FINANCIAL ANALYSIS

OF
INTERNATIONAL TRACTORS LIMITED
NASRALA
HOSHIARPUR
Submitted to:
Lovely Institute Of Management
Punjab Technical University
Jalandhar
In partial fulfillment of the requirement for the award of degree of
MASTER OF BUSINESS ADMINISTRATION (MBA)
(2001-2003)

Supervised by: Submitted by:

Ms. Puneet Sikand NEEL KAMAL SHARMA
Lecturer in LIM, MBA – 4th Semester
Phagwara. Univ. Roll No. 14422216

LOVELY INSTITUTE OF MANAGEMENT

Affiliated to
PUNJAB TECHNICAL UNIVERSITY
JALANDHAR
 BIBLIOGRAPHY

R.K. SHARMA and SHASHI K. GUPTA, “Management Accounting and Business

Finance”, Kalyani Publishers, Ludhiana, 2000.

I.M. PANDEY, “Financial Management”, Vikas Publishing house private limited, New

Delhi, 2000.

DILEEP PRAKASH, “Global Outsourcing”, Business World, May 12th 2003, PP 30-39.

ICFAI, “Financial Management” ICFAI Press Hyderabad.

C.R. KOTHARI, “Research Methodology, Methods & Techniques” Wishwa Parkashan

New Delhi, 1999.

S.D. GUPTA, “Statitical Methods” Sultan Chand & Sons, New Delhi, 2001.

Balance sheets, “International Tractors Limited from 1998 – 2002”. (Four years Balance

Sheets).

Financial statements, “International Tractors Limited”

a) Profit and loss account from 1999 – 2002.

b) Balance sheets from 1998 – 2002.

 CERTIFICATE

This is to certify that the project report entitled “Financial Analysis of

International Tractors Limited”, submitted by Mr. NEEL KAMAL SHARMA in
partial fulfillment for the award of Master of Business Administration (MBA) of Punjab
Technical University, Jalandhar is a bonafide research work carried out under my
supervision and guidance and no part of this project has been submitted for any other
degree / diploma.
The assistance and help received during the course of the investigation has been
fully acknowledged.

Dated: ____________ Ms. Puneet Sikand

(Lecturer)
Lovely Institute of Management,
Jalandhar.
 ACKNOWLEDMENT

It is difficult to acknowledge precious a debt as that of learning as it is the only

debt that is difficult to repay except through gratitude.
First and foremost I wish to express my profound gratitude to the almighty, the
merciful & compassionate with those grace & blessings. I have been able to complete this
work.
It is my profound privilege to express my sincere thanks to Dr. Sanjay Modi,
Director LIM Phagwara, for giving me an opportunity to work on the project and
giving me full support in completing this project.
I am very thankful to my guide Ms. Puneet Sikand (Lecturer in LIM,
Phagwara) for his full support in completing this project work.
Last but not least, I would like to thank my parents & my friends for their full
cooperation & continuous support during the course of this assignment.

(NEEL KAMAL SHARMA)

 CONTENTS

Certificate

Acknowledgement

Table of contents Page No.

Executive summary 1

Introduction to the Project 5

Introduction to the company 12

Data Presentation, Analysis and Interpretation 17

Conclusion & Suggestions 63

Bibliography

Annexure
 EXECUTIVE SUMMARY

1. Chapter 1

1.1. SCOPE
1.2. OBJECTIVE OF THE STUDY
1.3. RESEARCH METHODOLOGY
1.4. LIMITATIONS OF THE STUDY
1.5. LIMITATIONS OF THE RATIO ANALYSIS
1.6. TECHNIQUES USED
1.7. CONCLUSION

1
 EXECUTIVE SUMMARY

a. SCOPE OF THE STUDY

The main objective of carrying out this project is an effort to study Financial Analysis of
International Tractors Limited at Hoshiarpur. The study that I concluded is Financial
Analysis of International Tractors Limited is limited to analysis of Secondary data only.
All the information used for analysis of financial analysis of the firm has been collected
from Firms Balance sheet.

1.2 OBJECTIVE OF THE STUDY

The main objective of the study concluded is that to make comparative analysis or the
financial position and I have made my all endeavors to find out the factors affecting the
financial health of the company.

1.3 RESEARCH METHODOLOGY

For carrying out the study of this particular topic the data has been collected basically by
two major sources. These are: -
(a) Primary sources
The primary sources consist of the basic information collected from the staff people of
various departments, the officers as well as the managers of the international tractors
limited. It has been collected by consulting.

(b) Secondary sources

The secondary sources consist of the data and information collected from the annual
reports, magazines, journals, and the scheduled ledgers of international tractors limited.

1.4 LIMITATIONS OF THE STUDY

Although there was many limitations that come across during this study but the major
limitation that was faced by me was that the major portion of my collected data was from
the secondary sources.

2
1.5 LIMITATION OF THE RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of the financial analysis. Though
ratios are simple to calculate and easy to understand, they differ from some serious
limitations.

a) Limited use of a single ratio

A single ratio usually does not convey much of the sense. To make a better
interpretation a large number of ratios have to be calculated, which is likely to confuse
the analyst than help him in making any meaningful conclusions.

b) Lack of Adequate standards

There are no well-accepted standards or rules of thumb for all ratios, which can be
accepted as norms. It renders interpretations of ratios difficult.

c) Window dressing
Financial statements can easily be window dressed to present a better picture of
profitability to the outsiders. Hence one has to be very careful while making decisions
from ratios calculated from such financial statements.

d) Price level changes

While making ratio analysis no consideration is given to the price level and this
makes the interpretations of the ratios invalid.

1.6 TECHNIQUE USED

Although the ratio analysis has so many limitations but this is best techniques, which is
used internationally, used for measuring the strength and weaknesses of the company.
This is modern method, which shows the overall profitability of the company, to know
the better results the ratios are compared with the ratios of the other companies.

3
1.7 CONCLUSION
After analyzing the ratios of the INTERNATIONAL TRACTORS LIMITED the
interpretation is made in the form of graphical presentation and also in the form of the
text. In conclusion part it is effort to know overall strength and weaknesses of the
company and the suggestions are maintained in the form of liquidity, solvency,
profitability ratios of the company. Some other useful suggestions to the ITI is also given.

4
 ABOUT THE PROJECT
2. Chapter 2

2.1. INTRODUCTION
2.2. MEANING
2.3. OBJECTIVE
2.4. TYPES OF FINANCIAL ANALYSIS
2.5. PROCEDURE OF FINANCIAL ANALYSIS STATEMENTS
2.6. METHODS OF FINANCIAL ANALYSIS

5
Literature Survey
2.1 Introduction
Financial statements are prepared primarily for decision-making. They play a dominant
role in setting the framework of the managerial decisions. But the information provided
in the financial statements is not an end in itself as no meaningful conclusions can be
drawn from these statements alone. However the information provided in the financial
statements is of immense use in decision – making through analysis and interpretation of
financial statements. Financial analysis is the process of identifying the financial strength
& weaknesses of the Firm by property, establishing relationship between the items of the
Balance Sheet and the Profit and Loss Account.

