in the
enterprise

5. Helps in control:-
Ratio analysis even helps in making effective control of business.
The weaknesses are otherwise, if any, come to the knowledge of the
managerial, which helps, in effective control of the business.

b) Utility to shareholders/investors:-
An investor in the company will like to assess the financial position of
the concern where he is going to invest. His first interest will be the security
of his investment and then a return in form of dividend or interest. Ratio
analysis will be useful to the investor in making up his mind whether present
financial position of the concern warrants further investment or not.

C) Utility to creditors: -

59
 The creditors or suppliers extent short-term credit to the concern. They
are invested to know whether financial position of the concern warrants their
payments at a specified time or not.

d) Utility to employees:-

The employees are also interested in the financial position of the

concern especially profitability. Their wage increases and amount of fringe
benefits are related to the volume of profits earned by the concern.

e) Utility to government:-

Government is interested to know overall strength of the industry.

Various financial statement published by industrial units are used to calculate
ratios for determining short term, long-term and overall financial position of the
concerns.

f) Tax audit requirements:-

Sec44AB was inserted in the income tax act by financial act;
1984.Caluse 32 of the income tax act requires that the following accounting
ratios should be given:
1. Gross profit/turnover.
2. Net profit/turnover.
3. Stock in trade/turnover.
4. Material consumed/finished goods produced.

60
 Further, it is advisable to compare the accounting ratios for the year
under consideration with the accounting ratios for earlier two years so that
the auditor can make necessary enquiries, if there is any major variation in
the accounting ratios.

Limitations:

Ratio analysis is very important in revealing the financial position and

soundness of the business. But, inspite of its advantages, it has some limitations
which restrict its use. These limitations should be kept in mind while making
use of ratio analysis for interpreting the financial the financial statements. The
following are the main limitations of ratio analysis:
1. False results:-
Ratios are based upon the financial statement. In case financial
statement are in correct or the data of on which ratios are based is in correct,
ratios calculated will all so false and defective. The accounting system it self
suffers from many inherent weaknesses the ratios based upon it cannot be said
to be always reliable.
2. Limited comparability:-
The ratio of the one firm cannot always be compare with the
performance of other firm, if uniform accounting policies are not adopted by
them. The difference in the methods of calculation of stock or the methods used
to record the deprecation on assets will not provide identical data, so they
cannot be compared.
3. Absence of standard universally accepted terminology:-
Different meanings are given to a particular term, egg. Some firms
take profit before interest and tax; others may take profit after interest and
tax. A bank overdraft is taken as current liability but some firms may take it
as non-current liability. The ratios can be comparable only when all the firms
adapt uniform terminology.

61
4. Price level changes affect ratios:-

The comparability of ratios suffers, if the prices of the commodities

in two different years are not the same. Change in price effect the cost of
production, sale and also the value of assets. It means that the ratio will be
meaningful for comparison, if the prices do not change.
5. Ignoring qualitative factors:-
Ratio analysis is the quantitative measurement of the performance of the
business. It ignores qualitative aspect of the firm, how so ever important it may
be. It shoes that ratio is only a one sided approach to measure the efficiency of
the business.
6. Personal bias:-
Ratios are only means of financial analysis and an end in it self. The
ratio has to be interpreted and different people may interpret the same ratio in
different ways.

7. Window dressing:-
Financial statements can easily be window dressed to present a better
picture of its financial and profitability position to outsiders. Hence, one has
to be very carefully in making a decision from ratios calculated from such
financial statements.

8. Absolute figures distortive:-

Ratios devoid of absolute figures may prove distortive, as ratio analysis
is primarily a quantitative analysis and not a qualitative analysis.

Classification of ratios:
Several ratios, calculated from the accounting data can be grouped into
various classes according to financial activity or function to be evaluated.
Management is interested in evaluating every aspect of the firm’s
performance. They have to protect the interests of all parties and see that the

62
firm grows profitably. In view of thee requirement of the various users of
ratios, ratios are classified into following four important categories:

 Liquidity ratios - short-term financial strength


 Leverage ratios - long-term financial strength


 Profitability ratios - long term earning power
r
 Activity ratios - term of investment utilization

Liquidity ratios measure the firm’s ability to meet current obligations

Leverage ratios show the proportions of debt and equity in financing the
firm’s assets.

Activity ratios reflect the firm’s efficiency in utilizing its assets; and

Profitability ratios measure overall performance and effectiveness of the firm

63
LIQUIDITY RATIOS:

It is extremely essential for a firm to be able to meet the obligations as they

become due.
Liquidity ratios measure the ability of the firm to meet its current obligations
(liabilities).

