Contents

RATIO ANALYSIS.............................................................................................................2
1. INTRODUCTION.......................................................................................................2
1.1 Meaning of ratios...................................................................................................4
1.2 Types of ratios........................................................................................................5
2. Leverage ratios.............................................................................................................7
3. Activity ratios...............................................................................................................8
4. Profitability ratios......................................................................................................10
4.1 NEED FOR THE STUDY...................................................................................12
4.2 OBJECTIVES......................................................................................................12
4.3 Methodology........................................................................................................12
4.4 SCOPE OF THE STUDY..................................................................................12
4.5 LIMITATIONS OF THE STUDY.......................................................................13
5 Financial Ratio..........................................................................................................14
5.1 LIQUIDITY RATIOS..........................................................................................14
5.2 LEVERAGE RATIOS.........................................................................................19
5.3 ACTIVITY RATIOS............................................................................................22
5.4 PROFITABILITY RATIOS.................................................................................27
6.1 FINDINGS...............................................................................................................31
EXAMPLE........................................................................................................................33
CONCLUSION..................................................................................................................35
BIBLIOGRAPHY..............................................................................................................37

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 RATIO ANALYSIS

1. INTRODUCTION
The ratio analysis 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. With the help of ratios
that the financial statements can be analyzed more clearly and decisions made from such
analysis. Financial analysis is the process of identifying the financial strengths and
weakness of the firm y properly establishing relationship between the items of balance
sheet and the profit and loss account. There are various methods or techniques used in
analyzing financial statements. By the use of ratio analysis one can measure the financial
conditions of a firm and can point out whether the conditions is strong, good,
questionable or poor.
Analysis and interpretation of financial statement with the help of ratio is termed
as Ratio analysis.

It is process of identifying the financial strengths and weakness of the firm. This
may be accomplished either through a trend analysis of the firm over a period of time or
through a comparison of the firm ratios with its nearest competitors and with the industry
averages

Ratio analysis was pioneered by Alexander Wall, who presented a system of ratio
analysis in the year 1909. Alexanders contention was that interpretation of financial
statements can be made either by establishing quantitative relationships between various
items of financial statements.

Standards of comparison

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 The ratio analysis involves comparison for a use of full interpretation. A single
ratio in itself does not indicate favourable or unfavourable condition. It should be
compared with some standards. Standards of comparison may consist.

1. Ratios calculated from the past financial statement of the firm.

2. Ratios developed using the projected, or proforma of financial statements of the

same firm.

3. Ratios of some selected firms, especially the most progressive and successful, at
same point in the time, and

4. Ratios of the industry to which the firm belongs.

The easiest way to evaluate the performance of a firm is to compare its ratios with
the past ratios. When financial ratios over a period of time are compared it is known as
the time series. It gives an indication of the direction of change and reflects whether the
firms financial performance has improved, deteriorated or remained constant over time.
The analyst should not simply determine the change, but more importantly, he should
understand why ratios have changed. The change may be affected by changes in the
accounting polices without a material changes in the firms performance.

Sometimes ratios are used as the standard of comparison. Future ratios can be
developed from the projected or proforma of financial statements. The comparison of past
ratios with future ratios shows the firms relative strengths and weakness in the past and
future.

If the ratios indicate weak financial position, corrective actions should be initiated.
Another way of comparison is to compare ratios of firm with some selected firms in the
same industry at the same point in time. This kind of comparison indicates the relative
financial position and performance of the firm.

To determine the financial condition and performance of a firm, its ratios

compare with average ratios of the industry analysis, helps to ascertain the financial
standing and capability of the firm in the industry to which it belong. Industry ratios are
important standards in view of the fact that each industry has its characteristics, which
influence the financial and operating relationship.

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1.1 Meaning of ratios
A ratio is a mathematical relationship between two items expressed in a
quantitative form.

Ratio can be defined as Relationship in quantization forms, between figures

which have cause and effect relationship or which are connected with each other in some
manner or the other.

Ratio analysis is an age old technique of financial analysis. The

information provided by the financial statements in absolute form is and conveying very
little meaning to the users.

Advantage or Importance of ratio analysis

1. The Ability of corporation to meet its current obligations i.e., liquidity position.

2. Ratio analysis provides data for inter firm comparison. Ratios highlights the
factors associated with successful & unsuccessful firms corporations.