2.2 Meaning
The term “Financial Analysis” also known as analysis and interpretation of financial
statements refer to the process of determining financial strength and weaknesses of the
firm by establishing strategic relationship between the items of the balance sheet, profit
and loss account and other operative data.
According to Metcalf and Titard, “Analyzing financial statements is the process of
evaluating the relationship between the component parts of the financial statements to
obtain a better understanding of a firm’s position and performance.”
In the words of Myers, “Financial statement analysis is largely a study of relationship
among the various financial factors in a business as disclosed by a single set of
statements, and a study of the trend of these factors as shown in a series of statements”.

2.3 Objective
The purpose of objective of financial analysis is to diagnose the information contained in
financial statements so as to judge the profitability and financial soundness of the firm.
Just like a doctor examines his patient by recording his body temperature, blood pressure
etc. before making his conclusion regarding the illness and before giving his treatment, a
financial analyst analysis the financial statements with various tools of analysis before
commenting upon the financial wealth or weaknesses of an enterprise. The analysis and
interpretation of financial statements is essential to bring out the mystery behind the

6
figures in financial statements. Financial statements analysis is an attempt to determine
the significance and meaning of the financial statement data so that forecast may be made
of the future earnings, ability to pay interest and debt maturities (both current and the
long term) and profitability of a sound dividend policy.

2.4 Types of financial analysis

However, we can classify various types of financial analysis into different categories
depending upon (i) the material used, and (ii) the method of operation followed in the
analysis or the modus operandi of analysis.

Types of Financial Analysis

On the basis of material On the basis of modus

used operandi

External Internal Horizontal Vertical

analysis analysis analysis analysis

(i) On the basis of Material used:

a. External analysis
b. Internal analysis

a. External analysis
This analysis is done by outsiders who do not have access detailed internal
accounting records of the business firm. These outsiders include investors, potential
investors, creditors, potential creditors, government agencies, credit agencies, and the
general public. For financial analysis, these external parties to the firm depend almost
entirely on the published financial statements.

7
 b. Internal analysis
The analysis conducted by persons who have access to the internal accounting
records of a business firm is known as internal analysis. Such an analysis can therefore,
be performed by executives and employees of the organization as well as government
agencies which have statutory powers vested in them. Financial analysis for managerial
purposes is the internal type of analysis that can be affected depending upon the purpose
to be achieved.

(ii) On the basis of modus operandi

a. Horizontal analysis
b. Vertical analysis

a. Horizontal analysis
Horizontal analysis refers to the comparison of financial data of a company for
several years. The figure for this type of analysis are presented horizontally over a
number of columns. The figures of the various years are compared with standard or base
year. A base year is a year of analysis is also called ‘Dynamic analysis’ as it is based on
the data from year to year rather than on data of any one year.

b. Vertical analysis
Vertical analysis refers to relationship of the various items in the financial
statements of one accounting period. In this type of analysis the figures from financial
statements of the year are compared with a base selected from the same years statement.
It is also known as ‘static analysis’. Common size financial statements and financial
ratios are the two tools employed in vertical analysis. Since vertical analysis considers
data for one time period only. It is not very conducive to a proper analysis of financial
statements.

2.5 Procedure of financial statement analysis.

There are three steps involved in the analysis of financial statements. These are (i)
selection (ii) classification (iii) interpretation.

8
 The first step involves selection of information (data) relevant to the purpose of
analysis of financial statements. The second step involved is the methodical classification
of the data and the third step includes drawing of inferences and conclusion.

The following procedure is adopted for the analysis and interpretation of financial
statements: -
1. The analyst should acquaint himself with the principles and postulants of
accounting. He should know the plans and policies of the management so that he
may be able to find out whether these plans are properly executed or not.
2. The extent of analysis should be determined so that the sphere of work may be
decided. If the aim is to find out the earning capacity of the enterprise then
analysis of income statement will be undertaken. On the other hand, if financial
position is to be studied then Balance sheet analysis will be necessary.
3. The financial data given in the statements should be re-organized and re-arranged.
It will involve the grouping of similar data under same heads, breaking down of
individual components or statements according to the nature. The data is reduced
to a standard form.
4. A relationship is established among financial statements with the help of tools and
techniques of analysis such as ratios, trends, common size, funds flow etc.
5. The information is interpreted in a simple and understandable way. The
significance and utility of financial data is explained for helping decision taking.
6. The conclusions drawn from interpretation are presented to the management in
the form of reports.

2.6 Methods or devices of financial analysis: -

The analysis and interpretation of financial statements is used to determine the financial
position and results of operations as well. A number of methods or devices are used to
study the relationship between different statements. The following methods of analysis
are generally used:
1. Comparative statements
2. Trend analysis

9
 3. Common size statements
4. Funds flow analysis
5. Cash flow analysis
6. Ratio analysis
7. Cost volume profit analysis
These are explained as follows:

1. Comparative statements
The comparative financial statements are statements of the financial position at
different periods of time. The elements of financial position are shown in a comparative
form so as to give an idea of financial position at two or more periods. Any statement
prepared in a comparative form will be covered in comparative statements. From
practical point of view. Generally, two financial statements (Balance Sheet and the
Income Statement) are prepared in comparative form for financial analysis purposes.

2. Trend analysis
The financial statements may be analyzed by computing trends of series of
information. This method determines the direction upwards or downwards and involves
the computation of the percentage relationship that each statement items bears to the
same in the base year. The information for a number of years is taken up and one year,
generally taken for the base year. In figures for the base year are taken as 100 and trend
ratios for other years are calculated on the basis of the base year. The analyst is able to
see the trend of the figures, whether upward or downward.

3. Common size statements

The common size statements, balance sheet and the income statements are shown
in analytical percentages. The figures are shown as percentages of total assets, total
liabilities and the total sales. The total sales are taken as 100 and different assets are
expressed as a percentage of the total. Similarly various liabilities are taken as a part of
the total liabilities. These statements are also known as component percentage as 100

10
percent statements because every individual item is stated as a percentage of the total
100.
4. Funds flow analysis
The fund flow statement is a statement, which shows the movement of the funds
and is the report of the financial operations of the business undertaking. It indicates
various means by which funds were obtained during a particular period and the ways in
which these funds were employed. In simple words, it is a statement of sources and
application of funds.

5. Cash flow analysis

Cash flow statement is a statement, which describes the inflow (sources) and
outflow (uses) of the cash and cash equivalents in an enterprise during the specified
period of time. Such a statement enumerates net effects of the various business
transactions on cash and its equivalents and takes into account receipts and disbursements
of cash. A cash flow statement summarizes the causes of changes in cash position of a
business enterprise between the dates of the two balance sheets.

6. Ratio analysis
Ratio analysis is a technique of analysis and interpretation of financial statements.
It is the process of establishing and interpreting various ratios for helping in making
certain decisions. However ratio is not end itself. It is only a means of better
understanding of financial strengths and weaknesses of a firm. A ratio is a simple
arithmetical expression of the relationship of one number to another. It may be defined as
the indicated quotient of the two mathematical expressions.

