ACKNOWLEDGEMENT

I am very much obliged and indebted to Mr. K MOHAN RAO, GENRAL

Manager of Neycer India Limited for his approval and valuable suggestions to
take up the project.
.
I am greatly indebted to my guide MISS ALKA SWAMI , faculty guide for
Finance (summer internship),College of engineering & techonology for her
constant guidance, advice and help which enabled me to finish this project report
properly in time.

I am also grateful to Prof. NARENDRA CHOUDHARY, (HOD), college of

engineering & techonology, for permitting me to undertake this study.

Last but not the least, I would like to forward my gratitude to my friends & All
faculty members(RIMS) who always endured me and stood with me and without
whom I could not have completed the project.

My several well-wishers helped me directly or indirectly; I virtually fall short of

words to express my gratefulness to them. Therefore I am leaving this
acknowledgement incomplete in their reminiscence.

(Signature of student)
AJEET BHURA
 Ceramic Industry

Ceramic Industry in India is about 100 years old. It comprises ceramic tiles, sanitary
ware and crockery items. Ceramic products are manufactured both in the large and small-
scale sector with wide variation in type, size, quality and standard. India ranks 7th in the
world in term of production of ceramic tiles and produced 200million sq. meters of
ceramic tiles, out of a global production of 6400 million sq. meters during 2008-09.
State-of-the-art ceramic goods are being manufactured in the country and the technology
adopted by the Indian ceramic Industry is of international standard.

Capacity and Production

Sanitaryware is manufactured both in the large and small sector with variations in type,
range, quality and standard. At present there are 7 units with capacity of 86,500 tonne per
annum and, there are about 200 plants with a capacity of 50,000 tonne per annum in
small scale sector. The industry has a turn over of Rs. 400-500 crore. This industry has
been growing at the rate of about 5% per annum during the last 2 years. There is
significant export potential for sanitaryware. These are presently being exported to East
and West Asia, Africa, Europe and Canada. The exports were of the order of Rs.60 crore
during 2008-09. and small-scale sector. There are 16 units in the organized sector with a
total installed capacity of 43,000 tonnes per annum. In the small-scale sector, there are
about 1200 plants with a capacity of 3 lakh tonnes per annum. Majority of the production
of ceramics tableware is of bone china and stoneware. This industry in India is highly
labour intensive while in USA, UK, Japan and other countries there is full automation.
Quality of finished products, design and shapes in India are still below international
standards. The equipments are old and need to be updated to meet international standard.
The export of potteryware during 2008-09 was of the order of Rs. 85 crore.
 History of sanitary ware

Unlike body functions like dance, drama and songs, defecation is considered very lowly.
As a result very few scholars documented precisely the toilet habits of our predecessors.
The Nobel Prize winner for Medicine (1913) Charles Richet attributes this silence to the
disgust that arises from noxiousness and lack of usefulness of human waste. Others point
out that as sex organs are the same or nearer to the organs of defecation, these who dared
to write on toilet habits were dubbed either as erotic or as vulgar and, thus, despised in
academic and social circles. It was true for example of Urdu poets in India, English poets
in Britain and French poets in France. However, as the need to defecate is irrepressible,
so were some writers who despite social as well as academic stigma wrote on the subject
and gave us at least an idea in regard to toilet habits of human beings. Based on this
rudimentary information, one can say that development in civilization and sanitation have
been coterminous. The more developed was the society, the more sanitized it became and
vice versa.

Toilet is part of history of human hygiene which is a critical chapter in the history of
human civilization and which cannot be isolated to be accorded unimportant position in
history. Toilet is a critical link between order and disorder and between good and bad
environment.

In our own country i.e. India, how can any one ignore the subject of toilet when the
society is faced with human excretions of the order of 900 million litres of urine and 135
million kilograms of faucal matter per day with totally inadequate system of its collection
and disposal. The society, thus, has a constant threat of health hazards and epidemics. As
many as 600 out of 900 million people do open defecation. Sewerage facilities are
available to no more than 30 per cent of population in urban areas and only 3 per cent of
rural population has access to pour flush latrines.

Seeing this challenge, we think the subject of toilet is as important if not more than other
social challenges like literacy, poverty, education and employment. Rather subject of
toilet is more important because lack of excremental hygiene is a national health hazard
while in other problems the implications are relatively closer to only those who suffer
from unemployment, illiteracy and poverty. Thus the study of the history of toilet is an
important subject matter.

As long as man did not have an established abode, he did not have a toilet. He excreted
wherever he felt like doing so . When he learnt to have a fixed house, he moved toilet to
courtyard and then within his home. Once this was done, it became a challenge to deal
with smell and the need was felt to have a toilet which can intake human wastes and
dispose these out of the house instantly and, thus , help maintain cleanliness. Man tried
various ways to do so i.e. chamber pots, which were cleaned manually by the servants or
slaves, toilets protruding out of the top floor of the house or the castle and disposal of
wastes in the river below, or common toilets with holes on the top and flowing river or
stream underneath or just enter the river or stream and dispose of the waste of the human
body. While the rich used luxurious toilet chairs or cross stools, the poor defecated on the
roads, in the jungle or straight into the river.

It was only in the 16th century that a technology breakthrough came about and which
helped the human beings to have clean toilets in houses. This breakthrough did not come
about easily and human race had to live in sanitary conditions for thousands of years.

Historical Evolution:

The perusal of literature brings home the fact that we have only fragmentary information
on the subject of toilet as a private secluded place to help the body relieve its waste.
Sitting type toilets in human history appeared quite early. In the remains of Harappa
civilization in India, at a place called Lothar ( 62 Kilometers from the city of Ahmedabad
in Western India ) and in the year 2500 BC, the people had water borne toilets in each
house and which were linked with drains covered with burnt clay bricks. To facilitate
operations and maintenance, it had man-hole covers, chambers etc. It was the finest form
of sanitary engineering. But with the decline of Indus valley civilization, the science of
sanitary engineering disappeared from India. From then on , the toilets in India remained
primitive and open defection became rampant.