3. The efficiency of .the Corporation is. Utilizing its various assets in generating
sales revenue.

4. The extent to which the firms has used its ling-term solvency for borrowing funds

5. The overall operating efficiency & performance of the corporation

Limitations of ratio analysis

1. Comparison between two variables, prove worth provided their basis of valuation
is identical. But in reality, it is not possible, such as method of valuation of stock-
in-trade, or charging different methods of depreciation of fixed assets etc.

2. Ratio depends on the figure of the financial statement. But in most cases, the
figures are window dressed.

3. Ratio analysis became more meaningful and significant if trend analysis (i.e., the
analysis over a number of years) is possible, but in practice, it is difficult all the
time.

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 4. Ratio are calculated jointly on the basis of past result which may not be suited to
implement to the present business polices.

5. It is very difficult to ascertain the normal or standard ratio in order to make proper
comparison. Because, it differs from firm to firm, industry to industry.

1.2 Types of ratios

Several ratios, calculated from the accounting data, can be grouped into classes
according to financial activity or function to be evaluated. The parties interested in
financial analysis are short-term and long-term creditors, owners and management. Short-
term creditors main interest is in the liquidity position or short-term solvency of the firm,
long-term solvency and profitability of the firm. Similarly, concentrate on the firms
profitability and financial condition. Management is interested in evaluation of every
aspect of the firms performance. They have to protect the interests of all parties and see
that the firm grows profitably.

The requirement of the various of ratios, we may classify them into the following
four important categories.

1. Liquidity ratios

2. Leverage ratios

3. Activity ratios

4. Profitability ratios

1. Liquidity ratios

It is extremely essential for a firm to meet its obligations as they

become due. Liquidity ratios measure the ability of the firm to meet its current
obligations. In fact, analysis of liquidity needs the preparation of cash budgets and
fund 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 if not suffer from lack of liquidity, and also 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 creditors
confidence, or even legal tangles resulting in the closure of the company. A very high
degree of liquidity is also bad, idle assets earn nothing. The firms funds will be

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 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 or lack of it, are:

Current ratio

The current ratio is the ratio of the total current assets to total current
liabilities. It is calculated as:

Current ratio = current assets/current liabilities.

The current assets of the firm include cash and bank balances and those assets
which can be converted into cash within a year, such as marketable securities, debtors and
inventories. Pre-paid expenses, bills receivable accrued income are also included in
current assets.

Current liabilities include creditors bills payable, accrued expenses, short term
bank loan, income tax liability and long debt maturing in current year.

Quick ratio or acid-test ratio

Quick ratio established a relationship between quick or liquid assets and current
liabilities. The quick ratio is found out by dividing quick assets by current liabilities.

Quick assets includes assets which can be converted into cash immediately
without a loss of value such as cash and bank balance, book debts (debtors and bills
receivables) and marketable securities (temporary quoted investments). Inventories are
not included in quick assets because they require time for converting into cash and also
their value may fluctuate. Quick Ratio = Current Assets Inventories / Current
Liabilities.

Cash ratio : Cash ratio establishes a relationship between cash and cash
equalent and current liabilities. To get the cash ratio only absolute liquid assets
and readily realizable securities are taken into consideration. A cash ratio of 0.5 to
1 is considered as satisfactory.

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 Cash ratio= cash & bank + marketable securities/current liabilities

Net working capital ratio: Working capital ratio is the difference between the
current assets and current liabilities. The amount of working capital in some times
used as a measure of the firms liquidity. It is considered that if a firm has more
working capital ratios has the greater ability to meet its current obligations.

Working capital ratio= current assets-current liabilities / net asset

2. Leverage ratios

The process of magnifying the shareholders return through the

employment of debt is called trading on equity. To judge the long term financial
position of the firm, financial leverage or capital structure ratios are calculated. The ratios
indicate funds provided by owners and lenders. As a general rule there should be
appropriate mix of debt and owners equity in financing the firms assets.

The use of debt magnifies the shareholders earning as well as increases their
risk and firms ability of using debt for the benefit of shareholder. Basically these are
prepares to know the extent which operating profits are sufficient to cover the fixed
charges.

The following are the some of the important leverage ratios:

Debt-equity ratio

The debt equity ratio is an important tool of financial analysis to appraise the
financial structure of a firm. Debt equity ratio is the measure of relative claims of
creditors and owners the firms assets. So it has an important implication form the
creditor and owners point of view of the firm.

The debt equity ratio cab is calculated by dividing total debt by net worth.

Debt Equity Ratio = Total Debt / Net worth.