7. Cost volume profit analysis

Profit is the most important measure of a firm’s performance. In the free market
economy, profit is a guide for allocating resources efficiently. An analysis of the effects of
various factors on profit is an essential step in financial planning and decision-making.
The analytical techniques used to study the behavior of profit in response to the
changes in the volume costs and price is called the Cost Volume Profit (CVP) analysis.

11
 ABOUT THE COMPANY

3. Chapter 3

3.1. A SONALIKA GROUP PROFILE

3.2. INTERNATIONAL TRACTORS LIMITED

3.3. COMPANY PROFILE

3.4. THE TOP BRASS

3.5. ITL DEALERS

3.6. COMPANY SHAREHOLDIGNS

3.7. NUMBER OF MODELS

3.8. REGIONAL OFFICES

3.9. JOINT VENTURE

12
 SONALIKA GROUP OF INDUSTRIES

3.1 A SONALIKA GROUP PROFILE

SONALIKA GROUP OF INDUSTRIES was established as a small-scale unit about three
decades ago. Fabricate and assemble harvesting machines at Hoshiarpur. Gradually over
a period of time the company developed itself into a major force in agricultural
harvesting machines. And today is the largest group of the manufacturer of machines. The
group has progressed well in short period of time with increase in its product ranges. The
group has maintained an increasing record of continues profitability since its inception.

Different groups of Sonalika Group.

SONALIKA AGRO
INTERNATIONAL TRACTORS.

3.2 INTERNATIONAL TRACTORS LIMITED.

INTERNATIONAL TRACTORS LIMITED was established on 14th October, 1996 for
manufacture of tractors. It is situated at village Chak Gujran, Hoshiarpur with its head
office at Delhi. The unit is spread over 13 acres of the land. The unit international tractors
are presently holding 18 % of the market share.
Authorized capital of the ITL as on 31.03.2002 is 60000000.
Issued & subscribed capital on ITL is 60000000.

3.3 COMPANY PROFILE

Name of the Company : M/s International Tractors Limited.

Location : Village Chak Gujran, Jalandhar Road, Hoshiarpur
(PUNJAB)
Brand Name : SONALIKA
Product : TRACTORS
Established on : 14.10.1996
Present production : 60 Tractors per day

13
Installed capacity : 200 Tractors per day
Total Area : 13 Acres of Land.
Employees : 890 (direct)
ITL Certificates : 9001 and 14001 certification.

3.4 THE TOP BRASS

CHAIRMAN : SH. L.D. MITTAL
MANAGING DIRECTOR : SH. A.S. MITTAL
JOINT MANAGING DIR. : SH. D.K. MITTAL
DIRECTOR : SH. S.K. MITTAL
VICE PRESIDENT : SH. J.K. PALIWAL

3.5 ITL DEALERS IN ALL OVER INDIA

 PUNJAB
 UTTAR PRADESH
 MADHYA PRADESH
 ORISSA
 BIHAR
 HARYANA
 MAHARASHTRA
 ANDHRA PRADESH
 KARNATAKA
 TAMIL NADU
 RAJASTHAN
 WEST BENGAL and
 NEPAL

14
3.6 COMPANY SHAREHOLDINGS
 80 % Sonalika Group
 20 % Renault Agriculture

3.7 NUMBER OF MODELS

International tractors manufacturers 12 models of tractors. These models are:
 DI – 725 (SC)
 DI – 730 (SC)
 DI – 730 III
 DI – 732 III
 DI – 35 (I)
 DI – 740 (SC)
 DI – 740 (DC)
 DI – 745 (SC, DC, I)
 DI – 750 (SC)
 DI – 750 III (SC, DC)
 DI – 55 (DC)
 DI – 60 (SC, DC)

TOTAL NUMBER OF DEALERS IN INDIA, NEPAL, SRILANKA, AND

BANGLADESH is 548

3.8 REGIONAL OFFICES

 DELHI
 KANPUR
 PATNA
 BHOPAL
 AHMEDABAD

15
 3.9 JOINT VENTURE

International tractors have signed a joint venture agreement with Renault Agriculture of
France, a leading manufacturer of cars and tractors. This is a technical, financial,
commercial and exports collaboration.

Renault Agriculture of France is the world leader of Tractor manufacturing and was rated
as world number one Tractor Company at the year’s award in Italy.

INDO – FRANCE COLLABORATION

MAJOR FEATURES:
International tractors Ltd. signed an MOU with Renault Agriculture, a 100 % subsidiary
of Renault Group of France to manufacture and market tractors of the Renault agriculture
design in India and neighboring countries. Renault agriculture has three factories and
1833 people working for it and is represented by 52 countries across the globe. The MOU
was signed by Mr. L.D. Mittal (chairman) and Mr. B. Morange (M.D. Renault
Agriculture).

HIGHLIGHTS OF THE AGREEMENT

1. Renault will open European and Asia markets for Sonalika.
2. Joint participation in international marketing strategies.
3. Renault agriculture will take minority equity stake of 20% in present ITL and that
will remain under its managerial control.

16
 DATA PRESENTATION ANALYSIS AND INTERPRETATION

4. Chapter 4

4.1. INTRODUCTION

4.2. MEANING

4.3. STEPS INVOLVED IN THE RATIO ANALYSIS

4.4. GUIDELINES FOR USE OF RATIOS

4.5. CLASSIFICATION OF RATIOS

4.6. CALCULATION OF RATIOS

a) RATIO MATRIX

b) GRAPHICAL PRESENTATION

c) INTERPRETATION

17
 DATA PRESENTATION ANALYSIS AND
INTERPRETATION
RATIO ANALYSIS
4.1 INTRODUCTION
The ratio analysis is one of the most powerful tools of the financial analysis. It is
the process of establishing and interpreting various ratios (quantitative relationship
between figures and groups of the figures). It is with the help of ratio that the financial
statements can be analyzed more clearly and decisions made from such analysis.

4.2 MEANING
A ratio is a simple arithmetical expression of the relationship of one number to
another. It may be defined as the indicated quotient of two mathematical expressions.
According to the Accountant’s Handbook by Wixon, Kell and Bedford, a ratio is an
expression of the quantitative relationship between the two numbers.
According to the Kohler, a ratio is the relation of the amount, a, to another b, expressed as
the ratio of a to b; a:b (ais to b) or as a simple fraction, integer, decimal fraction &
percentage. In simple language ratio is one number expressed in terms of the another and
can be worked out by dividing one number into the other.

4.3 STEPS INVOLVED IN THE RATIO ANALYSIS

1. Selection of relevant data from the financial statements depending upon the
objective of the analysis.
2. Calculation of appropriate ratios from the above data.
3. Comparison of the calculated ratios with the ratios of the same firm in the past, or
the ratios developed from projected financial statements or the ratios of some
other firms or the comparison with the ratio of the industry to which the firm
belongs.
4. Interpretation of the ratios.