The archaeological excavations confirm existence of sitting type toilets in Egypt (2100
BC) also. Though we have been able to mechanize the working of these toilets, the form
and basic format of the toilet system remains the same. In Rome, public bath-cum-toilets
were also well developed. There were holes in the floor and beneath was a flowing water.
When the Romans travelled they constructed the toilets for their use. The stools were
key-hole type so that these could be used for defecation as well as urination. Excavations
in Sri Lanka and Thailand too have brought out a contraption in which urine was
separated and allowed to flow while the other portion was used at the same time for
defecation.

Historical evidence exists that Greeks relieved themselves out of the houses. There was
no shyness in use of toilet. It was frequent to see at dinner parties in Rome, slaves
bringing in urine pots made of silver; while members of the royalty used it but continued
to play at the same time. Whatever little information is available about history of toilets
in India, it was quite primitive. This practice of covering waste with earth continued till
the Mughal era , where in the forts of Delhi and Agra one can see remnants of such
methodologies to dispose of human waste.

Between the period 500 to 1500 AD was a dark age from the point of view of human
hygiene. It was an era of cess pools and human excreta all around. Rich man's housing
and forts in India had protrusions in which defecation was done and the excrements fell
into the open ground or the river below. The forts of Jaiselmer in India and big houses on
the banks of rivers bear testimony to this fact. In Europe, it was an era of chamber pots,
cess pools and cross stools. So were the toilets protruding out of the castles and the
excrements from which fell into the river.

SANITARYWARE INDUSTRY IN INDIA:

India is a large, highly populated Country of around one billion people, with an economy,
which is steadily growing. As per the study, there were an estimated 125 million
dwellings in India (1995), but 200 million households. This reveals an acute housing
shortage. The U.N. predicts an increase in the population of 1.6% per annum. There is a
gradual migrant shift from rural to urban areas and 27% of the population now lives in
urban areas as compared to 20% in 1971. There is a large difference in amenities between
the urban population and the rural. In 1994, 70% of the urban population had access to
adequate sanitation, whereas in the rural community only 14% had access.

In 1991, approximately 64% of urban households had some kind of toilet facility
compared with 9% of the rural areas. There is a widening difference in income between
different regions, the rich and the poor.

Sanitation is a must for every individual of our society. According to the Government
estimates, more than 50% of the urban population does not access to sanitation facilities.
Condition of the rural areas abysmal that only 6% of the populations are covered by
sanitation.

Population Covered by Sanitation Facilities

year Rural Urban

1985 0.7% 28.4%
1990 2.4% 45.9%
1997 6.4% 49.3%
2009 26.7% 67.3%

Sanitary ware demand:

Sanitary ware Industries in India for the last 6-7 years has shown very dramatic growth
with major players doubling their production capacity. The Companies have also
upgraded their manufacturing system by introducing Battery Casting, Beam Casting and
have gone in for latest imported Fast Firing Cycle Kiln Technology. These Companies
have also upgraded their quality and have introduced high value range in the market,
which has been accepted and appreciated. The demand for high value sanitary ware in
India is growing very fast. The Companies are trying to meet the demand as the
realization per Metric Ton for high value product is very good which ultimately results in
good profitability. In order to educate the customers in India to go for quality products
and also for higher value sanitary wares, companies have adopted a very aggressive
advertisement campaign. Companies have also strengthened their dealer network by
offering showroom incentives and some of the companies have also gone for their own
retail outlets in major towns. The demand for Sanitary wares in India is growing @ 15%
-17% every year.

The sanitary ware industry in India is divided in two sectors:-

1) organized
2) unorganized

1) The organized sector consisting of 5 companies (M/s. Hindustan Sanitary

Industries Limited, M/s. Parryware roca, M/s. Swastik Sanitarywares Limited,
M/s. Madhusudan Ceramics, M/s. Neycer India Limited), manufacturing
sanitaryware for the last 15-20 years and have established their Brand image. The
organized sectors produce fully vitrified sanitary wares, using latest technology
and best of Ceramic Raw Materials available in India.
2) The unorganized sectors have adopted local Indian technology to manufacture the
basic sanitary ware products. Since the availability of raw material is in
abundance and also very cheap in the state of Gujarat & Rajasthan, various
companies have established their factory in these areas. They are producing the
basic sanitary ware in various brands. Unorganized sector's percentage of
production capacity and also their sales in the local domestic market are higher
than that of the organized sectors' sales. Unorganized sanitary ware manufacturer
comes under small sectors and hence enjoy the benefit of Nil Excise Duty and
Sales Tax and hence they sell their products in the domestic market approximately
70% cheaper than the organized sector products.

Government of India Policy on Housing Sector is very encouraging. The Government has
announced Income Tax rebate on housing loan to boost the housing sector. All financial
institutions are lending money for construction of house at a very low rate of interest.
Government figure shows that Housing Sector is growing by approximately 25% every
year. The need of Housing in India with 100 crores population looks to be very potential.
As per DGTD Survey Report there is a shortage of about 20 million houses in the country
by the end of 8th Five Year Plan. The housing has become a basic necessity, as people in
India are looking forward for improved sanitary condition. The concept of making toilet
is fast growing even in village areas, where toilet till last two years did not exist.
Demand Estimates:

The total demand for sanitary ware in India for the organized manufacturers is at present
approximately 90,000 M.T. per annum. The region wise demand pattern can be estimated
as follows:

NORTH 18000
SOUTH 32000
EAST 15000
WEST 15000
TOTAL 90000

Note: Every year the above demand is expected to grow by 15 to 17%.

Current Market Size:

The Indian Sanitary ware market is worth around 1500 crores for the year 2008-09 with
an annual market size of around 13 million pieces. This represents a yearly growth rate of
about 3-4%.

Major players:
Until the mid 1940s the only sanitary ware available in India was imported mainly from
UK and was used only in upper class residences in major cities. The first sanitary ware
manufactured in India was by M/s. Parasuram Pottery Works. In the 1960s, companies
like EID Parry, in collaboration with Royal Doulton of UK and Hindustan Sanitary ware
in collaboration with Twyford of UK, started production of Vitreous China Sanitary
ware. Other major players who joined the organized sector were Madhusudan Ceramics
and Neyveli Ceramics. In the 1980s, 7-8 other players had entered the organized sector,
but most of them have since been taken over by the majors.