The liquidity ratios reflect the short- financial strength and solvency of a firm.In
fact, analysis of liquidity needs thepreparation of cash budgets and cash and
funds flow statements; but liquidity ratios, by establishing a relationship
between cash and other current assets to current obligations, provide a quick
measure of liquidity. A firm should ensure that it does not suffer from lack of
liquidity, and also that it does not have excess liquidity. The failure of a
company to meet its obligations due to lack of sufficient liquidity, will result in
a poor credit worthiness, loss of credit worthiness, loss of creditors’ confidence,
or even in legal tangles resulting in the closure of the company. A very high
degree of liquidity is also bad; idle assets earn nothing. The firm’s funds will be
unnecessarily tied up in current assets. Therefore, it is necessary to strike a
proper balance between high liquidity and lack of liquidity.
The most common ratios which indicate the extent of liquidity are lack
= of it, are:
(i) Current ratio
(ii) Quick ratio.
(iii)Cash ratio and
(iv)Networking capital ratio.

1. Current Ratio:
Current ratio is calculated by dividing current assets by current liabilities.

64
 Current assets
Current Ratio=

Current Liabilities

Current assets include cash and other assets that can be converted into cash
within in a year, such as marketable securities, debtors and inventories. Prepaid
expenses are also included in the current assets as they represent the payments
that will not be made by the firm in the future. All obligations maturing within
a year are included in the current liabilities. Current liabilities include creditors,
bills payable, accrued expenses, short-term bank loan, income tax, liability and
long-term debt maturing in the current year.
The current ratio is a measure of firm’s short-term solvency. It
indicates the availability of current assets in rupees for every one rupee
of current liability. A ratio of greater than one means that the firm has
more current assets than current claims against them Current liabilities.

2. Quick Ratio:
Quick ratio also called Acid-test ratio, establishes a relationship
between quick, or liquid, assets and current liabilities. An asset is a liquid if it
can be converted into cash immediately or reasonably soon without a loss of
value. Cash is the most liquid asset. Other assets that are considered to be
relatively liquid and included in quick assets are debtors and bills receivables
and marketable securities (temporary quoted investments). Inventories are
considered to be less liquid. Inventories normally require some time for
realizing into cash; their value also has a tendency to fluctuate. The quick ratio
is found out by dividing quick assets by current liabilities.

65
 (Quick Assets=Current Assets-Inventories)

Quick Assets
Quick Ratio=
Current Liabilities

3. Cash Ratio:
Since cash is the most liquid asset, it may be examined cash ratio
and its equivalent to current liabilities. Trade investment or marketable
securities are equivalent of cash; therefore, they may be included in the
computation of cash ratio:

Cash + Marketable Securities

Cash Ratio=
Current Liabilities

4. Interval Measure
Yet another, ratio, which assesses a firm’s ability to meet its regular cash
expenses, is the interval measure. Interval measure relates liquid assets to
average daily operating cash outflows. The daily operating expenses will be
equal to cost of goods sold plus selling, administrative and general expenses
less depreciation (and other non cash expenditures divided by number of days
in a year (say 360).

Current assets - inventory

Interval measure =

Average daily operating expenses

66
5. Net Working Capital Ratio
The difference between current assets and current liabilities excluding
short – term bank borrowings in called net working capital (NWC) or net
current assets (NCA). NWC is sometimes used as a measure of firm’s liquidity.
It is considered that between two firm’s the one having larger NWC as the
greater ability to meet its current obligations. This is not necessarily so; the
measure of liquidity is a relationship, rather than the difference between
current assets and current liabilities. NWC, however, measures the firm’s
potential reservoir of funds. It can be related to net assets (or capital
employed):

Net working capital (NWC)

NWC ratio =
(Net assets (or) Capital Employed)

6. Leverage Ratio:
The short-term creditors, like bankers and suppliers of raw materials,
are more concerned with the firm’s current debt-paying ability. On other hand,
ling-term creditors like debenture holders, financial institutions etc are more
concerned with the firm’s long-term financial strength. In fact a firm should

have a strong short as well as long-term financial strength. In fact a firm should
have a strong short-as well as long-term financial position. To judge the long-
term financial position of the firm, financial leverage, or capital
structureratios are calculated. These ratios indicate mix of funds provided by
ownersand lenders. As a general rule there should be an appropriate mix of debt
and owners equity in financing the firm’s assets.
Leverage ratios may be calculated from the balance sheet items to determine
the proportion of debt in total financing. Many variations of these ratios exist;
67
but all these ratios indicate the same thing the extent to which the firms has
relied on debt in financing assets. Leverage ratios are also computed form the
profit and loss items by determining the extent to which operating profits are
sufficient to cover the fixed charges.

7. DEBT RATIO:
Several debt ratios may be used to analyse the long term solvency of the
firm The firm may be interested in knowing the proportion of the interest
bearing debt (also called as funded debt) in the capital structure. It may,
therefore, compute debt ratio by dividing total debt by capital employed or
net assets. Capital employed will include total debt and net worth

Total debt (TD)

Debt ratio =
Total debt (TD) + Net worth (NW)

Total debt (TD)

Debt Ratio=
Capital employed (CE)

Debt-Equity Ratio:
The relationship describing the lenders contribution for each rupee of
the owners’ contribution is called debt-equity (DE) ratio is directly computed
by dividing total debt by net worth:

Total debt (TD)

Debt - equity ratio =
Net worth (NW)