18
4.4 GUIDELINES FOR USE OF RATIOS
The calculation of ratios may not be difficult task but their use is not easy. Following
guidelines or factors may be kept in mind while interpreting various ratios.

1. ACCURACY OF FINANCIAL STATEMENTS:

The ratios are calculated from the data available in financial statements. The
reliability of ratio is linked to the accuracy of information in these statements. Before
calculating ratios one should see whether proper concepts and conventions have been
used for preparing financial statements or not.
2. OBJECTIVE OR PURPOSE OF ANALYSIS:
The type of ratios to be calculated will depend upon the purpose for which these
are required. If the purpose is to study current financial position then ratios relating to the
current assets and current liabilities will be studied. The purpose of user is also important
for the analysis of ratios.
3. SELECTION OF RATIOS:
Another precaution in ratio analysis is the proper selection of appropriate ratios.
The ratios should match the purpose for which these are required.
4. USE OF STANDARDS:
The ratios will give an indication of financial position only when discussed with
reference to certain standards. Unless otherwise these ratios are compared with certain
standards one will not be able to reach at conclusion.
5. CALIBRE OF THE ANALYST:
The ratios are only the tools of the analysis and their interpretation will depend
upon the caliber and competence of the analyst. He should be familiar with various
financial statements and the significance of change etc.
6. RATIO PROVIDE ONLY A BASE:
The ratios are only guidelines for the analyst; he should not base his decision
entirely on them. He should study any other relevant information, situation in the
concern, general economic environment etc. before reaching final conclusions.

19
 4.5 CLASSIFICATION OF RATIOS

The ratios have different use for different people. Therefore ratios can be classified into
different categories. Various ratios can be divided into following categories depending
upon their use.

Traditional classification
Traditional classification or classification according to the statement, from which ratios
are calculated is as follows:
 Profit and loss account
 Balance sheet ratios
 Inter statement ratios

Classification according to the nature of ratios

In this type of ratios more emphasis is given to the nature of ratios, whether these pertain
to sales, earning, inventory etc.
 Liquidity or solvency ratio
 Debtors ratio
 Creditors ratio
 Sales ratio
 Earning ratios
 Cost of expenses ratio

According to importance of ratios

Under this type of ratios, ratios can be divided into two categories as following:
Primary ratios:
1. Return on capital employed
Secondary ratios:
1. Production cost ratios
2. Distribution cost ratios

20
 3. Selling cost ratios

According to users of the ratios

Ratios for management Ratios for shareholders Ratios for creditors
Return on capital Earning per share Current ratios
employed
Gross profit ratios Yield ratios Liquid ratios
Current ratios Payout ratios Debt equity ratio

21
Functional classification
The four most important financial dimensions, which a firm would like to analyze, are:
 Liquidity ratios
 Leverage ratios
 Activity ratios
 Profitability ratios

A. LIQUIDITY RATIOS:
Liquidity refers to the ability of the concern to meet its current obligations and when
these become due. The short – term obligations are met by realizing amounts from
current, floating or circulating assets. A firm should ensure that it does not suffer from
lack of liquidity and also that it does not have excess of liquidity. The failure of the
company to meet its obligations due to lack of sufficient liquidity will result in poor
creditworthiness, loss of creditors confidence, or even in legal tangles resulting in the
closure of the company. A very high degree of the 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 the high liquidity and lack of liquidity.

The most common ratios which indicates the extent of liquidity or lack of it are:
• Current ratio
• Quick ratio
• Absolute ratio

1. CURRENT RATIO
The current ratio is calculated by dividing current assets by liabilities with the help of
following formula:
Current ratio = Current Assets
Current Liabilities
 This ratio is an indicator of the firm’s commitment to meet its short-term
liabilities. Current assets means assets that will either be used up or converted into cash
within a years’ time or norms, operating cycle or the business, whichever is longer.
Current liabilities means liabilities payable within a year or during the operating cycle of
business, whichever is longer, out of existing current assets or by creation of other current
liabilities.
An ideal current ratio is (2:1). The ratio of 2 is considered as a safe margin of
solvency due to the fact that if the current assets are reduced to half i.e. 1 instead of 2,
then also the creditors will be able to get their payable in full.
Some of the current assets and current liabilities are as follows:

Current Assets Current Liabilities

Marketable Securities Bank overdraft
Sundry Debtor (less provision) Income tax
Billing Receivable Payable
Advances (recoverable)
Pre-paid expenses
Book debts outstanding for more than 6 months and loose tools should not be
included in current assets.

2. QUICK RATIO: (Acid Test Ratio or Liquid Ratio)

This ratio establishes a relationship between quick or liquid assets and current
liabilities.
Quick Ratio = Quick Assets
Quick Liabilities
Quick Assets = Current Assets – Inventories (i.e. stock) – prepaid expenses

An asset is liquid if it can be converted into cash immediately or reasonably soon

without a loss of value. Cash is (the most liquid asset).
 Generally, a quick ratio is (1:1) is considered to represent a satisfactory current
financial condition. A quick ratio of (1:1) or more does not necessarily imply sound
liquidity position of dead stock is fairly low.

3. ABSOLUTE LIQUID RATIO / CASH RATIO:

As all book debts may not be liquid, and cash may be immediately needed to pay
operating expenses and moreover, inventories are not absolutely non-liquid. To a
measurable extent, inventories are available to meet current obligation.
It would be appreciated that a company with a lower quick ratio may be quite
solvent in case its inventory has a ready market; its realizable value is even above the
book value and the portion.
Since cash is the most liquid asset, a financial analyst may examine the ratio of
cash and its equivalent to current liabilities.
An absolute liquid ratio of (0:5:1) may be adequate. The higher the ratio, the more
solvent is the business.

B. LEVERAGE RATIO (Test of long term solvency)

Solvency of a business means its ability to meet its long – term liabilities debenture
holder; mortgagors and other long – term depositors are primarily interested in
ascertaining whether the company is having adequate profit to pay its interest obligation
regularly. They would very much like to study the financial structure, the contribution of
long-term depositors, vie a vie the owner to the total capital employed.

1. DEBT – EQUITY RATIO

The ratio is also called ‘External Internal Equity Ratio’. It indicates the comparative
claims of outsiders and owner in the concern’s total equities the claim of depositors,
mortgagors, bondholders, suppliers, and other creditors are matched with those of owner,
i.e. shareholders or proprietors. The management has to keep healthy balance between the
two equities: external and internal.
Debt Equity Ratio = Total Debt
Net worth
TOTAL DEBT NET WORTH
Debentures and Bonus Equity share capital
Loan and Mortgage Pref. Share capital
Security deposit with company Reserve capital & Revenue
Fixed Deposit / Unsecured loans Profit and Loss (Cr.)
All Current Liabilities

These funds are available at the rate of the interest generally lower than the
market rate. They are used along with share capital funds; the entire balance is then left
for distribution among shareholders.
If the proportion of outside fund is quite high, the company is technically said to
be highly leveraged. In case the ratio is 1, it is considered quit satisfactory.
High – Debt Company is able to borrow funds on very restrictive terms and
conditions.