Total-debt ratio

The total debt ratio can be calculated by dividing total debt by capital
employed or total net assets. The total debt will include short and long term borrowings
from financial institutions. Capital employed will include total debt and net worth or net

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assets consists of net fixed (long term) assets minus current liabilities excluding interest
bearing short term debt. Total Debt Ratio= Total Debt/capital employed

Capital employed to net worth ratio or Equity ratio

The ratio can be calculated by dividing capital employed

or net assets by net worth. Network includes share capital and reserves and surplus.
Generally, capital employed or net assets to net worth ratio should be more than one.
Capital employed of NA = capital employed / Net worth

3. Activity ratios
The funds of creditors and owners are invested in various assets to generate sales
and profits, the better assets management, the large 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 as turnover ratios, because they indicate the speed with which
assets are being converted or turned into sales.

The following are the important activity ratios, which will evaluate the efficiency of
the firm:

Inventory turnover ratio

This ratio indicates the efficiency of the firm in selling its product and also
shows how rapidly the inventory is turning into receivables through sales.

The ratio is calculated by dividing the cost of goods sold by the average
inventory. Cost of goods sold is sales- gross profit of purchases + direct expenses+
opening stock+ manufacturing expenses closing stock. Average inventory is the average
of opening and closing balances of inventory.

Generally a high inventory turnovers indicative of good inventory management

and a low inventory turnover suggests an inefficient inventory management. Further a
low inventory turnover implies excessive inventory levels than warranted by production
and sales activities, or a slow moving of obsolete inventory, a high level of sluggish
inventory amounts to unnecessary tie up of funds, reduced profit and increased costs.
Therefore a balance should be maintained between too high and too low inventory
turnovers.

Inventory Turnover Ratio = Cost of goods sold / Average Stock.

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 Working capital turnover ratio

The ratio show the firm is able to generate sales by using its limited
resources of working capital. The firm may also take the ratio relating to net current
assets to sales. If the ratio is more it indicates efficient working capital management and
if it is less we can say it is inefficient in working capital management.

The networking capital turnover ratio can be computed by dividing sales by

networking capital. Working capital is current assets minus current liabilities.

Working Capital Turnover = Sales / Net Working capital.

Debtors turnover ratio

A firm sells goods for cash and credit bases, when the firm extends credits to its
customers, book debts (debtors or receivables) are created the firms account and they are
expected to be converted into cash over a short period of time, so these are included in
current assets. The liquidity of the firm depends on the quality of debtors to great extent.
To judge the quality of liquidity of debtors, we have to calculate the debt turnover ratio
and average collection period.

The debt turnover ratio is calculated by dividing credit sales by average debtors.
When the information regarding credit sales and opening and closing balance of debtors
may not be available, then debtor turnover ratio can be calculated by dividing total sales
by the yearend balance of debtors.

Generally the higher the value of debtors turnover, the more efficient is the
management of credit.

Average collection period is calculated to know the nature of the firms credit
policy and the quality of the debtors more clearly. It can be calculated by days in a year
divided by debtors turnover of debtors by sales multiplied by 360 days.

The shorter the average collection period, the better the quality of debtors, as a
short collection period implies the prompt payment by debtors.

Debtors turnover ratio = sales/debtors

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 Debtors Collection period
The average number of days for which debtors remain outstanding is
called the average collection and can be computed as follows:
Debtors collection period = no. of days in a year / debtors turnover ratio
(Or)
Average debtors /sales*365
The less collection period leads to the worthiness of the debtors.

4. Profitability ratios
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 term of profits.

The profitability ratios are calculated to measure the operating efficiency of

the company. Besides management of the company, 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. The following are the some of the
important profitability ratios:

Gross profit ratio

It is the first profitability ratio calculated in relation to sales. This ratio can
be called as gross profit margin of gross margin ratio. This ratio establishes a relationship
between gross profit and sales to measure the efficiency of the firm and it reflects its
pricing policy.

The ratio is calculated by dividing the gross profit by sales. A high gross profit
margin indicates that the firm is able to produce at relatively lower cost and it is also a
sigh of good management.
Whereas as a low gross profit margin reflects a higher cost of goods sold
due to the firms inefficient management.
Gross Profit Margin = Gross Profit / Sales * 100

Net profit ratio

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 Net Profit Margin Ratio establishes a relationship between net profit and
sales of the firm. It indicates the managements ability to earn sufficient profit on sales to
cover all operating expenses, the cost of merchandising of servicing and also should have
a sufficient margin to pay reasonable compensation to shareholders. A high ratio shows
better and low ratio shows the opposite.
The net profit is calculated by dividing the net profit after tax by sales, N.P. is
obtained when operating expenses, interest and taxes are deducted from gross profit.