68
8. Capital Employed to Net worth Ratio
It is another way of expressing the basic relationship between
debt and equity. One may want to know: How much funds are being
contributed together by lenders and owners for each rupee of owners’
contribution ? Calculating the ratio of capital employed or net assets to net
worth can find this out:

Capital employed (CE)

Capital employed to net worth Ratio =
Net worth (NW)

COVERAGE RATIO:
Interest Coverage Ratio:
Debt ratios described above are static in nature, and fail to indicate the
firm’s ability to meet interest (and other fixed charges) obligations. The
interestcoverage ratio or the times interest-earned isused to test the
firm’s debt-servicing capacity, the interest coverage ratio is computed by
dividing earnings before interest and taxes(EBIT)by interest charges:

EBIT
Interest coverage ratio=
Interest

ACTIVITY RATIOS:
Funds of creditors and owners are interested in various assets to
generate sales and profits. The better the management of assets, the larger the
amount of sales. Activity ratios are employed to evaluate the efficiency with

69
which the firm manages and utilizes its assets. These ratios are also called
turnover ratios because they indicate the speed with which assets are being
converted or turned over into sales. Activity ratios, thus, involves a relationship
between sales and assets. A proper balance between sales and assets generally
reflects that assets are managed well. Several activity ratios are calculated
to judge the effectiveness of asset utilization.

10. Inventory Turnover Ratio:

Inventory turnover indicates the efficiency of the firm in producing and
selling its product. It is calculated by dividing the cost of goods sold by the
average inventory:

Cost of goods sold

Inventory turnover Ratio =
Average inventory
(OR)
Net sales
Inventory

The average inventory is the average of opening and closing balances of

inventory. The cost of goods sold may not be available so we can compute
inventory turnover as sales divided by inventory In a manufacturing company
inventory of finished goods is used to calculate inventory turnover. This inventory
turnover ratio indicates whether investment in inventory is efficiently utilized or
not. It, therefore, explains whether investment in inventory in within proper limits
or not. It is calculated by dividing the cost of goods sales by the average inventory.
The inventory turnover shows how rapidly the inventory in turning into
receivable through sales.
A high inventory turnover is indicative of good inventory management.
A low inventory turnover implies excessive inventory levels than warranted
by production and sales activities or a slow moving or obsolete inventory.

70
Inventory Conversion Period:

It may also be of interest to see the average time taken for clearing the
stock. This can be possible by calculating the inventory conversion period. This
period is calculated by dividing the no. of days by inventory turnover ratio:

No. of days in the year

Inventory turnover ratio=
Inventory turnover ratio

11. Debtors (Accounts Receivable) Turnover Ratio:

A firm sells goods for cash and credit. Credit is used as a marketing
tool by number of companies. When the firm extends credits to its customers,
debtors (accounts receivable) are created in the firm’s accounts. Debtors are
convertible into cash over a short period and, therefore, are included in current
assets. The liquidity position of the firm depends on the quality of debtors to a
great extent. Financial analyst applies these ratios to judge the quality or
liquidity of debtors (a) Debtors Turnover Ratio (b) Debtors Collection Period
Debtors’ turnover is found out by dividing credit sales by average debtors:

Credit sales
Debtors turnover =
Debtors

Debtors’ turnover indicates the number of times debtors’ turnover each

year generally, the higher the value of debtors’ turnover, the more efficient
is the management of credit.
To outside analyst, information about credit sales and opening and
closing balances of debtors may not be available. Therefore, debtors’ turnover
can be calculated by dividing Total sales by the year-end balances of debtors:

71
 Sales
Debtors turnover =
Debtors

Average Collection Period:

Average Collection Period is used in determining the collectibles of
debtors and the efficiency of collection efforts. In ascertaining the firms
comparative strength and advantage relative to its credit policy and
performance
The average number of days for which the debtors remain outstanding is
called the Average Collection Period. The Average Collection Period measures
the quality of the debtors since it is indicated the speed of their collection

360
Average Collection Period=
Debtors Turnover Ratio
[or]
Debtors
= X 360
Sales

13. Net Assets Turnover Ratio:

Net assets turnover can be computed simply by dividing sales by net
sales (NA)

Sales
Net Assets Turnover =
Net assets

72
It may be recalled that net assets (NA) include net fixed assets (NFA) and net current
assets (NCA), that is, current assets (CA) minus current liabilities (CL). Since net
assets equal capital employed, net assets turnover may also be called capital
employed, net assets turnover may also be called capital employedturnover.

Total Assets Turnover:

Some analysts like to compute the total assets turnover in addition to or
instead of the net assets turnover. This ratio shows the firms ability in generating sales
from all financial resources committed to total asset

Thus:

Sales
Total Assets Turnover =
Total assets

Total Assets (TA) include net fixed Asses (NFA) and current assets (CA)
(TA=NFA+CA)

15. Current Assets Turnover

A firm may also like to relate current assets (or net working gap) to sales. It
may thus complete networking capital turnover by dividing sales by net working
capital.