2. EQUITY RATIO / PROPRIETORY RATIO

It is variant of debt – equity ratio. It is an important test to judge the long-term solvency
of a concern. It establishes relationship between the proprietor or shareholder’s funds and
the total assets. It may be expressed as:
Equity ratio = Proprietor’s funds
Total Assets

Proprietor’s fund or Net worth = Equity Share Capital + Reserve and Surplus +
Preference Share Capital.
Total Assets = Total Equities or Total Resources of the concern.

If we take the total assets as 100, the percentage of proprietor’s funds indicates the
contribution made by the owners towards total assets. The nearer the percentage of
proprietor’s funds to 100, the larger is their contribution and the greater is the securities
for creditors, depositors, mortgagors, and debenture holders.
 3. FUNDED DEBT TO TOTAL CAPITALISATION RATIO
Funded debt to total capitalization ratio reveals what portion of total capitalization is
provided by founded debt and is formulated as:
Funded debt to total capitalization = Funded debt * 100
Total capitalization

Funded Debt = Debentures + Bonus + Mortgage Loan + Other Loan – Term Loans
Total Capitalization = Proprietor’s Fund’s + Funded Debt
This ratio depicts the extent of dependence on outside sources for providing long
term finance 67% dependence may be reasonable for trading and industrial concerns. The
less the better, for long-term solvency. Beyond 67% it would be too risky. A high
percentage reduces the security for depositors.

4. FIXED ASSET RATIO:

The ratio is expressed as follows:
Fixed Asset Ratio = Fixed Asset
Long Term Funds

The ratio should not be more than 1 if it is less than 1, it shows that a part of the
working capital has been financed through long-term funds. This is desirable to some
extent because a part of working capital is termed, as “Core Working Capital” is more or
less of a fixed nature. The ideal ratio is .67.
Fixed Assets = Net Fixed Assets (i.e. Original Cost – Depreciation to date) + Trade
Investments
Long Term Funds = Share Capital + Reserves + Long Term Loans.

5. DEBT SERVICE RATIO / INTEREST COVERAGE RATIO:

Debit ratio discussed earlier is static in nature, and fails to indicate the firm’s
ability to meet interest obligations. Debt-service means regular and timely permanent
interest due on loans and debentures. Since interest is paid out of the earning), he more
the earning available, (he less is the risk as to the payment of interest. The interest
coverage ratio is computed by dividing earnings before interest and taxes (EBIT) by
interest changed:
Interest Coverage = EBIT
Interest

C. ACTIVITY RATIOS (Efficiency Ratio):

Funds of creditors and owners are invested 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 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 and assets.

1. DEBTORS TURNOVER / RECEIVABLE TURNOVER RATIO:

A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of
companies. When the firm extends credits to its customers, book debts are expressed to
be converted into cash over a short period acid, therefore, are included in current assets.
The liquidity position to the firm depends upon the quality of debtors to a great extent.
Debtors Turnover Ratio = Credit Sales
Average debtors

Account Receivable = Sundry Debtors + Bills Receivable

The higher the ratio, the better it is, since it would indicate that debts are being
collected more promptly. For measuring the efficiency, it is necessary to set up a standard
figure; ratio lower than the standard will indicate inefficiency.

2. COLLECTION PERIOD / AVERAGE AGE OF DEBTORS VELOCITY:

Debtor’s collection period represents the time segment, which is generally required to
recover the debts due from customers and amount realizable on bills.
Debtor Collection Period = 365 days
Debtors Turnover Ratio
 Debtor collection period measures the quality of debtors since it measures the
rapidly or slowness with which money is collected from then. A shorter collection period
implies prompt payment by debtors. It reduces the chances of bad debts. A longer
collection period implies neither too liberal nor too restrictive. A restrictive policy results
in lower sales, which will reduce profits.
In general, the amount of the receivable should not exceed 3-4 month’s credit
sales.

3. TOTAL ASSETS TURNOVER RATIO:

Some analysis like to compute the total assets turnover. This ratio shows the firm’s ability
in generating sales from all financial resources committed to total assets.
Total Assets Turnover Ratio = Sales
Total Assets

D. PROFITABILITY RATIO:
A Company should earn profits to survive and grow over a long period of time. Profit is
the difference between revenues and expenses over a period of time. Profit is ultimate
output of the company and it with has no future if it fails to make sufficient profits.
Therefore, the financial manager should continuously evaluate the efficiency of its
company in term of profits. The profitability ratios are calculated to measure the
operating efficiency of the company. Besides management of the company, creditors and
owner are also interested in the profitability of the firm. Owners want to get a reasonable
return on their investment. This is possible only when the company earns enough profits.
Profitability ratios, deals with two aspects ‘profits’ or earning and ‘expenses’
incurred to earn that profit. ‘Sales’ has been the main source of recovery of expenses and
earning of profit. These ratios thus study the relationship of profits as well as expenses
with sales. These have accordingly been divided into categories:

A. RATIO OF PROFIT TO SALES

1. Gross profit ratio
2. Net profit ratio
 3. Operating net profit ratio

B. RATIO OF EXPENSES TO SALES

C. RETURN ON INVESTMENT RATIO

(A). RATIO OF PROFIT TO SALES

1. Gross Profit Ratio:
Gross profit is an important concept for a business. It is always the endeavor of
the business to increase this margin. Gross profit represents the margin between the ‘Net
Sales’ and ‘Cost of Goods Sold’. The larger this gap, the greater is the scope of absorbing
various expenses on administration, maintenance, arranging finance, selling and
distribution and creating necessary provision for anticipated expenses, and yet leaving net
profit for the proprietors or share holders.
Gross profit ratio is an indicator of the extent of average mark-up on cost of
goods. It is primarily a test of the efficiency of purchases and sales management.
Its formulation is as below:
Gross Profit Ratio = Gross Profit * 100
Sales

Gross Profit = Sales – Cost of Goods

Cost of Goods = (Opening Stock + Net Purchase + Procurement Expenses + Production
Expenses – Closing Stock)
This ratio indicates the degree to which the selling price of goods per unit may
decline without resulting in losses from operations to the firm.
In case there is increase in the percentage of the gross profit as compared to the
previous years it is an indicator of one or more of the following factors:
1. The selling price of the goods has gone up without corresponding increase in the
cost of goods sold.
2. The cost of goods sold has gone down without corresponding decrease in the
selling price of the goods.
3. Purchase might have been omitted or the sales figures might have been inflated.
 4. The opening stock has been immediately or the closing stock has been
overvalued.

In case there is decrease in the rate of gross profit it may be due to one or more of
the following reasons:
1. There may be decrease in the selling price of the goods sold without
corresponding decrease in the cost of the goods sold.
2. There may be increase in the cost of the goods sold without corresponding
increase in the selling price of the goods sold.
3. There may be omission of sales.
4. Stock at the end may have been undervalued or the opening stock may have been
overvalued.