Net Profit Ratio = profit after tax / sales * 100

Operating profit ratio

The operating profit can be calculated by dividing operating profit by net sales. The
operating profits includes net profit = non operating expenses (interest to be paid, income
tax, loss on sale of assets) minus non operating income (interest on dividend, profit on
sale of asset) or gross profit minus operating expenses (administrative and selling
expenses). Operating profit ratio = operating profit / net sales.

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RESEARCH & METHODOLOGY

4.1 NEED FOR THE STUDY

Ratio analysis is a powerful tool of financial analysis. Financial analysis is the
process of determining strength and weakness of the industry establishing a strategic
relationship between the components of balance sheet and profit and loss account.
Financial performance evaluation has great influences on the development and progress
of the industry.

4.2 OBJECTIVES

To know the financial position of the ZUARI CEMENT Ltd.

To study the liquidity position of ZUARI CEMENT Ltd.
To Analyze the profitability, of ZUARI CEMENT Ltd.
To suggest a better way if any for the business growth.

4.3 Methodology
Source of data

The study is purely based on the secondary data. The data of zuari cement
limited for the year 2005 to 2009 is used in this study. The secondary data has been
collected from the profit and loss account, balance sheet of zuari cement limited.

Financial tools

Ratio analysis.

Period of study

5 year annual reports are used that is 2005 to 2009.

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4.4 SCOPE OF THE STUDY
The purpose of the study was to know the financial performance of the unit. For
this the ratio analysis tool was most suitable. This would reveal the solvency position of
the unit. The trend of sales and profitability for the past 5 years was calculated to know if
any deviation occurred and to know the reasons for it. However the study hard its own
limitation like ratio analysis is a post-mortem analysis and the data utilized were
secondary in nature etc. The scope of the present study is limited to the following aspects.

4.5 LIMITATIONS OF THE STUDY

The study is based on the information provided by the organization in the form of
various annual reports.

Detailed analysis could not be carried for the project work because of the limited
time span.

Less scope of gathering data

The analysis was confined to Zuari cement ltd. Only

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5 Financial Ratio
5.1 LIQUIDITY RATIOS
Current ratio

Current ratio is calculated by dividing the current assets by current liabilities. Current
assets include cash and those assets that can be converted into cash within a year , such as
marketable securities , debtors and inventories .prepaid expenses also includes in current
assets .current liabilities include creditors , bills payable , arrived expenses , short term
bank loan , income tax liability and long term debt maturing in the current year.

Current ratio represents a margin of safety for creditors. Current ratio of 2 to 1 or

more is considered satisfactory. The higher the current ratio the greater the margin of
safety. The larger the amount of current assets in ratio to current liabilities the more the
firms ability to meet its current obligations.

Current assets
Current ratio= -------------------------

Current liabilities

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Table 5.1.1 current ratio

Year Current assets Current liabilities Current ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 8879.5 3877.84 2.29

2005-06 8167.5 3509.59 2.33

2006-07 10725.94 3922.48 2.73

2007-08 27336.1 14506.15 1.88

2008-09 24288.00 25214.04 0.96

Chart 5.1.

Current ratio
3 Percentage
2.73
2.5 2.29 2.33
1.88
2

1.5
0.96
1
0.5

0
2004-05 2005-06 2006-07 2007-08 2008-09
Years

INFERENCE

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 The Ratio is above standard ratio (2:1) all years i.e. 2004-05 to 2008- 09 Ratios:
2.29, 2.33 , 2.73, 1.88, and 0.96 respectively.

Quick ratio

Establishes a relationship between quick or liquid, Assets and liabilities. An asset is a

Liquid if it can be converted into cash immediately. Inventories are considered to be less
liquid. The quick ratio is found out by dividing quick assets by current liabilities. A quick
ratio of 1to1 is considered to represent a satisfactory current financial condition.
Current assets-inventories

Quick ratio= -------------------------------------

Current liabilities

Table 5.1.2 Quick ratio

Year Quick assets Current liabilities Quick ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 6597.58 3877.84 1.70

2005-06 5664.30 3509.59 1.61

Chart
5.1.2
2006-07 7611.37 3922.48 1.94
INFER
ENCE
2007-08 23365.09 14506.15 1.61
The

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2008-09 18216.65 25214.04 0.72
 Quick ratio
2.5
Percentage
1.94
2 1.7 1.61 1.61
Ratio is above
1.5 standard ratio (1:1) all years i.e. 2003-04 to 2007- 08 Ratios: 1.7:1, 1.6:1,
1.0:1, 1.6:1,
1
and 0.7:1 respectively.
0.72

0.5
Cash ratio
0
2004-05 2005-06 2006-07 2007-08 2008-09
Cash is the most liquid asset.
YearsA financial analyst may examine cash ratio and its
Equivalent to current liabilities. Trade investment or marketable securities are
Equivalent of cash. The standard ratio is 0.5:1or 50:100(%).

