A STUDY ON FNANCIAL RATIO ANALYSIS IN SRI MEENAKSHI CARMENTS

PVT LTD AT KARUR.

INTRODCTION:Finance is life blood of the business. The financial management is the study about the
process of procuring and judicious use of financial resources is a view to maximize the value
of the firm. There by the value of the owners i.e. the example of equity share holders in a
company is maximized. The traditional view of financial management looks into the
following function that a finance manager of a business firm will perform.
1. Arrangement of short-term and long-term funds from the financial institutions
2. Mobilization of funds through financial instruments like equity shares, bond Preference
shares, debentures etc.
3. Orientation of finance with the accounting function and compliance of legal provisions
relating to funds procurement, use and distribution. With increase in complexity of
modern business situation, the role of the financial manager is not just confirmed to
procurement of funds, but his area of functioning is extended to judicious and efficient
use of funds available to the firm, keeping in view the objectives of the firm and
expectations of providers of funds.
DIFINATION:Financial Management has been defined differently by different scholars
. 1) Howard and Upton:- Financial Management is the application of the planning and
control function to the finance functions
2) Bringham:- Financial Management is an area of financial decision making harmonizing,
individual motives and enterprise goals SRI MEENAKSHI CARMENTS PVT LTD AT
KARUR.
MEANING OF RATIOS
Financial Statement contains a wealth of information which, if properly analyzed and
interpreted, can provide valuable insights into a firms performance and position. Analysis
Soft financial statements is of interest to (short terms well as long term) investors, security
analysts, managers, and others financial statement analysis may be done for a variety of
purpose, which may range from a simple analysis of the short -term liquidity position of the

firm to a comprehensive assessment of the strengths and weaknesses of the firm in various
areas. The principal tool of financial statement analysis is financial ratio analysis.
An absolute figure does not convey much meaning. Ti, there for, become necessary to study a
certain figure in relation to some other relevant figure to arrive at certain conclusion e.g. If
we give the figure of only gross profit earned by certain firm, we cannot say whether the
gross profit is heavy, reasonable or sufficient for this purpose we must take into consideration
the figure of sales.
Thus, the gross profit to is required to be studied in relation to the sales to decide the
percentage of gross profit to sale on the basis of percentage we can conclude whether the
gross profit earned is reasonable or otherwise. Thus the relationship between the two figures
expressed mathematically is called a ratio.
OBJECTIVES OF RATIO ANALYSIS: The study of financial statement of any corporate will help in knowing its present and
future earning capacity.
The study of financial resources can help in knowing whether a company can pay its
long-term or short-term liabilities.
Its very use full to know how much working capital is employed in business and
same effectively used.
Its use full to measure earning capacity and its comparison to other competitive units.
Help full to known marginal efficiency.
Use full to future planning RATIO ANALYSIS OF S SRI MEENAKSHI
CARMENTS PVT LTD AT KARUR.
INTERPRETATION OF RATIOS
The benefit of the ratio analysis depends to great extent upon their correct interpretation.
Interpretation requires considerable ability on the part of the analyst. He has to decide
whether the relationship disclosed by the ratio is satisfactory or not. He has to base his
decision on experience, or on comparison may be interpreted in any one of the following
ways.
1) BASED ON SINGLE RATIO AND GROUP RATIOS:-

The interpretation may be based on individual ratio e.g. If current ratio persistently
falls and goes below one, it can be interpreted as an indication of short-term
insolvency. However, one cannot get the position corrected by studying individual
ratio in isolation. It is therefore a common practice to study and interpret a set of
several related ratios e.g. for short-term solvency both the ratios, whose significance
is not fully understood, are made more meaningful by the computing and study of
additional relevant ratios.
2) COMPARISON OVERTIME:Ratio analysis is primarily useful for studying trends, indicating rise, decline or
stability over a period of time. For this purpose, ratios by themselves are of no
particular significance. For revelling such trends, the same ratio or a group of ratios is
studied over period of years. Thus the movements in the ratios, rather than the ratios
themselves, are important.
3) INTER-FIRM COMPARISON:Ratios of undertakings are compared with the respective ratios of other firm in the
same industry and with the industry on average An immense benefit is likely to from
such comparison as the concerns similarly situated are as a matter of fact, to sail in
the same boat.
PROCEDURE OF ANALYSIS:First or all the depth, object and extent of analysis must be determined, so that
necessary information can collect. The analysis is required to go through various
financial statements of the business and collect other required information from the
management. The analysis is required to rearrange the data given in the financial
statements in a manner, which will help the to analysis the statements easily and
conveniently. After analyzing the statement the interpretation is made and the
conclusions are drawn.
TYPES OF RATIOS:Classification of ratios is done in two ways.
A. According to nature of items.
B. According to purpose of the function.
A) ACCORDING TO NATURE OF ITEMS:1) Balance Sheet Ratios:The ratios exhibiting the relationship between two item or group of items in the
balance sheet e.r. Relation between current Assets and Current Liabilities.