There is no norm for judging the Gross Profit Ratio; therefore, the evaluation of
business on its basis is a matter of judgement. However the gross profits should be
adequate to cover operating expenses and to provide for fixed charges, dividends and
building up of reserves.

2. Net Profit Ratio / Net Profit Margin:

Net Profit is obtained when operating expenses; interest and taxes are subtracted
from the gross profit. The net profit margin ratio is measured as follows:
Net Profit Margin = Profit After Tax * 100
Sales
Net profit margin ratio establishes a relationship between the net profit and sales
and indicates management’s efficiency in manufacturing administering and selling the
products. This ratio is the overall measure of the firm’s ability to turn each rupee sales
into net profit.
This ratio also indicates the firm’s capacity to withstand adverse economic
conditions. A firm with a high net margin ratio would be in an advantageous position to
survive in the face of falling sales prices, risings cost of production or declining demand
for the product. Similarly, a firm with high net profit margin can make better use of
favorable conditions. Such as rising sales prices, falling cost of production or increasing
demand for the product. Such a firm will be able to accelerate its profits at a faster rate
than a firm with a low net profit margin.

3. Operating Net Profit Ratio:

Operating Net Profit means net profit from normal operations of a business, it is
calculate as:
Operating Net Profit = Net Sales – (Cost of Goods Sold + All Operating Expenses) +
Operating Sundry Income.
Here, all operational expenses refer to office and administration expenses, repairs
and maintenance, selling and distribution expenses and necessary provisions. Operational
Sundry Income may be in the form of discount – earned, commission receiver etc.
Non-Operating Income and non-operating expenses are not taken into account
while ascertaining operating net profit. In case of net profit is given, it has to be adjusted
by adding back non-operating and deducting then from non-operating incomes. Thus an
alternative of finding out operating net profit is:
The formula of operating net profit ratio is as under:
Operating Net Profit = Operating Net Profit * 100
Net Sales

Operating Net profit = Net Profit + Non-Operating Expenses – Non-Operational Income

The higher the ratio, the more is the profitability.

(B) RATIO OF EXPENSES TO SALES:

1. Operating Expenses Ratio:
Control over operational expenses is an important requisite for successful
management. Operating ratio indicates proportion of net sales that have been absorbed by
the expenses on operation.
This ratio relates to the total operating expenses (i.e. total expenses non-operating
expenses) to net sales and is expressed in percentage. Its formulation is as below:
 Operating Ratio = Total Operating Expenses * 100
Net Sales

Operating Expenses = Cost of Goods Sold + Office and Administration Expenses +

Repairs, Maintenance & Depreciation + Selling and Distribution Expenses + Necessary
Provisions
A higher operating expenses ratio is unfavorable since it will leave a small
amount of operating income to meet interest, dividends etc. certain expenses are within
the management policy. The variations in the ratio, temporary or long-lived, can occur
due to several factors:
1. Changes in sales price
2. Changes in the demand of the product
3. Changes in the administrative or selling expenses

2. Individual (or specific) Expense Ratios:

The operating expenses ratio indicates the average aggregated variations in
expenses, where some of the expenses may be increasing while others may be falling.
Thus, to know the behavior of specific expenses items, the ratio of each individual
operating expenses to sales should be calculated.
Comparison of such results with corresponding results of the previous years
would pinpoint such items of expenditure or group of expenses, which need control on
the part of the management.
Individual expenses ratios = Specific Expenses * 100
Net Sales

(C) RETURN ON INVESTMENT RATIO:

1. Return on Equity Capital:
Return on equity capital is calculated by dividing net profit after tax by total equity
capital. It is calculated as:
 Return on equity capital = Profit after tax * 100
Equity capital

2. Return on Investment (ROI):

It is calculated by dividing net profit after tax by shareholder’s funds. It is calculated
as:
Return on investment (ROI) = Profit after tax * 100
Equity capital

3. Return on Capital Employed:

Return on capital employed is considered to be the prime or principal ratio. It
throws the light on the over – all profitability of the business, which means how much,
earning the amount investment in the business, is yielding.
Profit is the chief motive of organizing business enterprise. Maximization of
profit is the natural instinct of every businessman. The success of the business is,
therefore, judged by the extent of return on the amount invested in the business.
The ratio of the return on investment has 2 components.
1. Capital employed
2. Return or profit

1. Capital employed:
In general sense, ‘Capital Employed’ refers to the investment made in the
business. Three possible definitions of the term capital employed are generally put
forward and used by various authors in the analysis of financial statements.
1. Gross Capital Employed: Comprises fixed assets plus current assets.
2. Net Capital Employed: Comprises fixed assets plus current assets less
current liabilities.
3. Proprietors Net Capital Employed: Comprises net capital employed plus
debentures and other long-term borrowings.
 2. Return on profit
To calculate a fair ratio of return on capital employed, there should be proper
matching of 2 components of the ratio, i.e. capital employed and return. Any incomes
from such assets are excluded from the profit.
The Ratio is computed as = Net Profit (adjusted) * 100
Capital Employed
CALCULATION OF RATIOS

1. CURRENT RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 1.22 1.41 1.37 2.58

CURRENT RATIO

3
2.5
2
1.5
1
0.5
0
1998-99 99-2000 2000-01 2001-02
YEARS

Current Ratio: The current ratio of the company is increasing in all the years,

with the highest increase in the year 2001-2002. This is due to increase in the current

assets of the company namely sundry debtors and the loans and the advances made by

the company.
 2. LIQUID RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 0.82 0.86 0.83 2.03

LIQUID RATIO

2.5

1.5

0.5

0
1998-99 99-2000 2000-01 2001-02
YEARS

Liquid / Quick Ratio: Sundry debtors and loan and advances also affect the

quick ratio of the company. The increase in these sundry debtors and the loans and

advances may decrease the profitability of the company. Usually, a high acid test ratio

/ quick ratio is an indication that the firm is liquid and has the ability to meet its

current liabilities in time. As a rule of thumb is 1:1 is considered satisfactory.

 3. ABSOLUTE LIQUID RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 0.27 0.23 0.21 0.59

ABSOLUTE LIQUID RATIO

0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1998-99 99-2000 2000-01 2001-02
YEARS

Absolute Liquid Ratio: Absolute liquid ratio of the company is according to the

rule of thumb i.e. 0.5:1 in the year 2001-02 which is due to heavy cash & bank balances

maintained by the company.

 EFFICIENCY RATIOS

4. DEBTORS TURNOVER RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 17.82 10.21 9.22 8.02

DEBTORS TURNOVER RATIO

20

15

10

0
1998-99 99-2000 2000-01 2001-02
YEARS

Debtors Turnover Ratio: The Debtors turnover ratio, which shows that the number of

times the debtors are turned over during a year. But the debtor of the company is reducing

which shows that the company is not properly managing its debtors. There is no rule of

thumb, which may be used as a norm to interpret the ratio, as it may be different from

firm to firm depending upon the nature of the business.