Cash & bank + marketable securities

Cash ratio= -------------------------------------------------------

Current liabilities

Table
Year Cash & bank Current liabilities Cash ratio 5.1.3
(Rs in lakhs) (Rs in lakhs) ( in times ) cash
ratio

2004-05 1716.40 3877.84 0.44

2005-06 1290.71 3509.59 0.37

2006-07 1383.35 3922.48 0.35

Chart
2007-08 12012.16 14506.15 0.83 5.1.3

2008-09 4773.47 25214.04 0.18

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 Years

INFERENCE The Ratio is above standard ratio (0.5:1) all years i.e. 2003-04 to 2007-
08 Ratios: 0.44, 0.37, 0.35, 0.83 and 0.18 respectively

Networking capital ratio

The difference between current assets and current liabilities excluding short-term bank
barrowing is collected net working capital or net current assets. Net working capital ratio
is some times used as measure of a firms liquidity. It is considered that between two
firms. The one having the larger networking capital has the greater ability to meet its
current obligations.

The ratio is calculated as:

Net working capital= current assets-current liabilities
Net assets= fixed assets + current assets

Net working capital

Net working capital ratio= ----------------------------

Net assets

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 Table
5.1.4
Year Net working capital Net assets Net working capital ratio Net
(Rs in lakhs) (Rs in lakhs) ( in times ) working
capital
ratio
2004-05 5001.66 45357.34 0.11

2005-06 4657.91 42070.25 0.11

2006-07 6803.46 42684.40 0.16

2007-08 12829.95 107415.94 0.12

Chart
2008-09 926.04 150822.72 0.01 5.1.4
Percentage

Net working capital ratio

0.18 0.16
0.16
0.14 0.12
0.12 0.11 0.11
0.1
0.08
0.06
0.04
0.02 0.01
0
2004-05 2005-06 2006-07 2007-08 2008-09
Year

INFERENCE

Net working capital ratio is sometimes used as a measure of firms liquidity.

During the period from 2003-04 to 2007-08 the ratios are 0.11, 0.11, 0.16, 0.12, 0.01.

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 5.2 LEVERAGE RATIOS
Financial leverage refers to the use of debt finance ratios help in assessing
the risk arising from the use of debt capital. To judge the long-term financial position of
the firm, financial leverage ratios are calculated. The ratios indicate mix of funds
provided by owners and lenders.

Debt equity ratio

Several debt equity ratios are utilized to analyze the out siders funds of a
firm. And the total shareholders fund

Total debt

Debt equity ratio= ---------------------------

Net worth

Total debt = secured loans + unsecured loans

Net worth = share capital + reserves and surplus

Table 5.2.1 Debt equity ratio

Year Total debt Net worth Debit equity ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 28089.02 64698.07 0.43

2005-06 27198.47 64698.07 0.42

2006-07 25198.62 64698.07 0.39

2007-08 16454.93 80846.56 0.20

2008-09 24948.24 100619.28 0.25

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Chart 5.2.1

INFERENCE

The debt equity ratio has been decreased from 0.43 in 2003-04 to 0.25 in 2007-08.
This is due to decrease in debt funds. It is good sign for the company.

Total debt ratio

The debt-equity ratio is determined to ascertain the soundness of the long

term financial policies of the company. It is also known as external internal equity ratio.
Total debt = secured loans + unsecured loans

Capital employed = share capital + reserves and surplus + total debt

Total debt

Total debt ratio = -------------------------

Capital employed

Table 5.2.2 Total debt ratio

Year Total debt Capital employed Total debt ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 28089.02 92787.09 0.30

2005-06 27198.47 91896.54 0.30

2006-07 25198.62 89896.69 0.28

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2007-08 16454.93 97301.49 0.17

2008-09 24948.24 125567.52 0.20

Chart 5.2.2
Percentage

Total debt ratio

0.35
0.3 0.3
0.3 0.28

0.25
0.2
0.2 0.17
0.15
0.1
0.05
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years

INFERENCE The total debt ratio has been decreased from 0.30 in 2003-04 to 0.20 in
2007-08. This is due to decrease in debt funds. It represents the company having low debt
ratio. So, the company is flexible in the firms operation

Capital employed to net worth ratio /equity

The ratio can be calculated by dividing capital employed or net assets by net
worthy. Network includes share capital and reserves and surplus. Generally,
capital employed or net assets to net worth ratio should be more than one.