The large foreign players like American Standard, Toto, Villeroy and Boch have also set
up distribution channels in India.

In addition to the branded products made by the above companies, there are a large
number of small-scale units mainly in Thangad and Morbi districts of Gujarat.
Concerns:
It has been observed that many sanitary ware manufacturers in the small-scale sector do
not manufacture ceramic sanitary ware to standard quality norms. Moreover some of
these manufacturers use the word "Vitreous" along with their brand name whereas they
do not meet the water absorption standards and thereby are misleading the consumers. .

Outlook for Sanitary ware Industry in India:

In the next decade, India is expected to be one of the world's fastest growing countries for
sanitary ware consumption. The sanitation penetration has more from 8% in 1982 to 18%
in 1994 and to 29% in 1999 and to 49% in 2009.

The comparative penetration levels in neighboring countries are as follows: Pakistan:

50%, Sri Lanka: 65%, Malaysia: 94% and Thailand: 96%.

The government impetus to improve hygiene and sanitation is likely to increase the
demand for sanitary ware in India. Moreover the increasing urbanization of India and the
consequent requirement for residential and commercial buildings will be a major driver
for growth of sanitary ware. Along with this the focus of the central and state
governments to provide housing facilities to the poor, is also expected to generate
demand.

The National Housing Policy formulation that envisages "Housing for all" by the end of
Ninth Plan period is a big step towards this. Indira Awaas Yojana, Samgra Awaas Yojana
are programs for providing housing to the rural poor is a key step taken by the
government in this area. The housing development organizations like HUDCO, State
Housing Development Boards and Rajiv Gandhi Rural Housing Corporation Ltd. are also
playing a large role in this initiative.

It is estimated that there is currently a demand for 20 million housing units in India.
Further, a significant number of the 115 million housing units across the country will
need reconstruction for improvement. Therefore a replacement market will emerge,
though currently original equipment sanitary ware market accounts for nearly 90% of the
market.
SANITARYWARE INDUSTRY STATISTICS:

1. World production: 187 Million pieces

2. India's Share: 6.7 Million pieces.

3. World ranking (in production): not in the Top 10 (India A/c for 3.30%)

4. Global Industry Growth Rate: 5-7%

5. Growth Rate (India Domestic Market): 10%

6. Organized sector:
% Share of Production: 43%
No. of units: 6
Production Capacity: 103300 M.T. per annum
Actual Production: 95000 M.T. per annum

7. Unorganized sector:
% Share of Production: 57%
Production Capacity: 136700 M.T. per annum
Actual Production: 120000 M.T. per annum
Learning Objectives
 1. Prepare and interpret financial statements in comparative and common-
size form.

2. Compute and interpret financial ratios that would be most useful to a

common stock holder.

3. Compute and interpret financial ratios that would be most useful to a

short-term creditor

4. Compute and interpret financial ratios that would be most useful to long
-term creditors.

SCOPE OF THE STUDY:

• To carry out a critical analysis of NEYCER INDIA LTD financial statement
analysis.

• To find out the opportunity to capture greater market share.

• To find out the areas of weakness in the existing financial system

holding.

Financial statement analysis is defined as the process of identifying

financial strengths and weaknesses of the firm by properly establishing
relationship between the items of the balance sheet and the profit and loss
account.

There are various methods or techniques that are used in analyzing

financial statements, such as comparative statements, schedule of changes in
working capital, common size percentages, funds analysis, trend analysis, and
ratios analysis.

Financial statements are prepared to meet external reporting obligations

and also for decision making purposes. They play a dominant role in setting the
framework of 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.

Section I.1 Tools and Techniques of Financial Statement Analysis:

Following are the most important tools and techniques of financial statement
analysis:

1. Horizontal and Vertical Analysis

2. Ratios Analysis

Horizontal Analysis or Trend Analysis:

Comparison of two or more year's financial data is known as horizontal

analysis, or trend analysis. Horizontal analysis is facilitated by showing changes
between years in both dollar and percentage form.

Trend Percentage:

Horizontal analysis of financial statements can also be carried out by computing

trend percentages. Trend percentage states several years' financial data in terms
of a base year. The base year equals 100%, with all other years stated in some
percentage of this base.
 Horizontal Analysis of Profit & Loss Account

Vertical Analysis:

Vertical analysis is the procedure of preparing and presenting common

size statements. Common size statement is one that shows the items
appearing on it in percentage form as well as in dollar form. Each item is stated
as a percentage of some total of which that item is a part. Key financial changes
and trends can be highlighted by the use of common size statements.
 RATIO ANALYSIS:
Fundamental Analysis has a very broad scope. One aspect looks at the general
(qualitative) factors of a company. The other side considers tangible and
measurable factors (quantitative). This means crunching and analyzing numbers
from the financial statements. If used in conjunction with other methods,
quantitative analysis can produce excellent results. Ratio analysis isn't just
comparing different numbers from the balance sheet, income statement, and
cash flow statement. It's comparing the number against previous years, other
companies, the industry, or even the economy in general. Ratios look at the
relationships between individual values and relate them to how a company has
performed in the past, and might perform in the future.

MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a mathematical

yardstick that measures the relationship two figures, which are related to each
other and mutually interdependent. Ratio is express by dividing one figure by the
other related figure. Thus a ratio is an expression relating one number to another.
It is simply the quotient of two numbers. It can be expressed as a fraction or as a
decimal or as a pure ratio or in absolute figures as “so many times”. As
accounting ratio is an expression relating two figures or accounts or two sets of
account heads or group contain in the financial statements

MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of items or

group of items in the financial statement are computed, determined and
presented. Ratio analysis is an attempt to derive quantitative measure or guides
concerning the financial health and profitability of business enterprises. Ratio
analysis can be used both in trend and static analysis. There are several ratios at
the disposal of an annalist but their group of ratio he would prefer depends on the
purpose and the objective of analysis. While a detailed explanation of ratio
analysis is beyond the scope of this section, we will focus on a technique, which
is easy to use. It can provide you with a valuable investment analysis tool. This
technique is called cross-sectional analysis. Cross-sectional analysis
compares financial ratios of several companies from the same industry. Ratio
analysis can provide valuable information about a company's financial health.
A financial ratio measures a company's performance in a specific area. A
company whose leverage ratio is higher than a competitor's has more debt per
equity. You can use this information to make a judgment as to which company is
a better investment risk. However, you must be careful not to place too much
importance on one ratio. You obtain a better indication of the direction in which a
company is moving when several ratios are taken as a group.
OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business organization-