2) Revenue Statement or Profit and loss account ratios:The ratios disclosing the relationship between two items or group of items in the
profit and loss account it. Relationship between Sales and Gross profit.
3.Inter Statement or Composite Ratio:The ratios indicating the relationship of certain items in the balance sheet with some
figures in the revenue statements i.e. Net Profit and Capital or Sales and Fixed Assets.
B) FUNCTIONAL CLASSIFICATION:1) Liquidity Ratios; These ratios measure the liquid position of the enterprise i.e. whether the
current assets to pay current liabilities as and when they mature. Thus, these ratios indicates
short-term solvency of the business
2) Leverage Ratios; They indicate the relative use of debt and equity in financing assets of the firm. The
extent, to which the practice of trading on equity can be carried on safety, can be
known through these ratios.
3.Activity Ratios:These ratios measure the efficiency in the employment of funds in the business
operations. They respect the companys level of activities in relation to its turnover.
4.Profitability Ratios:There ratios measure overall performance. And profits earning Capacity of the
business. They reveal the effect of the business transaction on the profit position of
the enterprise.
PROFITABILITY RATIO:1) Gross Profit Ratio:This ratio reflects the efficiency with which the management produces each unit
product.
The ratio is calculated as under:
Gross Profit Ratio= Profit Sales
It is the ratio which is most commonly employed by accountants for comparing the
earnings of business for one period with those of other or earnings of one concern
with of another in the same industry. It indicates the degree to which selling prices
goods per unit may decline without in losses on operations for the firm.

2) Net Profit Ratio:

Net Profit is that proportion of net sales which remains to the owners or the
shareholders after all costs. Charges and expenses including income-tax have been
deducted. It is calculated as under. Net profit (after tax) Sales It differs from the ratio
of operating profit is to net sales in as much as it is calculated after adding nonoperating incomes, like interest, dividends on investment etc. To operating profit and
deducting non-operating expenses such as loss on sale of old assets, provisions for
legal damages etc. from such profits.
LIQUIDITY/SOLVENCY RATIO:
- 1) Current Ratio or working capital Ratio or 2:1 Ratio:It is a ratio of current assets to current liabilities. The ratio is calculated by dividing
the current assets by the current liabilities. Current Assets Current liabilities certain
authorities have suggested that in order to ensure solvency of a concern. Current
assets should be at least twice the liabilities and therefore. This ration is known as 2:1
ratio.
2.Liquid Ratio or Acid Test Ratio or Quick Ratio:The current Ratio fails to serve as a realistic guide to the solvency of the concern, as
the major portion on the current assets may comprise of such assets which cannot be
converted immediately cash (e.g. stock) to meet the immediate liabilities. It this ratio
is 1:1, it is considered that all claims will be met when they arise. Quick / Liquid
Assets Current liabilities
ACTIVITY RATIO
1) Inventory Turnover Ratio:The term Inventory Turnover refers to the number of times in a year
inventories are sold and replaced. Inventory Turnover Ratio:- Cost of Goods Sold
or sales Average Inventory at cost It is Indication of the velocity with which
merchandize moves through the business. This is a test of inventory to discover
possible trouble in the form of over stocking or over valuation. It assists the
financial manager in evaluating inventory policy.
2) Operating Ratio:The ratio shows the percentage of net sales i.e. observed by the cost of goods sold
operating. Naturally higher the ratio, the less favourable it is. Because it would

