LIQUIDITY RATIOS

These ratios measure a firms ability to meet short-term obligations

& show its short-term financial position.

Current ratio=Current Assets / Current Liabilities

(2006) 3564169000 / 749439000 = 4.76:1

(2007) 3129129000 / 881681000 = 3.55:1

(2008) 3421308000 / 1346771000 = 2.54:1

However the standard of current ratio is 2:1.

Here the ratio is decreasing every year because its current assets
& liabilities are equally increasing which may be un-favourable.
But current ratio should not be used as a sole index of short-term
solvency because;
1. It measures only the quantity and not the quality of current
assets.
2. It may be possible that the current ratio is favourable but the
firm may be in financial trouble because of more obsolete or
slow-moving stocks & debtors which are not easily
recoverable.
3. Valuation of current assets & window dressing is another
problem of current ratio.

Quick ratio=Quick Assets / Current Liabilities

(2006) {3564169000-1256141000} / 749439000 = 3.08:1

(2007) {3129129000-1363508000} / 881681000 = 2:1
(2008) {3421308000-1696200000} / 1346771000 = 1.28:1

However the standard is 1:1.

Here the ratio is decreasing because its current assets & liabilities
are equally increasing which may be un-favourable. It is a more
rigorous test of liquidity.
Hence it may be possible for a firm;
1. having a high quick ratio may not have a satisfactory
liquidity position if it has slow-paying debts.

1
 2. having low quick ratio may have a good liquidity position if
it has fast moving inventories.

3 current
ratio
2 quick ratio
1

0
2006 2007 2008

LEVERAGE / DEBT RATIOS

These ratios shows the extent to which the is financed

by debt.

Debt-to-Equity=(Total Debt / Shareholders equity)100

(2006) {793539000 / 4241886000} 100 = 18.71%

(2007) {992095000 / 3689273000} 100 = 26.90%
(2008) {1447377000 / 3568512000} 100 = 40.56%

This ratio indicates the proportionate claims of owners & the

outsiders against the firms assets.And the purpose is to get an
idea of the cushion available to outsider on the liquidation of the
firm.
ratio un-favourable ratio favourable

Long-term-debt to total capitalization ratio = (Total Long-

term-debt / Total Debt+Total Equity)100

(2006) {793539000 / 793539000+4241886000} 100 =

15.76%
(2007) {992095000 / 992095000+3689273000} 100 =
21.19%
(2008) {1447377000 / 3568512000+1447377000} 100 =
28.86%

2
 This ratio is also used for the purpose to get an idea of the
cushion available to outsiders on the liquidation of the firm.So
the debt ratios tell us the relative proportions of capital
contribution by creditors & by owners.

50

40
Debt-to-Equity
30 ratio

20 Total
Capitalization
10
ratio
0
2006 2007 2008

COVERAGE RATIO

These ratios relate the financial charges of a firm to its

ability to service or cover them.

Interest Coverage Ratio=EBIT / Interest expenses

(2006) 1439970000 / 3660000 = 393.43 times

(2007) 1769028000 / 3202000 = 552.48 times
(2008) 544822000 / 2704000 = 201.49 times

As this ratio tells the no. of times interest is earned & also
indicates the ability to cover interest charges.The ratio is
an index of the financial strength of an enterprise.A high
ratio assures the lender a regular & periodical interest
income.But the weakness of ratio may create some
problems to the financial manager in raising funds from
debt sources.

3
 600
500
400
Interest
300
Coverage
200 ratio
100
0
2006 2007 2008

ACTIVITY / TURNOVER RATIOS

These ratios measures that how effectively the firm is
using its assets.

Receivable turnover ratio=Annual net credit sales / Avg.

receivables

(2006) 5887748000 / 178019500 = 33.07 times

(2007) 6546371000 / 168779500 = 38.79 times
(2008) 7059011000 / 133910500 = 52.71 times

Debtors turnover ratio indicates the no. of times the

debtors are turnedover during a year.Higher the value of
(RT) the more efficient is the management of debtors or
more liquid are the debtors.Here it is favourable.

Avg. Collection period=365 / RT

(2006) 365 / 33.07 = 11 days

(2007) 365 / 38.79 = 9 days
(2008) 365 / 52.71 = 7 days

The ratio measures the quality of debtors.A short

collection period implies prompt payment by debtors.It
reduce the chances of bad debts.Here it is also
favourable.

4
 60
50
40
30 Debtors
turnove r ratio
20
10
0
2006 2007 2008

Payable turnover ratio=Annual net credit purchases / Avg.

payables

(2006) 776374000 / 722784500 = 1.07 times

(2007) 1246586000 / 815560000 = 1.53 times
(2008) 1328913000 / 1114226000 = 1.19 times

This ratio signifies the credit period enjoyed by the firm in

paying creditors.