Sales
Current assets turnover =
Current assets

73
16. Fixed Assets Turnover:
The firm to know its efficiency of utilizing fixed assets separately.
This ratio measures sales in rupee of investment in fixed assets. A high ratio
indicates a high degree of utilization in assets and low ratio reflects the
inefficient use of assets

Sales
Fixed Assets Turnover =
Fixed Assets

17. Working Capital Turnover Ratio:

Working Capital of a concern is directly related to sales. The current assets
like debtors, bills receivable, cash, and stock etc. change with the increase or
decrease in sales. The Working Capital is taken as:

Working Capital = Current Assets – Current Liabilities

This Ratio indicates the velocity of the utilization of net working capital. This
Ratio indicates the number of times the working capital is turned over in the course of
a year. This Ratio measures the efficiency with which the working capital is being used
by a firm. A higher ratio indicates the efficient utilization of working capital and the
low ratio indicates inefficient utilization of working capital.

Sales
Working capital turnover =
Net working capital

74
PROFITABILITY RATIOS
A company should earn profits to survive and grow over a long
period of time. Profits are essential, but it world be wrong to assume that every
action initiated by management of a company should be aimed at maximizing
profits, irrespective of concerns for customers, employees, suppliers or social
consequences.
It is unfortunate that the word profit is looked upon as a term of abuse
since some firms always want to maximize profits ate the cost of employees,
customers and society. Except such infrequent cases, it is a fact that sufficient
profits must be able to obtain funds from investors for expansion and growth
and to contribute towards the social overheads for welfare of the society.
Profit is the difference between revenues and expenses over a period of time
(usually one year). Profit is the ultimate output of a company, and it will have
no future if it fails to make sufficient profits. Therefore, the financial manager
should continuously evaluate the efficiency of the company in terms of profit.
The profitability ratios are calculated to measure the operating efficiency of the
company. Besides management of the company, creditors and owners are also
interested in the profitability of the firm. Creditors want to get interest and
repayment of principal regularly. Owners want to get a required rate of return on
their investment.
This is possible only when the company earns enough profits.

Generally, two major types of profitability ratios are calculated:

 Profitability in relation to sales.

 Profitability in relation to investment.

75
16. Net Profit Margin

Net profit is obtained when operating expenses; interest and taxes are
subtracted form the gross profit margin ratio is measured by dividing profit
after tax by sales:

Net Profit
Net profit Ratio = X 100
Sales

Net profit ratio establishes a relationship between net profit and sales
and indicates and management’s in manufacturing, administrating and selling
the products. This ratio is the overall measure of the firm’s ability to turn each
rupee sales into net profit. If the net margin is inadequate the firm will fail to
achieve satisfactory return on shareholders’ funds. This ratio also indicates the
firm’s capacity to withstand adverse economic conditions.A firm with high net
margin ratio would be advantageous position to survive in the face of falling
prices, selling prices, cost of production .

76
17. Net Margin Based on NOPAT
The profit after tax (PAT) figure excludes interest on borrowing.
Interest is tax deducts able, and therefore, a firm that pays more interest pays
less tax. Tax saved on account of payment of interest is called interest tax
shield. Thus the conventional measure of net profit margin-PAT to sales ratio-
is affected by firm’s financial policy. It can mislead if we compare two firms
with different debt ratios. For a true comparison of the operating performance
of firms, we must ignore the effect of financial leverage, viz., the measure of
profits should ignore interest and its tax effect. Thus net profit margin (for
evaluating operating performance) may be computed in the following way:

EBIT (1-T) NOPAT

Net profit margin = =
Sales Sales

18. Operating Expense Ratio:

The operating expense ratio explains the changes in the profit
margin (EBIT to sales) ratio. This ratio is computed by dividing operating
expenses viz., cost of goods sold plus selling expense and general and
administrativeexpenses (excluding interest) by sales.

Operating expenses
Operating expenses ratio=
Sales

77
19. Return on Investment (ROI)

The term investment may refer to total assets or net assets. The
funds employed in net assets in known as capital employed. Net assets equal
net fixed assets plus current assets minus current liabilities excluding bank
loans. Alternatively, capital employed is equal to net worth plus total debt.
The conventional approach of calculating return of investment
(ROI) is to divide PAT by investments. Investment represents pool of funds
supplied by shareholders and lenders, while PAT represent residue income of
shareholders; therefore, it is conceptually unsound to use PAT in the
calculation of ROI. Also, as discussed earlier, PAT is affected by capital
structure. It is, therefore, more appropriate to use one of the following measures
of ROI for comparing the operating efficiency of firms:

BIT (1-T) EBIT (1-T)

ROI = ROTA = =
Total assets TA

EBIT (1-T) EBIT (1-T)

ROI = RONA = =
Net assets NA

Since taxes are not controllable by management, and since firm’s opportunities
for availing tax incentives differ, it may be more prudent to use before tax to
measure ROI. Many companies use EBITDA (Earnings before Depreciation,
Interest, Tax and Amortization) instead of EBIT to calculate ROI. Thus the
ratio is:

EBIT
ROI=
Total Assets (TA)