 5. INVENTORY TURNOVER RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 12.98 9.90 9.33 10.89

INVENTORY TURNOVER RATIO

14
12
10
8
6
4
2
0
1998-99 99-2000 2000-01 2001-02
YEARS

Inventory turnover ratio: The inventory turnover ratio shows how rapidly the

inventory is turning into receivables through sales. This ratio has been increased as

compared to the last year 2000 - 2001. A high inventory turnover indicates the efficient

management of inventory because more frequently the stocks are sold.

 6. INVENTORY CONVERSION PERIOD

Year 1998-99 99-2000 2000-01 2001-02

Ratio 28.12 36.86 39.12 33.51

INVENTORY CONVERSION PERIOD

45
40
35
30
25
20
15
10
5
0
1998-99 99-2000 2000-01 2001-02
YEARS

Inventory conversion period: Inventory conversion period of the company on an

average slightly increasing as compared to the year 1998 - 1999.

 7. CREDITORS TURNOVER RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 7.56 8.65 5.52 9.41

CREDITORS TURNOVER RATIO

10

0
1998-99 99-2000 2000-01 2001-02
YEARS

Creditors turnover ratio: This ratio shows the time period of the company to pay its

debts. This company’s creditors ratio is increasing, which shows the company is

efficiently managing its reserves by increasing its time period to pay its debts.
 8. AVERAGE PAYMENT PERIOD

Year 1998-99 99-2000 2000-01 2001-02

Ratio 48.28 42.19 66.12 38.66

Days Days Days Days

AVERAGE PAYMENT PERIOD

70
60
50
40
30
20
10
0
1998-99 99-2000 2000-01 2001-02
DAYS

Average payment period: Average payment period shows the average number of days

taken by the firm to pay its creditors. Average payment period of the company is

decreased as compared to the previous year 2000 – 2001 that shows that the company is

efficiently managing its creditors in the year 2001 - 2002.

 SOLVENCY RATIOS

9. DEBT-EQUITY RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 1.93 1.23 1.45 0.57

DEBT - EQUITY RATIO

2.5

1.5

0.5

0
1998-99 99-2000 2000-01 2001-02
YEARS

Debt equity ratio: Debt equity ratio is calculated to measure the extent to which the

debt financing has been used in the business. A ratio of 1:1 may be usually considered to

be satisfactory ratio although there cannot be any rule of thumb for all types of business.
 10. FUNDED DEBT TO TOTAL CAPITALISATION

Year 1998-99 99-2000 2000-01 2001-02

Ratio 10.89 27.78 17.96 28.78

FUNDED DEBT TO TOTAL

CAPITALISATION

35
30
25
20
15
10
5
0
1998-99 99-2000 2000-01 2001-02
YEARS

Funded debt to total capitalization: In this company this ratio is increasing

which is not better for the company. So the company should adopt the measures to reduce

this ratio. There is no rule of thumb but still the lesser the reliance on outsiders the better

it will be. If the ratio is smaller, better it will be up to 50% to 55% this ratio may be

tolerable and not beyond.

 11. EQUITY RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 0.31 0.37 0.35 0.50

EQUITY RATIO

0.6
0.5
0.4
0.3
0.2
0.1
0
1998-99 99-2000 2000-01 2001-02
YEARS

Equity ratio: Equity ratio is the proprietary ratio of the company, which shows the

relationship between the shareholders and the fund to total assets of the company. In the

company this ratio is varied in different years.

 12. SOLVENCY RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 0.61 0.46 0.51 0.29

SOLVENCY RATIO

0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1998-99 99-2000 2000-01 2001-02
YEARS

Solvency ratio: Solvency ratio is the ratio of the total liabilities to total assets. In

the company the solvency ratio of the company is reducing which shows the satisfactory

or stable is the long-term solvency position of the firm.

 13. FIXED ASSETS TO NET WORTH RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 0.79 0.84 0.72 0.46

FIXED ASSETS TO NETWORTH

RATIO

1
0.8

0.6
0.4

0.2
0
1998-99 99-2000 2000-01 2001-02
YEARS

Fixed assets to Net Worth ratio: This ratio established the relationship between the

fixed assets and shareholders funds to the company. This ratio is on an average but is

slightly decreasing in the last two years. There is no rule of thumb to interpret this ratio

but 60 to 65 % is considered to be satisfactory ratio.

 14. FIXED ASSETS TO LONG TERM FUND RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 0.70 0.61 0.59 0.33

FIXED ASSETS TO LONGTERM

FUNDS RATIO

0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1998-99 99-2000 2000-01 2001-02
YEARS

Fixed assets to long-term fund ratio: This ratio indicates the extent to which the

total of fixed assets are financed by long term funds of the company. But at this company

this ratio is declining which shows that the company is working on its short-term sources.
 15. RATIO OF CURRENT ASSETS TO PROPRIETORS FUND

Year 1998-99 99-2000 2000-01 2001-02

Ratio 236.92 175.78 199.98 148.85

RATIO OF CURRENT ASSETS TO

PROP. FUNDS

250
200

150
100

50
0
1998-99 99-2000 2000-01 2001-02
YEARS

Ratio of current assets to proprietors fund: There is no rule of thumb is

established for this ratio but in this company this ratio is slightly varied between different

years.
 PROFITABILITY RATIO

16. NET PROFIT RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 7.67 8.60 7.62 12.49

NET PROFIT RATIO

14
12
10
8
6
4
2
0
1998-99 99-2000 2000-01 2001-02
YEARS

Net profit ratio: Net profit ratio of the company is increasing which is a healthy

sign for the company. This ratio is increased due to the liberal credit policy of the

company and increase in the sales of the company.

 17. RETURN ON INVESTMENT

Year 1998-99 99-2000 2000-01 2001-02

Ratio 53.69 47.32 44.48 52.40

RETURN ON INVESTMENT

60
50
40
30
20
10
0
1998-99 99-2000 2000-01 2001-02
YEARS

Return on investment: This ratio is one of the most important ratios used for

measuring the overall efficiency of the firm. As compared to the previous years this ratio

is on an average but it is better to compare with the other similar firms for better results.
 18. EARNING PER SHARE RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 19.82 29.95 30.34 46.44

EARNING PER SHARE RATIO

50

40

30

20

10

0
1998-99 99-2000 2000-01 2001-02
YEARS

Earning per share: Earning per share is good measure of profitability in this company.

This ratio is increasing every year in this company, which shows the earning capacity of

the invertors.
 19. RETURN ON EQUITY CAPITAL

Year 1998-99 99-2000 2000-01 2001-02

Ratio 198 299 303.49 464.46

RETURN ON EQUITY CAPITAL

500

400

300

200

100

0
1998-99 99-2000 2000-01 2001-02
YEARS

Return on equity capital: Return on equity capital, which is the relationship between

profits of a company and its equity capital. In this company this ratio is increasing every

year.
 20. DIVIDEND PAYOUT RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 0 0.033 0.313 0.753

DIVIDEND PAYOUT RATIO

0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1998-99 99-2000 2000-01 2001-02
YEARS

Dividend payment ratio: This ratio is calculated to know the relationship between

dividend per share paid and the market value of the share. In the company this ratio is

increasing year by year.