Capital employed

Equity ratio = --------------------------

Net worth

Capital employed = share capital + reserves and surplus + total debt

Net worth = share capital + reserves and surplus

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Table 5.2.3 Capital employed to net worth ratio

Year Capital employed Net worth Capital employed to

(Rs in lakhs) (Rs in lakhs) net worth ratio
( in times )

2004-05 92787.09 64698.07 1.43

2005-06 91896.54 64698.07 1.42

2006-07 89896.69 64698.07 1.39

2007-08 97301.49 80846.56 1.20

2008-09 125567.52 100619.28 1.25

Percentage

Chart 5.2.3
Capital employed to net worth ratio
1.45 1.43 1.42
1.39
1.4
1.35
1.3
1.25
1.25
1.2
1.2
1.15
1.1
1.05
2004-05 2005-06 2006-07 2007-08 2008-09
Years

INFERENCE: The capital employed to net worth ratio has been decreased
from 1.43 in 2003-04 to 1.25 in 2007-08. This is due to decrease in debt funds.

5.3 ACTIVITY RATIOS

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 assets are being converted into sales.

Inventory turnover ratio

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 Inventory turnover ratio is a measure of liquidity. It indicates the
speed at which the inventory is sold out. A high turnover ratio indicates that the
inventory is out Fast and a low turnover ratio show a sale of inventory. This ratio
indicates the efficiency of the firm in selling its products.
Cost of goods sold

Inventory turnover ratio = ---------------------------------

Average inventory

Cost of goods sold = sales gross profit

Average inventory = opening stock + closing stock / 2

Table 5.3.1 Inventory turn over ratio

Year Cost of goods sold Inventory Inventory turnover ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 25509.56 2487.69 10.25

2005-06 29237.39 2392.56 12.22

2006-07 16825.32 2696.36 6.24

2007-08 36172.58 3430.26 10.54

2008-09 46374.89 5021.18 9.24

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Chart 5.3.1

Percentage

Inventory turnover ratio

14
12.22
12 10.25 10.54
10 9.24

8
6.24
6
4
2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years

INFERENCE

The Ratios of all years i.e. 2003-04 to 2007- 08 Ratios: 10.25, 12.22, 6.24, 10.54
and 9.24 respectively.

Working capital turnover ratio

In this ratio numerator is sales and denominator is net working

capital. It shows how many times net working capital goes into sales. Higher the
ratio, the lower the investment tied in working capital and vice versa. Very high
working capital turnover is not desirable, since it pushes the enterprise into financial
structure. Lower magnitude of the ratio is a reflection of low utilization of working
capital.

Sales
Working capital turnover ratio = -------------------------------------

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 Working Capital
Net working capital = total current assets total current liabilities

Table 5.3.2 Working capital turnover ratio

Year Sales Net working capital Working capital turnover ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 29021.15 5001.66 5.80

2005-06 32605.16 4657.97 7.00

2006-07 41516.72 3187.96 13.02

2007-08 99378.92 12829.95 7.75

2008-09 117521.84 926.04 126.90

Percentage

Chart 5.3.2
Working capital turnover ratio
140 126.9
120
100
80
60
40
20 13.02 7.75
5.8 7
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years

INFERENCE

The Ratios of all years i.e. 2003-04 to 2007- 08 Ratios: 5.80, 7.00, 13.02, 7.75
and 126.90 respectively.