78
20. Return on Equity (ROE)
Common or ordinary shareholders are entitled to the residual
profits. The rate of dividend is not fixed; the earnings may be distributed to
shareholders or retained in the business. Nevertheless, the net profits after taxes
represent their return. A return on shareholders equity is calculated to see the
profitability of owners’ investment. The shareholders equity or net worth will
include paid-up share capital, share premium, and reserves and surplus less
accumulated losses. Net worth also be found by subtracting totalliabilities from
total assets. The return on equity is net profit after taxes divided by
shareholders equity, which is given by net worth:

Profit after taxes PAT

ROE = =
Net worth (Equity) NW

ROE indicates how well the firm has used the resources of owners. In
fact, this ratio is one of the most important relationships in financial analysis.
The earning of a satisfactory return is the most desirable objective of business.
The ratio of net profit to owners’ equity reflects the extent to which this
objective has been accomplished. This ratio is, thus, of great interest to the
present as well as the prospective Shareholders and also of great concern to
management, which has the responsibility of maximizing the owners’ welfare.
The return on owners’ equity of the company should be compared with
the ratios of other similar companies and the industry average. This will reveal
the relative performance and strength of the company in attracting future
investments.

79
21. Earnings per Share (EPS)
The profitability of the shareholders investments can also be measured
in many other ways. One such measure is to calculate the earnings per share.
The earnings per share (EPS) are calculated by dividing the profit after taxes
by the total number of ordinary shares outstanding.

Profit after tax

EPS =
Number of share outstanding

22. Dividends per Share (DPS or DIV)

The net profits after taxes belong to shareholders. But the
income, which they will receive, is the amount of earnings distributed as cash
dividends. Therefore, a large number of present and potential investors may be
interested in DPS, rather than EPS. DPS is the earnings distributed to ordinary
shareholders dividend by the number of ordinary shares outstanding.

Earnings paid to shareholders (dividends)

DPS=
Number of ordinary shares outstanding

23. Dividend – Payout Ratio

The Dividend – payout Ratio or simply payout ratio is DPS ( or
total equity dividends) divided by the EPS ( or profit after tax):

80
 Equity dividends
Dividend Payout Ratio =

Profit after tax

Dividends per share DPS

= =
Earnings per share EPS

4.DATA Analysis & Interpretation

1.LIQUIDITY RATIO

a)Current ratio

Current
Years Current assets Ratio
liabilities

1,73,47,87,565 1.47
2012-13 2,56,69,83,895

2013-14 2,64,80,61,231 1,76,45,48,279 1.5

2014-15 2,67,02,72,091 1,74,00,68,207 1.53

2015-16 2,77,08,77,333 1,83,56,17,297 1.51

81
 GRAPH

Current ratio
1.54
1.53
1.52
1.51
1.5
1.49
Series1
1.48
1.47
1.46
1.45
1.44
2013 2014 2015 2016

Interpretation

From the above graph it can be observed that there is fluctuated trend during the
study period. It increases from 1.31 to 1.34 in the year 2008-09.

It decreases from 1.32 to 1.2 in the year 2010-11. It increases from 1.2 to 1.48 in
the year 2011-12. It increases from 1.48 to 1.73 in the year 2012-13.

Quick ratio

Current
Years Quick assets Ratio
liabilities

2,12,47,63,236 1,73,47,87,565
2012-13 1.22

2013-14 2,22,30,60,252 1,76,45,48,279 1.26

2014-15 2,33,38,54,211 1,74,00,68,207 1.34

2015-16 2,44,60,30,568 1,83,56,17,297 1.33

82
 GRAPH

Quick ratio
1.35

1.3

1.25
Series1

1.2

1.15
2013 2014 2015 2016

Interpretation:

From the above graph it can be observed that there is fluctuating trend during
the study period. It increases from 0.6 to 0.71 in the year 2009-10.

It decreases from 0.71 to 0.38 in the year 2010-11. It increases from 0.38 to
0.63 in the year 2011-12. It increases from 0.63 to 0.91 in the year 2012-13.

The standard ratio of the company must be 1:1. It shows that the quick ratio of
the company satisfactory.

LEVERAGE RATIO

a)Debt-Equity ratio

Shareholder’s
Years Total Liabilities Ratio
Equity

2012-13 47,88,46,387 58,50,53,858 0.81

2013-14 53,63,63,629 65,85,79,979 0.81

2014-15 56,70,28,071 69,12,68,774 0.82

2015-16 52,51,65,912 74,42,43,266 0.7

83
 GRAPH

Debt equity ratio

0.85
0.8
0.75
0.7 Series1

0.65
0.6
2013 2014 2015 2016

Interpretation

From the above table the debt-equity ratios are 0.81, 0.81, 0.82 and 0.7 in
the year 2015-16 the ratio is low because of the revamping of galvanizing
plant.