leave a small margin to meet interest, dividends and other corporate needs.
Operating Ratio = Cost Goods Sold + Operating Expenses Net Sales
3) Fixed Assets Turnover Ratio:The ratio measures the efficiency in the utilization of fixed assets. This ratio
indicates whether the fixed assets are being fully unitized A high ratio is an index
of the vestment in fixed asset. Normally standard ratio taken as five times
. Fixed Assets Turnover Ratio = Sales Net Fixed Assets
4) Total Assets Turnover Ratio:The ratio is arrived at by dividing sales by the total assets Sales Total Assets The
ratio indicates the sales generated per rupee of investment in total assets. Thus, it
aims to point out the efficiency or inefficiency in the used of total assets or capital
employed. Increase in ratio indicates that more revenue is generated per rupee of
total investment in assets
LEAVERGE RATIO:1) Debt Equity Ratio:It measure of the relative claims of creditors and owners against the assets of
the firm. Total Debts Net worth owners Equity The term total debt includes
all debts i. e. long term, short term mortgages. Bills, debentures etc. whereas
the term net worth means equity share capital, reserves and surplus i.e.
proprietors. Funds or equity 1:1 ratio is acceptable.
2) Fixed Assets to worth Ratio:Fixed assets Net worth It indicates that the company has used short term
funds for acquiring fixed assets, which policy is not desirable. To the extent
fixed assets exceed the amount of capital and reserves, the working capital are
depleted. When the amount of proprietors fund exceeds the value of fixed
Assets i.e. when the percentage is less than 100, a part of the working capital
is supplies by the shareholders. Provided that there are no other non-current
assets.
NEED FOR THE STUDY
The study has been conducted for gaining practical knowledge about Ratio analysis of
SRI MEENAKSHI CARMENTS PVT LTD AT KARUR.
The study is undertaken as a part of the MBA curriculum from NOVEMBER 1 TO
NOVEMBER 39

 in the form of final years project training for the fulfilment of the requirement of
MBA degree
AREA OF THE PROJECT
This project A Study on RATIO ANALYSIS of SRI MEENAKSHI CARMENTS PVT
LTD AT KARURis considered as an analytical research.
OBJECTIVES OF THE STUDY
To study the profitability of SRI MEENAKSHI CARMENTS PVT LTD AT
KARUR.
To study the liquidity position.
To find activity turnover
To study operating efficiency of SRI MEENAKSHI CARMENTS PVT LTD AT
KARUR.
To study the organization activity of each department.
To find out the financial performance of the organization for last 5 years through ratio
analysis.
To know how the ratio analysis helps the organization to improve profits.
To know the Utilization of financial resources

SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The main scope
of the study was to put into practical the theoretical aspect of the study into real life work
experience. The study of Ratio analysis further the study is based on last 5 years Annual. SRI
MEENAKSHI CARMENTS PVT LTD AT KARUR.
LIMITATIONS OF THE STUDY
The study duration (summer in plant) is short.
The analysis is limited to just five years of data study (from year 2005 to year 2009)
for financial analysis.
Limited interaction with the concerned heads due to their busy schedule
METHDOLOGY
In preparing of this project the information collected from the following sources.
Primary data:

The Primary data has been collected from Personal Interaction with Finance manager
Mr.C .B Karabe and other staff members.
Secondary data:
The major source of data for this project was collected through Balance sheet of SSHSKL
Profit and loss account of 5 year period from 2005-2009
SAMPLING DESIGN Sampling unit : Financial Statements.
Sampling Size : Last five years financial statements.
Tools Used: MS-Excel has been used for calculations.

FINANCIAL ANALYSIS
Financial analysis is the process of identifying the financial strengths and weaknesses of the
firm and establishing relationship between the items of the balance sheet and profit & loss
account.
Financial ratio analysis is the calculation and comparison of ratios, which are derived from
the information in a companys financial statements. The level and historical trends of these
ratios can be used to make inferences about a companys financial condition, its operations
and attractiveness as an investment. The information in the statements is used by Trade
creditors, to identify the firms ability to meet their claims i.e. liquidity position of the
company. Investors, to know about the present and future profitability of the company and its
financial structure. Management, in every aspect of the financial analysis. It is
theresponsibility of the management to maintain sound financial condition in the company.
RATIO ANALYSIS
The term Ratio refers to the numerical and quantitative relationship between two items or
variables. This relationship can be exposed as
Percentages
Fractions
Proportion of numbers
Ratio analysis is defined as the systematic use of the ratio to interpret the financial
statements. So that the strengths and weaknesses of afirm, as well as its historical
performance and current financial condition can be determined. Ratio reflects a quantitative
relationship helps to form a quantitative judgment.
STEPS IN RATIO ANALYSIS
The first task of the financial analysis is to select the information relevant to the
decision under consideration from the statements and calculates appropriate ratios.
To compare the calculated ratios with the ratios of the same firm relating to the pas6t
or with the industry ratios.