Avg. Payment Period=365 / PT

(2006) 365 / 1.07 = 341 days

(2007) 365 / 1.53 = 239 days
(2008) 365 / 1.19 = 307 days

It represents the no. of days taken by the firm to pay its

creditors.

ratio un-favourable ratio favourable

1.6
1.4
1.2
1
0.8 Creditors
0.6 turnover ratio
0.4
0.2
0
2006 2007 2008

5
 Inventory Turnover ratio=Cost of goods sold / Avg.
inventory

(2006) 3435553000 / 1237020500 = 2.78 times

(2007) 3850568000 / 1309824500 = 2.94 times
(2008) 4991510000 / 1529854000 = 3.26 times

This ratio measures the velocity of conversion of stock

into sales.
ratio favourable = efficient mngt. ,more profit
ratio un-favourable = inefficient mngt. , low profit
A low IT ratio may be due to ;
1. over-investment in inventories
2. dull business
3. poor quality of goods

Inventory Turnover in days=365 / IT

(2006) 365 / 2.78 = 131 days

(2007) 365 / 2.94 = 124 days
(2008) 365 / 3.26 = 112 days

3.3
3.2
3.1
3
2.9 Inventory
2.8 turnove r ratio
2.7
2.6
2.5
2006 2007 2008

Total Assets Turnover ratio=Net Sales / Total Assets

(2006) 5887748000 / 5035425000 = 1.17 times

(2007) 6546371000 / 4681368000 = 1.40 times
(2008) 7059011000 / 5015889000 = 1.41 times

This ratio measures the velocity of conversion of assets

into sales.
ratio favourable ratio un-favourable

6
 1.6
1.4
1.2
1
0.8 Total as sets
0.6 turnove r ratio
0.4
0.2
0
2006 2007 2008

PROFITABILITY RATIOS

These ratios relate the profit to sales & investment.

Gross Profit Margin ratio=(Gross Profit / Net Sales) 100

(2006) {2478628000 / 5887748000} 100 = 42.09 %

(2007) {2733886000 / 6546371000} 100 = 41.76 %
(2008) {2097653000 / 7059011000} 100 = 29.72 %

As there is no standard of GP ratio evaluation.

GP ratio reflects the efficiency with which a firm produces
its products.Higher the GP ratio better it is.Here it is un-
favourable because ;
1. decrease in the selling price of goods sold , without
corresponding decrease in the cost of goods sold.
2. increase in the cost of goods sold without any
increase in selling price.
3. un-favourable purchasing or mark-up policies.
4. inablitiy of management to improve sales volume or
mission of sales.
5. over-valuation of opening stock or under-valuation of
closing stock.

7
 50

40

30
GP m argin
20 ratio

10

0
2006 2007 2008

Net Profit Margin ratio=(Net Profit / Net Sales) 100

(2006) {1000008000 / 5887748000} 100 = 16.98 %

(2007) {1209593000 / 6546371000} 100 = 18.48 %
(2008) {343980000 / 7059011000} 100 = 4.87 %

Obviously, higher the ratio the better is the profitability.

Here it is un-favourable.This ratio also indicates the firms
capacity to face adverse economic conditions such as
price competition , low demand etc.
It should be noted that the performance of profits must
also be seen in relation to investments or capital of the
firm & not only in relation to sales.
20

15

10 NP m argin
ratio
5

0
2006 2007 2008

Return on Equity=(Net Profit after Taxes /

Shareholders Equity)100

(2006) {1000008000 / 4241886000} 100 = 23.57 %

(2007) {1209593000 / 3689273000} 100 = 32.79 %
(2008) {343980000 / 3568512000} 100 = 9.64 %

The decrease in this ratio is un-favourable.

8
This ratio measures the overall profitability of a firm also
indicates the extent to which the primary objective of a
business is achieved which is to maximize its earnings.
35
30
25
20
15 ROE
10
5
0
2006 2007 2008

Return on Investments=(Net Profit after Taxes / Total

Assets) 100

(2006) {1000008000 / 5035425000} 100 = 19.86 %

(2007) {1209593000 / 4681368000} 100 = 25.84 %
(2008) {343980000 / 5015889000} 100 = 6.86 %

ROI is also called earning power of a firm.It is also derived

as (Net Profit Margin ratio)*(Total Asset Turnover
ratio) ,
ROI resolves the shortcomings of ignoring the utilization of
assets & profitability on sales.
Here it is un-favourable.
30
25
20
15
ROI
10
5
0
2006 2007 2008