ACTIVITY RATIO

a)Debtors turnover ratio

S.no Years Ratios

1 2012-13 1.97
2 2013-14 2.41
3 2014-15 1.5
4 2015-16 1.78

84
 GRAPH

Debtors turnover ratio

3
2.5
2
1.5
Series1
1
0.5
0
2013 2014 2015 2016

Interpretation:

From the above table Debtors turnover ratio in 2013-16 are 1.97,
2.41,1.5 and 1.78 and The debtor’s turnover ratio in the year 2014-15
is low but again improved in 2015-2016 because the more credit
sales.

b) Average collection period

S.no Years Days

1 2012-13 181
2 2013-14 151
3 2014-15 243
4 2015-16 205

85
 GRAPH

Average collection period

300
250
200
150
Series1
100
50
0
2013 2014 2015 2016

Interpretation

From the above table we can see that during 2013-2016 the days of
average collection period are fluctuating throughout the years
as 181,151,243 and 205.

C) Fixed Asset Turnover ratio

S.no Years Ratios

1 2012-13 15.23
2 2013-14 13.03
3 2014-15 10.42
4 2015-16 13.07

86
 GRAPH

Fixed asset turnover ratio

20

15

10
Series1
5

0
2013 2014 2015 2016

Interpretation

From the above data we can see that the fixed asset turnover ratio is decreased
from 2013-15 15.23, 13.03 and 10.42 but improved in 2016 with 13.07

d)Creditor days

S.no Years Days

1 2012-13 116
2 2013-14 117
3 2014-15 148
4 2015-16 135

87
 GRAPH

Creditor days
200

150

100
Series1
50

0
2013 2014 2015 2016

Interpretation
From the above data the creditor days from 2013-2016 are 116,117,148 and 135
from the year 2014-2015 there is high change in days from 117-148.

e)Debtor days

S.no Years Days

1 2012-13 209

2 2013-14 147
3 2014-15 202
4 2015-16 165

88
 GRAPH

Debtor days
250
200
150
100 Series1
50
0
2013 2014 2015 2016

Interpretation

From the above data the debtor days from the year 2013 to 2014,there is a
change in debtor days from 209 to 147.

f) Inventory turnover ratio

Average
Years COGS Ratio
Inventory

2012-13 2,15,06,10,070 26,07,87,021 8.24

2013-14 3,19,60,64,119 40,38,40,660 7.91

2014-15 2,39,46,03,432 35,66,41,003 6.71

2015-16 2,86,86,52,025 31,64,14,907 9.07

89
 GRAPH

Inventory turnover ratio

10
8
6
4 Series1

2
0
2013 2014 2015 2016

Interpretation

From the above data the inventory turnover ratio from the years 2013-2016 are
8.24,7.91,6.71 and 9.07,there is a growth in year 2015-2016 from 6.71 to 9.07
which is a good rate of conversion.

h)Inventory days

S.no Years Days

1 2012-13 56
2 2013-14 37

3 2014-15 40
4 2015-16 33

90
 GRAPH

Inventory days
60
50
40
30
Series1
20
10
0
2013 2014 2015 2016

Interpretation

From the data given we can see that the inventory days of financial years from
2013-2016 are 56,37,40 and 33.

In the year 2016 the inventory days are reduced than previous year from 40 to
33 which indicates good sign for inventory days.

3.PROFITABLITY RATIOS

a)Gross profit ratio

Years Gross profit Net sales Ratio

52,83,82,671 2,67,89,92,741
2012-13 19.72

2013-14 66,59,59,985 3,86,20,24,104 17.24

2014-15 49,64,74,687 2,89,10,78,119 17.17

2015-16 68,22,09,102 3,55,08,61,127 19.21

91
 GRAPH

Gross profit ratio

20

19

18
Series1
17

16

15
2013 2014 2015 2016

Interpretation

From the above graph it can be observed that it increases from 0.05 to 0.06. It
decreases from 0.06 to 0.05 in the year 2009-10. It increases from 0.05 to 0.06
in the year 2011-12 and it remains constant in the year 2012-13.

b)Net Profit ratio

Years Net profit Net sales Ratio

7,01,09,936 2,67,89,92,741
2012-13 2.61

2013-14 7,35,26,121 3,86,20,24,104 1.9

2014-15 4,26,97,079 2,89,10,78,119 1.48

2015-16 5,29,74,492 3,55,08,61,127 1.49

92
 GRAPH

Net profit ratio

3
2.5
2
1.5
Series1
1
0.5
0
2013 2014 2015 2016

Interpretation

From the above graph it can be observed that there is no fluctuating trend during
the study period. It increases from 0.03 to 0.04 in the year 2009-10. It was
constant till the end of the study period.

93
 FINDINGS

 It is found that the financial position of the company is liquid

The working capital position as revealed in the financial statements of

(ANVITA HONDA VIJAYAWADA.)

 for the study period are also found healthy.

 By Ratio analysis it was found that the profit before tax and profit after tax is

been fluctuating during the study period.

 From the study it was observed that the current ratio has decreased in the

year 2010 and then increased and reached 1.73% in the year 2012.

 By calculating the profitability ratios it was found that the company

profitability position was constant.

 By ratio analysis it is found that the working capital was showing an

increasing trend in all years.

SUGGESTIONS

 It is suggested to the company to maintain same level of working capital to

meet day to day operations efficiently.

 It is suggested to the company to increase liquid assets so that it would

overcome liabilities.

 As the trend of working capital is increasing it is suggestible for the

company to retain as to meet expenses in future.