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 Debtors turnover ratio

It indicates the number of times debtors turnover each year. If it is high that
indicates the effectiveness of management in collecting debts. Generally, the higher the
value of debtors turnover, the more efficient is the management of credit.
Sales
Debtors turnover ratio = -----------------------
Average debtors

Table 5.3.3 Debtors turn over ratio

Year Sales Debtors debtors turnover ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 29021.15 3109.72 9.33

2005-06 32605.16 2467.39 13.21

2006-07 39689.62 943.79 42.05

2007-08 99378.92 2531.00 39.26

2008-09 117521.84 2640.09 44.51

Chart 5.3.3

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 Percentage
Debtors turnover ratio
50 44.51
42.05
39.26
40

30

20
13.21
9.33
10

0
2004-05 2005-06 200-07 2007-08 2008-08
Year

INFERENCE

The Ratios OF all years i.e. 2003-04 to 2007- 08 Ratios: 9.33, 13.21, 42.05, 39.26
and 44.51 respecti

Debtors collection period

Debtors collection period indicates the speed of the collection
of debts by the firm. If the firm is collecting the debts in time then that will good for the
firm. The shorter collection period is the better quality of debtors.
No. Of days in a year (360)
Debtors collection period = --------------------------------------
Debtors turnover ratio
(or)
Average debtors / credit sales*365
Table 5.3.4 Debtors collection period
Credit sales Debtors Debtors collection period
Year (Rs in lakhs) (Rs in (in days)
lakhs)
29021.15 3109.72 39
2004-05

32605.16 2467.39 27
2005-06

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 39689.62 943.79 9
2006-07

99378.32 2531.00 10
2007-08

117521.84 2640.09 8
2008-09

Chart 5.3.4
Percentage

Debtors collection period (day)

45
39
40
35
30 27
25
20
15 10
9 8
10
5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Year

INFERENCE The days of all years i.e. 2003-04 to 2007- 08 days: 39, 27, 9, 10and 8
respectively

5.4 PROFITABILITY RATIOS

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.

Profitability in relation to sales.

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 Profitability in relation to investment.

Gross profit ratio

The gross profit ratio indicates the extent to which sales of goods per unit
may decline with out May loss in the operations of the firm. This is also known as
Gross profit margin (or) Gross profit margin on sales. The gross profit is the
difference between sales and cost of goods sold.

Gross profit (sales-cost of goods sold)

Gross profit ratio = ___________________________ x 100

Net sales
Table 5.4.1 Gross profit ratio

Year Gross profits Net sales Gross profit ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 13172.03 29021.15 45.39

2005-06 13369.03 32605.16 41.06

2006-07 18776.27 39689.62 47.30

2007-08 63206.34 99378.92 63.60

2008-09 71146.95 117521.84 60.54

Chart 5.4.1

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 Percentage
Gross profit ratio

70 63.6
60.54
60
45.39 47.3
50
41.06
40
30
20
10
0
2004-05 2005-06 2006-07 2007-08 2008-09
Year

INFERENCE

The ratio of all years i.e. 2003-04 to 2007-08 ratios 45.39, 41.06, 47.30,
63.60, 60.54 respectively.

Net profit margin ratio

Net profit is obtained when operating expenses; Interest and taxes are subtracted
from the gross profit. The net profit margin ratio is measured by dividing profit
after tax by sales. The ratio also indicates the firms capacity to withstand adverse
economic conditions.

Net profit
Net profit margin ratio = ---------------------- x 100

Net sales

Table 5.4.2 Net profit ratio

Year Net profit Net sales Net profit ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 -2747.91 29021.15 -9.47

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2005-06 -2104.92 32605.16 -6.46

2006-07 2265.11 39689.62 5.71

2007-08 18057.74 99378.92 18.17

2008-09 19772.72 117521.84 16.82

Chart 5.4.2
Percentage

Net profit ratio

20 18.17
16.82
15
10
5.71
5
0
2004-05 2005-06 2006-07 2007-08 2008-09
-5
-10 -6.46
-9.47
-15

Year

INFERENCE The first two years the ratios are -9.47, -6.46. After three years the ratios
are 5.71, 18.17, 16.82. The net profit ratio of the company is in increased trend. It shows
that the net profit is increasing year by year.

Operating profit ratio

This ratio establishes the relationship between operating profit and sales.

Operating profit

Operating profit ratio = --------------------------------- x 100

Net sales

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Table 5.4.3 Operating profit ratio

Year Operating profit Net sales Operating profit ratio

(Rs in lakhs) (Rs in lakhs) ( in times )

2004-05 -35.05 29021.15 -0.12

2005-06 -190.94 32605.16 -0.59

2006-07 13883.70 43921.16 31.61

2007-08 61291.86 99378.92 61.68

2008-09 75391.89 117521.84 64.15

Chart 5.4.3
Percentage

Operating profit ratio

70 61.68 64.15
60
50
40 31.61
30
20
10
-0.12 -0.59
0
-10 2004-05 2005-06 2006-07 2007-08 2008-09
Years

INFERENCE

The operating profit ratio has been increasing from -0.12 in 2003-04 to 64.15 in
2007-08. This is due to increase in operating profit.