A) Solvency-
1) Long term
2) Short term
3) Immediate
B) Stability
C) Profitability
D) Operational efficiency
E) Credit standing
F) Structural analysis
G) Effective utilization of resources
H) Leverage or external financing

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1] Calculation of ratio
2] Comparing the ratio with some predetermined standards.
The standard ratio may be the past ratio of the same firm or industry’s average
ratio or a projected ratio or the ratio of the most successful firm in the industry. In
interpreting the ratio of a particular firm, the analyst cannot reach any fruitful
conclusion unless the calculated ratio is compared with some predetermined
standard. The importance of a correct standard is oblivious as the conclusion is
going to be based on the standard itself.
TYPES OF COMPARISONS
The ratio can be compared in three different ways –

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare them
with the ratio or ratios of some other selected firm in the same industry at the
same point of time. So it involves the comparison of two or more firm’s financial
ratio at the same point of time. The cross section analysis helps the analyst to
find out as to how a particular firm has performed in relation to its competitors.
The firm’s performance may be compared with the performance of the leader in
the industry in order to uncover the major operational inefficiencies. The cross
section analysis is easy to be undertaken as most of the data required for this
may be available in financial statement of the firm.

2] Time series analysis:

The analysis is called Time series analysis when the performance of a firm is
evaluated over a period of time. By comparing the present performance of a firm
with the performance of the same firm over the last few years, an assessment
can be made about the trend in progress of the firm, about the direction of
progress of the firm. Time series analysis helps to the firm to assess whether the
firm is approaching the long-term goals or not. The Time series analysis looks for
(1) Important trends in financial performance
(2) Shift in trend over the years
(3) Significant deviation if any from the other set of data.

3] Combined analysis:
If the cross section & time analysis, both are combined together to study the
behavior & pattern of ratio, then meaningful & comprehensive evaluation of the
performance of the firm can definitely be made. A trend of ratio of a firm
compared with the trend of the ratio of the standard firm can give good results.
For example, the ratio of operating expenses to net sales for firm may be higher
than the industry average however, over the years it has been declining for the
firm, whereas the industry average has not shown any significant changes.
PRE-REQUISITIES TO RATIO ANALYSIS
In order to use the ratio analysis as device to make purposeful conclusions, there
are certain pre-requisites, which must be taken care of. It may be noted that
these prerequisites are not conditions for calculations for meaningful conclusions.
The accounting figures are inactive in them & can be used for any ratio but
meaningful & correct interpretation & conclusion can be arrived at only if the
following points are well considered.

1) The dates of different financial statements from where data is taken must be
same.

2) If possible, only audited financial statements should be considered, otherwise

there must be sufficient evidence that the data is correct.

3) Accounting policies followed by different firms must be same in case of cross

section analysis otherwise the results of the ratio analysis would be distorted.

4) One ratio may not throw light on any performance of the firm. Therefore, a
group of ratios must be preferred. This will be conductive to counter checks.

5) Last but not least, the analyst must find out that the two figures being used to
calculate a ratio must be related to each other, otherwise there is no purpose of
calculating a ratio

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from

financial statements. Figures may be taken from Balance Sheet, P& P A/C, or
both. One-way of classification of ratios is based upon the sources from which
are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called Balance
Sheet Ratios E.g. ratio of current assets to current liabilities or ratio of debt to
equity. While calculating these ratios, there is no need to refer to the Revenue
statement. These ratios study the relationship between the assets & the
liabilities, of the concern. These ratios help to judge the liquidity, solvency &
capital structure of the concern. Balance sheet ratios are Current ratio, Liquid
ratio, and Proprietary ratio, Capital gearing ratio, Debt equity ratio, and Stock
working capital ratio.
2] Revenue ratio:

Ratio based on the figures from the revenue statement is called revenue
statement ratios. These ratios study the relationship between the profitability &
the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio,
Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover ratio.

3] Composite ratio:

These ratios indicate the relationship between two items, of which one is found in
the balance sheet & other in revenue statement. There are two types of
composite ratios:
Investments of the concern. E.g. return on capital employed, return on
proprietors fund, return on equity capital etc.
b) Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios,
dividend payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in to liquidity

ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios.

1] Liquidity ratios:

It shows the relationship between the current assets & current liabilities of the
concern e.g. liquid ratios & current ratios.

2] Leverage ratios:

It shows the relationship between proprietors funds & debts used in financing the
assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietary
ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known as
Turnover ratios & productivity ratios e.g. stock turnover ratios, debtor’s turnover
ratios.

4] Profitability ratios:

a) It shows the relationship between profits & sales e.g. operating ratios, gross
profit ratios, operating net profit ratios, expenses ratios
b) It shows the relationship between profit & investment e.g. return on
investment, return on equity capital.
5] Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of the
outsiders to be paid out of such profit e.g. dividend payout ratios & debt service
ratios.

BASED ON USER:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3] Ratios for management:

Return on capital employed, turnover ratios, operating ratios, expenses ratios

4] Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios
LIQUIDITY RATIO: -

Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year)
obligations. The ratios, which indicate the liquidity of a company, are Current
ratio, Quick/Acid-Test ratio. These ratios are discussed below:
(a) CURRENT RATIO:

Current ratio may be defined as the relationship between current assets and
current liabilities. This ratio also known as Working capital ratio is a measure of
general liquidity and is most widely used to make the analysis of a short-term
financial position (or) liquidity of a firm.

2009 2008 2007

current assets 213,872,627.50 166,335,137.90 131,176,557.55
current liabilities 165,468,787.68 124,300,967.17 65,897,010.96
current ratio 1.29 1.34 1.99
Interpretations:

The current ratio is a financial ratio that measures whether or not a firm has
enough resources to pay its debts over the next 12 months. It compares a firm's
current assets to its current liabilities. The current ratio is an indication of a firm's
market liquidity and ability to meet creditor's demands. Acceptable current ratios
vary from industry to industry but the conventional rule is 2:1.If a company's
current assets are in this range then it is generally considered to have good
short-term financial strength.