 21. RETURN ON GROSS CAPITAL EMPLOYED

Year 1998-99 99-2000 2000-01 2001-02

Ratio 23.07 31.57 29.85 38.25

RETURN ON GROSS CAPITAL

EMPLOYED

50

40

30
20

10

0
1998-99 99-2000 2000-01 2001-02
YEARS

Return on gross capital employed: Return on capital employed established the

relationship between the profits and the capital employed. This ratio shows the overall

profitability of the company. But the company has to increase this ratio to increase the

profitability.
 22. RETURN ON NET CAPITAL EMPLOYED

Year 1998-99 99-2000 2000-01 2001-02

Ratio 59.67 59.47 62.06 53.96

RETURN ON NET CAPITAL

EMPLOYED

64
62
60
58
56
54
52
50
48
1998-99 99-2000 2000-01 2001-02
YEARS

Return on the net capital employed: The term net capital employed comprises the

total assets used less current liabilities. This ratio is decreasing which is the good sign for

the company.
 LEVERAGE RATIOS

23. CAPITAL GEARING RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 8.17 2.59 4.56 0.71

CAPITAL GEARING RATIO

9
8
7
6
5
4
3
2
1
0
1998-99 99-2000 2000-01 2001-02
YEARS

Capital gearing ratio: This ratio shows the relationship between the equity share

capital and the other fixed interest bearing loans. This company is low-geared company

because long-term debt was less than the equity and reserves.
 24. RATIO OF RESERVES TO EQUITY CAPITAL

Year 1998-99 99-2000 2000-01 2001-02

Ratio 269.10 554.08 796.36 1454.1

RATIO OF RESERVES TO EQUITY

CAPITAL

1600
1400
1200
1000
800
600
400
200
0
1998-99 99-2000 2000-01 2001-02
YEARS

Ratio of reserves to equity capital: The ratio establishes relationship between the

reserves and the equity capital. This ratio shows the better position of the company,

which is highly increasing every year.

 25. FINANCIAL LEVERAGE

Year 1998-99 99-2000 2000-01 2001-02

Ratio 1.02 1.04 1.21 1.80

FINANCIAL LEVERAGE

1.5

0.5

0
1998-99 99-2000 2000-01 2001-02
YEARS

Financial leverage: Use of long-term debts along with equity shares is financial

Leverage. This shows the capital structure of the company.

 26. RATIO OF CURRENT LIABILITIES TO SHAREHOLDERS FUND

Year 1998-99 99-2000 2000-01 2001-02

Ratio 1.93 1.23 1.45 0.57

RATIO OF CURRENT LIABILITIES

TO SHAREHOLDERS FUNDS

2.5

1.5
1

0.5

0
1998-99 99-2000 2000-01 2001-02
YEARS

Ratio of current liabilities to shareholders fund: This ratio shows that the how much

amount of current liabilities is financed from the fixed assets. This ratio is decreasing

which is positive sign for the company.

 27. AVERAGE COLLECTION PERIOD

Year 1998-99 99-2000 2000-01 2001-02

Ratio 20.48 35.74 39.58 45.51

AVERAGE COLLECTION PERIOD

50

40

30

20

10

0
1998-99 99-2000 2000-01 2001-02
YEARS

Average collection period: This ratio represents the average number of days for which
it has to wait for its receivables are converted into cash. In this firm the ratio of average
collection period is increasing which is not a good sign for the company’s profitability
position.
 28. WORKING CAPTIAL TURNOVER RATIO

Year 1998-99 99-2000 2000-01 2001-02

Ratio 16.23 10.60 10.68 4.59

WORKING CAPITAL TURNOVER

RATIO RATIO

20

15

10

0
1998-99 99-2000 2000-01 2001-02
YEARS

Working capital turnover ratio: This indicates the number of times the working
capital is turned over in the course of a year. Working capital turnover ratio is reducing of
this company. So the company should have to improve it.
Chapter 5
 CHAPTER 5

CONCLUSION & SUGGESTIONS

The conclusion derived from the study of financial analysis of international tractors
limited shows that the overall financial strength of the company is extremely good.
Because the current assets exceeds the current liabilities in all the financial years of the
company. But current assets of the company are heavily increased during the year 2001-
2002 which boosted the current ratio of the company. The working capital position of the
company is better in the financial year 2001-2002 as compared to the previous years. The
overall profitability of the company is good.

Suggestions:
1. Liquidity Ratios:
Liquidity refers to the ability of the concern to meet its current obligations as and
when these become due. The short-term obligations are met by realizing amounts from
current floating or circulating assets. The liquidity position of the company is better as
compared to the previous years. The ratios such as current ratio, liquid ratio and absolute
liquid ratio has been increased as compared to the previous year 1998 – 1999, 1999 –
2000 and 2000 – 2001. This increases due to the sundry debtors, loan and advances and
heavy cash and bank balances maintained by the company. Although company is heaving
better liquidity position, but there is still a scope to improve it.

2. Solvency Ratios:
The term solvency refers to the ability of a concern to meet its long-term
obligations. Due to the heavy liquidity position maintained by the company. But the long-
term position is not much better. All the ratios including equity ratio, fixed assets to net
worth, fixed assets to the long-term funds ratios are decreasing. So the company is
recommended to make the balance between liquidity and solvency position of the
company.
 3. Profitability Ratios:
The primary objective of the business undertaking is to earn profits. Profit earning
is considered essential for the survival of the business. The net profits of the company is
increased as compared to the previous years but this is due to the increase in the credit
sales of the company which shows that the company is adopting liberal credit policy to
increase its profits but the company is also suffered from the increase in average days of
collection so the company should maintain its credit policy to make a balance between
the cash and credit sales and take some measures its average days of collection. For
improving its collections, the company may adopt the services of the factors (factoring).

4. Efficient utilization of resources:

The company is having better short-term financial position. It has more current
assets as compared to the current liabilities, which will effect the overall profitability
position of the company so the company should manage its current assets properly.

5. Management of debtors:
The increase in the current assets is due to the increase in the debtors of the
company. So the company is recommended to manage its debtors properly. Increase in
debtors may create certain problems in the long-term run of the company.

SOME GENERAL SUGGESTIONS FOR THE SUCCESS OF THE COMPANY:

1. Increasing the market area or developing the new market:

The company is having better financial strength. So by efficiently using these
resources company can increase the area of operation or develop new markets by
adopting international standards.

2. Quality control:
By providing good and the cost control measure with the objectives to attain the
desired level of the sales volume.
 3. Locational advantage:
Punjab is the agricultural and higher crop producing state of the country and the
company is operating in the rural area of the Hoshiarpur (Punjab). So it can take the
locational advantage, as it is the tractor producing company in Punjab.

It is hoped that by adopting these suggestions ITL can achieve its desired
place in the tractor industry of the Punjab as well as in the World.