94
 5.SUMMARY AND CONCLUSION

The project is done at (ANVITA HONDA VIJAYAWADA.)

 to study the financial position by using the techniques of

financial statement analysis by using Ratios

The liabilities of the (ANVITA HONDA VIJAYAWADA.)

 are moving at a constant rate but the assets are fluctuating.

At an overall glance, by analysing the trends in working

capital, income levels etc., it is understood that the (ANVITA

HONDA VIJAYAWADA.)

present financial position is satisfactory.

95
 BIBLIOGRAPHY
Books Referred:

 I.M. Pandey, “Financial Management”, Vikas

Publishing’s house Pvt, Ltd.,
 M.Y.Khan – P.K.Jain, “Financial
Management”, TaTa Mc Graw-Hill publishers
company Ltd.,
 Prasanna Chandra, “Financial Management”
TaTa Mc Graw-Hill publishers company Ltd.,
 R.K.Sharama And Seshi K.Gupta ,
“Management accounting - Principles and
Practices” Kaylan publishers
Websites:
– http://www.investopedia.com/
– https://www.indiamart.com/
– www.scribd.com

96
BALANCE SHEET FOR THE YEAR ENDING 31.03.2013

As on As on
Schedule
Particulars 31.03.2013 31.03.2012
No.
(Rs.) (Rs.)

97
Equity & Liabilities

Shareholder’s funds
Share Capital 2 50,00,00,000 50,00,00,000
Reserves and surplus 3 8,50,53,858 1,49,43,922

58,50,53,858 31,49,43,922
Non-current Liabilities
Long term borrowings 4 18,34,39,620 27,83,37,739
Deferred tax liabilities(Net) 5 1,51,10,777 1,39,02,666
Other Long term Liabilities 6 28,11,07,114 5,40,21,838
Long term Provisions 7 82,43,023 62,16,496

48,79,00,534 35,24,78,739
Current Liabilities
Short term Borrowings 8 29,54,06,767 29,48,86,125
Trade Payables 85,18,54,250 50,80,82,722
Other Current Liabilities 9 58,31,09,937 18,25,25,598
Short term provisions 10 44,16,611 1,12,87,722

1,73,47,87,565 99,67,82,167

Total 2,80,77,41,957 1,66,42,04,828

Assets
Non Current Assets
Fixed Assets
1.Tangiable 11 23,35,34,224 146,7,34,779
2.Capital work in progress 46,29,556 15,28,605
23,81,63,780 14,82,63,384
Long term loans and advances 12 25,94,282 42,95,784

24,07,58,062 15,25,59,168

Current Assets
Inventories 13 41,09,44,582 11,06,29,460
Trade Receivables 14 1,53,40,91,893 1,01,88,22,569
Cash and cash equivalents 15 25,70,20,339 19,34,52,600
Short term loans and advances 16 35,04,49,211 18,03,59,414
Other Current Assets 17 1,44,77,870 8,38,617

2,56,69,83,895 1,51,16,45,660
Total 2,80,77,41,957 1664204828

98
Significant accounting policies 1

The accompany notes are an

integral part of the financial
statements

99
BALANCE SHEET FOR THE YEAR ENDING 31.03.2014
As on As on
Schedule
Particulars 31.03.2014 31.03.2013
No.
(Rs.) (Rs.)
Equity & Liabilities

Shareholder’s funds
Share Capital 2 50,00,00,000
Reserves and surplus 3 8,50,53,858

Non-current Liabilities
Long term borrowings
Deferred tax liabilities(Net)
Other Long term Liabilities
Long term Provisions
58,50,53,858
4 18,34,39,620
5 1,51,10,777
6 28,11,07,114
7 82,43,023

48,79,00,534
Current Liabilities
Short term Borrowings 8 29,54,06,767
Trade Payables 85,18,54,250
Other Current Liabilities 9 58,31,09,937
Short term provisions 10 44,16,611

1,73,47,87,565

Total 2,80,77,41,957

Assets
Non Current Assets
Fixed Assets
1.Tangiable 11 23,35,34,224
2.Capital work in progress 46,29,556
23,81,63,780
Long term loans and advances 12 25,94,282

24,07,58,062

Current Assets
Inventories 13 41,09,44,582
Trade Receivables 14 1,53,40,91,893
Cash and cash equivalents 15 25,70,20,339
Short term loans and advances 16 35,04,49,211
100
Other Current Assets 17 1,44,77,870