(b) QUICK RATIO

Quick ratio is a test of liquidity than the current ratio. The term liquidity refers to
the ability of a firm to pay its short-term obligations as & when they become due.
Quick ratio may be defined as the relationship between quick or liquid assets and
current liabilities. An asset is said to be liquid if it is converted into cash with in a
short period without loss of value.

Quick ratio= quick or liquid assets

Current liabilities

Current liabilities
2009 2008 2007
quick assets 165,481,425.46 128,376,787.24 96,040,203.74
current 165,468,787.68 124,300,967.17 65,897,010.96
liabilities
quick ratio 1 1.03 1.45
Interpretations:
In finance, the Acid-test or quick ratio or liquid ratio measures the ability of a
company to use its near cash or quick assets to immediately extinguish or retire
its current liabilities. Quick assets include those current assets that presumably
can be quickly converted to cash at close to their book values. Generally, the
acid test ratio should be 1:1 or better; however this varies widely by industry.
Here in the last three years leaving 2006-2007, industry has maintained its ratio
near to the rule of thumb but the basic reason for the increase in the ratio is that
the current liabilities are not more quickly convertible into current assets
ACTIVITY RATIOS

Funds are invested in various assets in business to make sales and earn profits.
The efficiency with which assets are managed directly effect the volume of sales.
Activity ratios measure the efficiency (or) effectiveness with which a firm
manages its resources (or) assets. These ratios are also called “Turn over ratios”
because they indicate the speed with which assets are converted or turned over
into sales.

· Working capital turnover ratio

· Fixed assets turnover ratio
· Capital turnover ratio
· Current assets to fixed assets ratio

(a) WORKING CAPITAL TURNOVER RATIO

Working capital of a concern is directly related to sales

Working capital= current assets –current liabilities
It indicates the velocity of the utilization of net working capital. This indicates the
no. of times the working capital is turned over in the course of a year. A higher
ratio indicates efficient utilization of working capital and a lower ratio indicates
inefficient utilization.
Working capital turnover ratio=cost of goods sold/working capital.

2009 2008 2007

cost of good sold 956,597,583.37 784,095,590.36 605,748,315.99
working capital 48,403,839.82 42,034,170.73 65,279,546.59
working capital ratio 19.76284499 18.65376613 9.279297232
 Interpretation
Income from services is greatly increased due to the extra invoice for Operations
& Maintenance fee and the working capital is also increased greater due to the
increase in from services because the huge increase in current assets. The
income from services is raised and the current assets are also raised together
resulted in the decrease of the ratio of 2007 compared with 2006.

(b) FIXED ASSETS TURNOVER RATIO

It is also known as sales to fixed assets ratio. This ratio measures the efficiency
and profit earning capacity of the firm. Higher the ratio, greater is the intensive
utilization of fixed assets. Lower ratio means under-utilization of fixed assets.

Fixed assets turnover ratio= cost of sales

Fixed assets

2009 2008 2007

cost of sales 1,162,962,825.12 945,808,364.75 719,242,057.42
fixed assets 366,895,818.80 316,532,852.68 283,774,550.38
fixed assets turnover ratio 3.169735837 2.988025909 2.534554478
Interpretation
Fixed assets are used in the business for producing the goods to be sold. This
ratio shows the firm’s ability in generating sales from all financial resources
committed to total assets. The ratio indicates the account of one rupee
investment in fixed assets. The income from services is increased in the current
year due to the increase in the Operations & Maintenance fee due to the
increase in extra invoice and the net fixed assets are reduced because of the
charge of depreciation. Finally, that affected a slight increase in the ratio
compared with the previous year’s ratio
(c) CAPITAL TURNOVER RATIOS

Sometimes the efficiency and effectiveness of the operations are judged by

comparing the cost of sales or sales with amount of capital invested in the
business and not with assets held in the business, though in both cases the
same result is expected. Capital invested in the business may be classified as
long-term and short-term capital or as fixed capital and working capital or Owned
Capital and Loaned Capital. All Capital Turnovers are calculated to study the
uses of various types of capital.

Capital turnover ratio= cost of good sold

Capital employed

2009 2008 2007

cost of god sold 956,597,583.37 784,095,590.36 605,748,315.99
share holder fund 271,027,820.28 229,348,314.43 200,223,726.47
capital turnover ratio 3.529518049 3.418798138 3.025357317
Interpretation
This is another ratio to judge the efficiency and effectiveness of the company like
profitability ratio. The income from services is increased in 2008 year compared
with the 2007 year and the total capital employed includes capital and reserves &
surplus. Due to huge increase in the net profit the capital employed is also
increased along with income from services. Both are affected in the increment of
the ratio of current year.

(d) CURRENT ASSETS TO FIXED ASSETS RATIO

This ratio differs from industry to industry. The increase in the ratio means that
trading is slack or mechanization has been used. A decline in the ratio means
that debtors and stocks are increased too much or fixed assets are more
intensively used. If current assets increase with the corresponding increase in
profit, it will show that the business is expanding.

Current assets to fixed assets ratio= current assets

Fixed assets

2009 2008 2007

current assets 213,872,627.50 166,335,137.90 131,176,557.55
fixed assets 366,895,818.80 316,532,852.68 283,774,550.38
current assets to fixed 0.582924679 0.525490913 0.462256243
assets ratio
Interpretation
Current assets are increased due to the increase in the sundry debtors and the
net fixed assets of the firm are decreased due to the charge of depreciation and
there is no major increment in the fixed assets. The increment in current assets
and the decrease in fixed assets result an increase in the ratio compared with the
previous year

Times interest earned ratio

Interest Charges = traditionally "charges" refers to interest expense found on the

income statement.

Times Interest Earned or Interest Coverage is a great tool when

measuring a company's ability to meet its debt obligations. When the interest
coverage ratio is smaller than 1, the company is not generating enough cash
from its operations EBIT to meet its interest obligations. The Company would
then have to either use cash on hand to make up the difference or borrow funds.
Typically it is a warning sign when interest coverage falls below 2.5 xs.