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6.1 FINDINGS
During the study period, the current ratio of the company in the first 3 years
was above the standard norm 2:1. But from the year 2007-08, it started
decreasing and reached to 0.96 in 2008-09.

In the year 2009, the Quick ratio was decreased to 0.72 from 1.61 times in
2007-08 due to decrease in the cash balance. It was also decreased from 1.94
in 2006-07 to 1.61 in 2007-08. Even in 2005-06, it was decreased to 1.61 from
1.70 in 2004-05.

The standard cash ratio is 0.5:1. In the years 2009, 2007, 2006, and 2005 were
0.18, 0.35, 0.37, and 0.44 were below standard. But in the year 2007-08 the
company maintained standard cash ratio.

The Net working capital ratio was 0.11 in the years 2005, 2006. In subsequent
years 2007, 2008 and 2009 it was 0.16, 0.12, and 0.01 respectively. It means
that company was not in a position to meet its current obligations.

The debt equity ratio was 0.43 in 2004-05 and 0.42 in 2005-06. But in later
years it decreased to 0.39 in 2006-07 and to 0.17 in 2007-08. But it was
increased to 0.20 in 2008-09.

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 Total debt ratio has been decreased from 0.30 in 2004-05 to 0.20 in 2008-09.
This is due to decrease in debt funds.

The capital employed to net wroth ratio was decreased continuously from 1.43
in 2005-06 to 1.25 in 2008-09. This is due to increase in debt funds.

Except in 2005-06, the inventory turn over ratio decreased from 10.25 times in
2004-05 to 9.24 in 2008-09. In 2005-06, it was 12.22.

Debtors turn over ratio of the firm for the year 2005 to 2009 was increased
continuously from 9.33 in 2004-05 to 44.51 in 2008-09.

Debtors collection period of the firm. In the year 2009 from 39, 27 and 10
(days) in 2005, 2006, and 2008 years. That means the company collection
period is good.

Gross profit ratio was 45.39 in the year 2005. In subsequent years 2005 to
2009, it was 41.06, 47.30, 63.60 and 60.54 respectively.

Net profit ratio was -9.47 in the year 2005. In later years 2006 to 2009, it was
-6.46, 5.71, 18.17 and 16.82 respectively. The ratios are in increasing trend.
The varies between from -9.46 to 16.82.

6.2 SUGGESTIONS

The company should maintain current assets to improve the liquidity position of
the company.

The debt equity ratio is to be improved as the low debt equity implies a greater
claim of owners than creditors.

The company shall reduce its selling and distribution expenses which lead to
increase the profitability of the company.

Debtors turnover ratio was too high due to increased sales, Hence the company is
suggested to take precaution to avoid bad debts.

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 EXAMPLE

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37 | P a g e
 CONCLUSION

This study reveals that the overall the performance of the Zuari
cement ltd was not satisfactory. The financial position of the company should be
fluctuating years. And the company should take necessary steps in order to improve the
liquidity and profitability positions.

Financing is the back bone of the progress of any company. Therefore a financial ratio
has its impact on the management. Ratios give the clear picture of financial condition of
the company.

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 The areas which were assigned to me were all key areas of the finance divisions
which also include different departments & functions. The profitability position of the
company is very good because, the cost of production is low & selling price is high .The
company has minimum debt in the capital structure, it doesnt have financial risk.

By the ratio analysis I conclude that, overall financial performance of the

company is satisfactory & operating performance in the terms utilization of various assets
is good.

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 BIBLIOGRAPHY

JAMES C.VANN HORNE, Financial Management, 9th edition Prentice Hall

of India Private Limited, New Delhi, 1994.
KHAN M.Y. & JAIN P.K, Financial Management, 2nd Edition Tata Mc. Graw-
Hill Publishing Co. Ltd., New Delhi.
PANDEY I.M., Financial Management, 7th Edition, Vikas Publishing House
Pvt. Ltd., New Delhi, 1995.

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 KOTHARI C.R., Research Methodology, 2nd Edition, Wishwa Prakasham, New
Delhi, 1990.
MAHESWARI S.N., Financial Management, 4th Edition, Sultan Chand & Sons,
New Delhi. 1997.
PRASANNA CHANDRA., Financial Management, 3rd Edition, Tata McGraw-
Hill Publishing Co., Ltd., New Delhi, 1984.

WEBSITE BROWSED

www.google.com
www.zuaricementltd.com

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