2,56,69,83,895
Total 2,80,77,41,957

Significant accounting policies 1

The accompany notes are an

integral part of the financial
statements

101
BALANCE SHEET FOR THE YEAR ENDING 31.03.2015

As on As on
Schedule
Particulars 31.03.2015 31.03.2014
No.
(Rs.) (Rs.)
SOURCES OF FUNDS:
SHARE HOLDERS FUNDS
(a) Share capital 1 2000000.00 2000000.00
(b) Reserves and surplus 7534844.56 4610265.20
Share application money 2200000.00 1376070.50
LOAN FUNDS:
(a) Secured loans 2 23155577.05 21151897.90
(b) Unsecured loans 0.00 837000.00
TOTAL 34890421.61 29975233.60
APPLICATION OF FUNDS
Fixed assets
(a) Gross block 27864417.61 16882033.41
(b) Less: depreciation 3 4232194.86 3032766.97
(c ) Net block 23632222.75 13849266.44
CURRENTASSETS,LOANS&ADVANCES
Inventories 51640675.00 30911818.00
Investments 0.00 326816.00
Sundry Debtors 4 16469190.54 18454508.13
Cash and bank balances 5 946861.48 841490.48
Other current assets 6 1259372.80 1043012.00
Loans and advances 7 4851088.17 13982329.67
Sub-total (a) 75167187.99 65559974.28
Less: current liabilities and provisions:
(a) Sundry creditors 8
(b) Provisions 9 59440901.00 46800169.99
Sub-total (b) 3263727.00 1962247.00
NET CURRENT ASSETS (A)-(B) 62704628.00 48762416.99
Deferred tax 12462559.99 16797557.29
Miscellaneous expenditure -1204361.13 -671590.13
(to the extent not written off or adjusted) 0.00 0.00
Profit & loss account
NOTES ON ACCOUNTS 13 0.00 0.00

34890421.61 29975233.60

102
INCOME STATEMENT FOR THE YEAR ENDING 31.03.2013

As on
Schedu As on
31.03.200
le 31.03.2008
Particulars 7
No. (Rs.)
(Rs.)

INCOME:
Sale 14937776.44 26275948.
Other income 10 661082.00 00
15598858.44 3004497.9
2
29280445.
EXPENDITURE 92

Material consumed 11 9990241.43

Electricity 597353.00
Freights 137631.00
fuel 0 22830279.
Wages 1081870.00 07
Direct expenses 12 18727.00 654905.00
Administration & other expenses 2357486.95 318458.15
Interest 147047.47 23554.30
Depreciation 501513.78 1756772.0
13 0
Notes on accounts 90352.00
1397136.2
TOTA 14831870.63 6
L: 287151.96
802204.93
Profit / loss for the year before taxation 766987.81

LESS: Provision for Tax Deferred 168361.00

tax liability 84508.00 28160813.
13797.00 67
Current year tax
Fringe
benefit tax 500321.81 1119632.2
5
1892763.26
Profit after taxation 43133.00
333736.00
Balance brought forward from previous 2849.00
year
103
BALANCE CARRIED TO 739914.25
BALANCE SHEET 2393085.07
1152849.0
1

1892763.2
6

104
INCOME STATEMENT FOR THE YEAR ENDING 31.03.2014
Schedu As on As on
le 31.03.2009 31.03.2008
Particulars
No. (Rs.) (Rs.)

INCOME:
Sale 60620458.00 14937776.
Other income 10 180484.00 44
60800942.00 661082.00
15598858.
44
EXPENDITURE

Material consumed 11 35290991.45

Electricity 806298.00
Freights 1126781.00 9990241.4
Wages 5899798.00 3
Direct expenses 5269642.00 597353.00
Administration & other expenses 12 6294094.51 137631.00
Interest 1817981.50 1081870.0
Depreciation 821476.41 0
18727.00
Notes on accounts 13 2357486.9
5
TOTA 57327062.87 147047.47
L: 501513.78

Profit / loss for the year before taxation 3473879.13

LESS: Provision for Tax Deferred 283973.00 14831870.

tax liability 956670.00 63
Current 16056.00
year tax
766987.81
Fringe 2217180.13
benefit tax 168361.00
2393085.07 84508.00
13797.00
Profit after taxation

Balance brought forward from previous 500321.81

year
105
 1892763.2
BALANCE CARRIED TO 4610265.20 6
BALANCE SHEET
2393085.0
7

106
INCOME STATEMENT FOR THE YEAR ENDING 31.03.2015

As on As on
Schedule
31.03.2010 31.03.2009
Particulars No.
(Rs.) (Rs.)

INCOME:
Sale 99507508.00 68935160.00
Less : taxes 10 17017812.00 8314702.00
Net sales 82489696.00 60620458.00
Other income 18040.00 180484.00
82507736.00 60800942.00

EXPENDITURE

Material consumed 11 54152908.51 35290991.45

Electricity 779807.00 806298.00
Freights 1905577.00 1126781.00
Wages 6371249.00 5899798.00
Direct expenses 1124011.00 5269642.00
Administration & other expenses 12 9067845.70 6294094.51
Interest 3521958.54 1817981.50
Depreciation 1199427.89 821476.41

Notes on accounts 13

TOTAL: 78122784.64 57327062.87

Profit / loss for the year before 4384951.36 3473879.13

taxation

LESS: Provision for Tax 532771.00 283973.00

Deferred tax liability

Current year tax 882334.00 956670.00

Fringe benefit tax 45267.00 16056.00

Profit after taxation 2924579.36 2217180.13

Balance brought forward from 4610265.20 2393085.07

107
previous year

BALANCE CARRIED TO 7534844.56 4610265.20

BALANCE SHEET

----- o -----

108