Times interest earned ratio= earning before interest and tax

Interest expenses

2009 2008 2007

Interest 3,209,915.88 6,928,453.76 8,279,943.34
Ebit 68,863,649.30 53,688,291.53 32,864,165.44
interest coverage ratio 58.54959521 21.50856843 9.533360164

Interpretation
The ideal ratio is 6. This Ratio indicates whether a business is earning sufficient
profits to pay the interest charges. This ratio is not satisfactory and company
should increase the sales and profits, to pay the interest charges for the long
term debts.
PROFITABILITY

These ratios help measure the profitability of a firm. A firm, which generates a
substantial amount of profits per rupee of sales, can comfortably meet its
operating expenses and provide more returns to its shareholders. The
relationship between profit and sales is measured by profitability ratios. There are
two types of profitability ratios: Gross Profit Margin and Net Profit Margin.

(a) NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit (after tax) and sales
and indicates the efficiency of the management in manufacturing, selling
administrative and other activities of the firm.
2009 2008 2007
net profit 41679505.85 29124587.96 11525457.19
Sales 1162962825 945808364.8 719242057.4
net profit ratio 3.583906979 3.07933288 1.602444834
Interpretation
The net profit ratio is the overall measure of the firm’s ability to turn each rupee of
income from services in net profit. If the net margin is inadequate the firm will fail
to achieve return on shareholder’s funds. High net profit ratio will help the firm
service in the fall of income from services, rise in cost of production or declining
demand. The net profit is increased because the income from services is
increased. The increment results a slight increase in 2009 ratio compared with
the year 2008.

GROSS PROFIT RATIO:-

Meaning: This ratio measures the relationship between gross profit and sales. It
is defined as the excess of the net sales over cost of goods sold or excess of
revenue over cost. This ratio shows the profit that remains after the
manufacturing costs have been met. It measures the efficiency of production as
well as pricing. This ratio helps to judge how efficient the concern is I managing
its production, purchase, selling & inventory, how good its control is over the
direct cost, how productive the concern , how much amount is left to meet other
expenses & earn net profit.

Gp ratio=Earnings before interest & taxes

Sales

2009 2008 2007

operating profit 187939275.4 149021121.8 78935682
Sales 1,162,962,825.12 945,808,364.75 719,242,057.42
operating profit ratio 16.16038547 15.75595304 10.97484236
Interpretation:
The profitability position of the company is satisfactory because of the Gross
profit ratio is satisfactory because of the Gross profit ratio is increasing from year
to year but it is not enough the company should control the cost of goods sold the
company should control the cost of goods sold expenses and increase the sales.

FINANCIAL
These ratios determine how quickly certain current assets can be converted into
cash. They are also called efficiency ratios or asset utilization ratios as they
measure the efficiency of a firm in managing assets. These ratios are based on
the relationship between the level of activity represented by sales or cost of
goods sold and levels of investment in various assets. The important turnover
ratios are debtors turnover ratio, average collection period, inventory/stock
turnover ratio, fixed assets turnover ratio, and total assets turnover ratio. These
are described below:
Debtor’s turnover ratio is calculated by taking the year-end accounts receivable
divided by the average net sales per day. This indicates the average number of
days that sales are outstanding. In other words, it reports the number of days it
takes, on average, to collect credit sales. The average collection period
measures the days of financing that a company extends to its customers.
Obviously, a shorter average collection period is usually preferred to a longer
one.
Another measure that can be used to provide this same information is the
receivables turnover. If the receivables turnover is six, this means the average
collection period is about 2 months (12 months divided by the turnover ratio of 6).
If the turnover is four times, the firm has an average collection period of about 3
months (12 months divided by the turnover ratio of four).
2009 2008 2007
Debtors 22,751,126.52 20,356,414.89 14,165,366.45
Sales 1,162,962,825.12 945,808,364.75 719,242,057.42
avg. collection period 7.140521606 7.855810661 7.188621273

Debtors turnover ratio=credit sales

Avg debtors

Average age of account receivable=months in a year

Debtor’s turnover ratio
Interpretation:
Debtor turnover ratio indicates the velocity of debts collection of a firm. In simple
words it indicates the number of times averaged debtors (receivable) are turned
over during a year. Generally higher the value of the debtors the turnover is more
efficient and better is the management of the company repayment period. In
2006-2007, the ratio was 7.18 times but it keeps on increasing over the years
and in 2007-2008 this was 7.85 times of sales. So, proper attention should be
taken over this area.

INVENTORY OR STOCK TURNOVER RATIO (ITR)

ITR refers to the number of times the inventory is sold and replaced during the
accounting period.

Stock Turnover Ratio = COGS

Average stock

ITR reflects the efficiency of inventory management. The higher the ratio, the
more efficient is the management of inventories, and vice versa. However, a high
inventory turnover may also result from a low level of inventory, which may lead
to frequent stock outs and loss of sales and customer goodwill. For calculating
ITR, the average of inventories at the beginning and the end of the year is taken.
 2009 2008 2007
Inventory 48,391,202.04 37,958,350.66 35,136,353.81
COGS 956,597,583.37 784,095,590.36 605,748,315.99
ITR 19.76800623 20.65673499 17.23993102

Interpretation
Stock turnover ratio shows the relationship between the stock & sales it means
how stock turned over in sales. By seeing in year 2008 the ratio increase means
that the stock turned in very slow manner. But after 2008 the ratio has improved
and the stock turned into sales very quickly.

FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed assets. It
is also known as sales to fixed assets ratio. This ratio measures the efficiency
and profit earning capacity of the firm. Higher the ratio, greater is the intensive
utilization of fixed assets. Lower ratio means under-utilization of fixed assets

Fixed assets turnover = Net sales

Net fixed assets
 2009 2008 2007
Cost of sales 1,162,962,825.12 945,808,364.75 719,242,057.42
Fixed assets 366,895,818.80 316,532,852.68 283,774,550.38
Fixed assets turnover 3.169735837 2.988025909 2.534554478
ratio

Interpretation:
The ideal ratio is 5. The ratio is increasing from year to year which is a good sign
but at a slower rate and we should increase the sales up to the maximum level
and we should use the fixed assets up to full 100% capacity. This ratio measures
the efficiency with which fixed assets are employed. A high ratio indicates a high
degree of efficiency in asset utilization while a low ratio reflects an inefficient use
of assets. However, this ratio should be used with caution because when the
fixed assets of a firm are old and substantially depreciated, the fixed assets
turnover ratio tends to be high (because the denominator of the ratio is very low).
(a) PROPRIETORY RATIO
A variant to the debt-equity ratio is the proprietary ratio which is also known as
equity ratio. This ratio establishes relationship between share holder’s funds to
total assets of the firm.