 It facilitates in assessing success or failure of the firm.

Third step is to interpretation, drawing of inferences and report writing conclusions
are drawn after comparison in the shape of report or recommended courses of action.

BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between variables. They enable analyst to
draw conclusions regarding financial operations. They use of ratios as a tool of financial
analysis involves the comparison with related facts. This is the basis of ratio analysis. The
basis of ratio analysis is of four types.
Past ratios, calculated from past financial statements of the firm. Competitors ratio, of the
sum most progressive and successful competitor firm at the same point of time. Industry
ratio, the industry ratios to which the firm belongs to projected ratios, ratios of the future
developed from the projected or pro forma financial statements
NATURE OF 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.
It is only a means of understanding of financial strengths and weaknesses of a firm. There are
a number of ratios which can be calculated from the information given in the financial
statements, but the analyst has to select the appropriate data and calculate only a few
appropriate ratios. The following are the four steps involved in the ratio analysis.
Selection of relevant data from the financial statements depending upon the objective of the
analysis. Calculation of appropriate ratios from the above data. 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 ratios of the
industry to which the firm belongs.
INTERPRETATION OF THE RATIOS

The interpretation of ratios is an important factor. The inherent limitations of ratio analysis
should be kept in mind while interpreting them. The impact of factors such as price level
changes, change in accounting policies, window dressing etc., should also be kept in mind
when attempting to interpret ratios. The interpretation of ratios can be made in the following
ways.
Single absolute ratio
Group of ratios
Historical comparison
Projected ratios
Inter-firm comparison
GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS
The calculation of ratios may not be a difficult task but their uses not easy. Following
guidelines or factors may be kept in mind while interpreting various ratios are Accuracy of
financial statements
Objective or purpose of analysis
Selection of ratios
Use of standards
Caliber of the analysis
IMPORTANCE OF RATIO ANALYSIS
Aid to measure general efficiency
Aid to measure financial solvency
Aid in forecasting and planning
Facilitate decision making
Aid in corrective action
Aid in intra-firm comparison
Act as a good communication
Evaluation of efficiency

 Effective tool
LIMITATIONS OF RATIO ANALYSIS
Differences in definitions
Limitations of accounting records
Lack of proper standards
No allowances for price level changes
Changes in accounting procedures
Quantitative factors are ignored
Limited use of single ratio
Background is over looked
Limited use
Personal bias
CLASSIFICATIONS OF RATIOS
The use of ratio analysis is not confined to financial manager only. There are different parties
interested in the ratio analysis for knowing the financial position of a firm for different
purposes. Various accounting ratios can be classified as follows:
1. Traditional Classification
2. Functional Classification
3. Significance ratios
1. Traditional Classification
It includes the following. Balance sheet (or) position statement ratio: They deal with the
relationship between two balance sheet items, e.g. the ratio of current assets to current
liabilities etc., both the items must, however, pertain to the same balance sheet. Profit & loss
account (or) revenue statement ratios: These ratios deal with the relationship between two
profit & loss account items, e.g. the ratio of gross profit to sales etc.,

Composite (or) inter statement ratios: These ratios exhibit the relation between a profit & loss
account or income statement item and a balance sheet items, e.g. stock turnover ratio, or the
ratio of total assets to sales.
2. Functional Classification
These include liquidity ratios, long term solvency and leverage ratios, activity ratios and
profitability ratios.
3. Significance ratios
Some ratios are important than others and the firm may classify them as primary and
secondary ratios. The primary ratio is one, which is of the prime importance to a concern. The
other ratios that support the primary ratio are called secondary ratios.
IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOSARE
Liquidity ratio
Leverage ratio
Activity ratio
Profitability ratio

Data analysis
Liquidity ratio
Current ration
Years
2011
2012
2013
2014
2015

Current assets
58574151
52,470,336
69,883,268
89,433,596
115,431,868

Current ratio
Current liabilities
7903952
31,884,616
16,065,620
47,117,199
30,266,661

Ratio
7.41
1.65
4.35
1.9
3.85

Interpretation Quick assets are those assets which can be converted into cash
with in a short period of time, say to six months. So, here the sundry debtors
which are with the long period does not include in the quick assets. Compare
with 2006, the Quick ratio is increased because the sundry debtors are increased
due to the increase in the corporate tax and for that the provision created is also
increased. So, the ratio is also increased with the 2006