Proprietary ratio= share holder fund

Total assets

2009 2008 2007

Shareholder fund 271,027,820.28 229,348,314.43 200,223,726.47
Total assets 3,037,099,011.87 2,493,353,442.25 1,914,072,219.56
Proprietary ratio 0.089239047 0.091983876 0.10460615

Interpretation
The proprietary ratio establishes the relationship between shareholders funds to
total assets. It determines the long-term solvency of the firm The reserves and
surplus is increased due to the increase in balance in profit and loss account,
which is caused by the increase of income from services. Total assets, includes
fixed and current assets. The fixed assets are reduced because of the
depreciation and there are no major increments in the fixed assets.
STOCK WORKING CAPITAL RATIO:

This ratio shows the relationship between the closing stock & the working capital.
It helps to judge the quantum of inventories in relation to the working capital of
the business. The purpose of this ratio is to show the extent to which working
capital is blocked in inventories. The ratio highlights the predominance of stocks
in the current financial position of the company. It is expressed as a percentage.

Stock working capital ratio = Stock

Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition &
quality of the working capital. This ratio also helps to study the solvency of a
concern. It is a qualitative test of solvency. It shows the extent of funds blocked in
stock. If investment in stock is higher it means that the amount of liquid assets is
lower.
2009 2008 2007
Inventory 48,391,202.04 37,958,350.66 35,136,353.81
Working 48,403,839.82 42,034,170.73 65,279,546.59
capital
Stwr 0.99973891 0.903035554 0.538244452
Interpretation:

Debt to equity ratio

Shows a firm’s total debt in relation to the total rupees amount owners have
invested in the firm. The debt-to-equity ratio (D/E) is a financial ratio indicating
the relative proportion of shareholder equity and debt used to finance a
company's assets. Closely related to leveraging, the ratio is also known as Risk,
Gearing or Leverage. The two components are often taken from the firm's
balance sheet or statement of financial position (so-called book value), but the
ratio may also be calculated using market values for both, if the company's debt
and equity are publicly traded, or using a combination of book value for debt and
market value for equity financially.

Debt to equity ratio= total debt

Total equity

2009 2008 2007

Long term funds 110,333,601.35 99,393,387.99 121,745,108.13
Equity 271,027,820.28 229,348,314.43 200,223,726.47
Debt to equity 0.407093269 0.433373091 0.608045361
Interpretation
The debt to equity ratio is important tool of financial analysis to appraise the
financial structure if the company. It express the relation between the internal and
external equities .this ratio is very important from the point of view of creditors
and owners. The ratio is good which shows the sound structure of the company.

CREDITORS TURNOVER RATIO:

It is same as debtor’s turnover ratio. It shows the speed at which payments are
made to the supplier for purchase made from them. It is a relation between net
credit purchase and average creditors.

Credit turnover ratio = net credit purchase

Average creditors

Average age of accounts payable=months in a year

Creditor’s turnover ratio
Both the ratios indicate promptness in payment of creditor purchases. Higher
creditors turnover ratio or a lower credit period enjoyed signifies that the creditors
are being paid promptly.. A very low ratio indicates that the company is not taking
full benefit of the credit period allowed by the creditors.

2009 2008 2007

Creditors 119,075,626.13 95,332,830.28 46,071,516.56
Sales 1,162,962,825.12 945,808,364.75 719,242,057.42
Avg. payment period 37.37230683 36.79020439 23.38031178

Interpretation:
The creditor turnover ratio shows the relationship between the credit purchase
and average trade creditors. It shows the speed at which the payment is done to
the creditors for the purchase made from them. The days are increasing while
making payment that sounds good because the company having money in the
bank for some more days.
(b) RETURN ON TOTAL ASSETS

Profitability can be measured in terms of relationship between net profit and

assets. This ratio is also known as profit-to-assets ratio. It measures the
profitability of investments. The overall profitability can be known.

Return on assets= Net profit

Total assets

2009 2008 2007

Net profit 41679505.85 29124587.96 11525457.19
Total 3,037,099,011.87 2,493,353,442.25 1,914,072,219.56
assets
ROA 0.01372346 0.01168089 0.006021433

Interpretation:
This is the ratio between net profit and total assets. The ratio indicates the return
on total assets in the form of profits. The net profit is increased in the current year
because of the increment in the income from services due to the increase in
Operations & Maintenance fee. The fixed assets are reduced due to the charge
of depreciation and no major increments in fixed assets but the current assets
are increased because of sundry debtors and that affects an increase in the ratio
compared with the last year i.e. 2007.

Return on equity

Return on Equity measures the rate of return on the ownership interest

shareholders' equity of the common stock owners. It measures a firm's efficiency
at generating profits from every unit of shareholders' equity (also known as net
assets or assets minus liabilities). ROE shows how well a company uses
investment funds to generate earnings growth.

2009 2008 2007

Net profit 41679505.85 29124587.96 11525457.19
Share capital 23,084,150.00 23,084,150.00 23,084,150.00
ROE 1.805546483 1.261670365 0.49928012
Interpretation:
This ratio shows the relationship between profit & equity shareholders fund in the
company. It is used by the present / prospective investor for deciding whether to
purchase, keep or sell the equity shares. The company is not listed in bse so the
difficulty of paying dividend is not there.

EARNINGS PER SHARE

Earnings per share is a small verification of return of equity and is calculated by
dividing the net profits earned by the company and those profits after taxes and
preference dividend by total no. of equity shares.

Eps= Earnings
No. of shares

The Earnings per share is a good measure of profitability when compared with
EPS of similar other components (or) companies, it gives a view of the
comparative earnings of a firm.

CREDITORS TURNOVER RATIO:

It is same as debtor’s turnover ratio. It shows the speed at which payments are
made to the supplier for purchase made from them. It is a relation between net
credit purchase and average creditors

Credit turnover ratio = Net credit purchase

Average creditors

Average age of accounts payable=Months in a year

Creditor’s turnover ratio
 2009 2008 2007
Creditors 119,075,626.13 95,332,830.28 46,071,516.56
Sales 1,162,962,825.12 945,808,364.75 719,242,057.42
Avg. account payable 37.37230683 36.79020439 23.38031178

Interpretation:
The creditor turnover ratio shows the relationship between the credit purchase
and average trade creditors. It shows the speed at which the payment is done to
the creditors for the purchase made from them. The days are increasing while
making payment that sounds good because the company having money in the
bank for some more days.
 DU PONT ANALYSIS

A type of analysis that examines a company's Return on Equity (ROE) by

breaking it into three main components: profit margin, asset turnover and
leverage factor. By breaking the ROE into distinct parts, investors can examine
how effectively a company is using equity, since poorly performing components
will drag down the overall figure. To calculate a firm's ROE through Du Pont
analysis, multiply the profit margin (net income divided by sales), asset turnover
(sales divided by assets) and leverage factor (total assets divided by
shareholders' equity) together. This assessment permits the financial analyst to
comprehend where greater or lower return is coming from in relation to other
firms in similar industries.

PRACTICAL APPLICATION

Since the end product is Return on Equity it makes sense to just skip to the end
and divide net income by total equity. The time pressed analyst might be easily
seduced into using such an expedient approach. However, the exercise of using
all the root components tells much about a company’s relative health that would
otherwise be missed if one looks at the highly distilled Return on Equity ratio.
Computation of the basic components over time provides insight into trends, both
ill and well. As Brown originally used the formula within the corporation it
had direct application within sales or purchasing departments as an explanation
of earned Return on Assets (ROA). It was also helpful in analyzing changes
over time, teaching employees how they have an impact on company results and
showing the impact of purchasing. Brown went on to use the formula for
evaluating the merits of prospective investments. The formula works as well
for financial investors as corporate investors. Had he lived long enough the
dynamite salesman might have been surprised to see his series of ratios become
the dominant analytical technique as the stocks of Nifty Fifty companies reached
a peak in the 1970s.
Formula
Return on equity = Profit margin x Assets turnover x equity multiplier
(Net income/Equity) = (Net income/Sales) x (Sales/Total assets)
X (Total assets/Equity)

2009 2008 2007

Net Income 41679505.85 29124587.96 11525457.19
Sales 1,162,962,825.12 945,808,364.75 719,242,057.42
Total Assets 3037099012 2493353442 1914072220
Share Holder Fund 271,027,820.28 229,348,314.43 200,223,726.47
Profit Margin 3.583906979 3.07933288 1.602444834
Assets Turnover 0.38291897 0.379331846 0.375765371
Equity Multiplier 11.21 10.87 9.56
DuPont Analysis 15.37831275 12.69884544 5.756289423

ROE = Net Income / Shareholder's Equity

Interpretation:
If this number goes up, it is generally a great sign for the company as it is
showing that the rate of return on the shareholders’ equity is going up. The
problem is that this number can also rise simply when the company takes on
more debt, thereby decreasing shareholder equity. This would increase the
leverage of the company, which could be a good thing, but it will also make the
stock more risky. Here the company increased there roe very effectively in year
2007 in compare to year 2008 and reached at 15 percent which is ideal
percentage in DuPont analysis.

IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management, ratios are of crucial significance. The

importance of ratio analysis lies in the fact that it presents facts on a comparative
basis & enables the drawing of interference regarding the performance of a firm.
Ratio analysis is relevant in assessing the performance of a firm in respect of the
following aspects:
1] Liquidity position,
2] Long-term solvency,
3] Operating efficiency,
4] Overall profitability,
5] Inter firm comparison
6] Trend analysis.

1] LIQUIDITY POSITION: -
With the help of Ratio analysis conclusion can be drawn regarding the liquidity
position of a firm. The liquidity position of a firm would be satisfactory if it is able
to meet its current obligation when they become due. A firm can be said to have
the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the
interest on its short maturing debt usually within a year as well as to repay the
principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratio is
particularly useful in credit analysis by bank & other suppliers of short term loans.

2] LONG TERM SOLVENCY: -

Ratio analysis is equally useful for assessing the long-term financial viability of a
firm. This respect of the financial position of a borrower is of concern to the long-
term creditors, security analyst & the present & potential owners of a business.
The long-term solvency is measured by the leverage/ capital structure &
profitability ratio analysis s that focus on earning power & operating efficiency.
Ratio analysis reveals the strength & weaknesses of a firm in this respect. The
leverage ratios, for instance, will indicate whether a firm has a reasonable
proportion of various sources of finance or if it is heavily loaded with debt in
which case its solvency is exposed to serious strain. Similarly the various
profitability ratios would reveal whether or not the firm is able to offer adequate
return to its owners consistent with the risk involved.
3] OPERATING EFFICIENCY:
Yet another dimension of the useful of the ratio analysis, relevant from the
viewpoint of management, is that it throws light on the degree of efficiency in
management & utilization of its assets. The various activity ratios measure this
kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate
analysis, dependent upon the sales revenues generated by the use of its assets-
total as well as its components.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial
position of a firm, the management is constantly concerned about overall
profitability of the enterprise. That is, they are concerned about the ability of the
firm to meets its short term as well as long term obligations to its creditors, to
ensure a reasonable return to its owners & secure optimum utilization of the
assets of the firm. This is possible if an integrated view is taken & all the ratios
are considered together

5] INTER – FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but also
serves as a stepping-stone to remedial measures. This is made possible due to
inter firm comparison & comparison with the industry averages. A single figure of
a particular ratio is meaningless unless it is related to some standard or norm.
One of the popular techniques is to compare the ratios of a firm with the industry
average. It should be reasonably expected that the performance of a firm should
be in broad conformity with that of the industry to which it belongs. An inter firm
comparison would demonstrate the firms position vice-versa its competitors. If
the results are at variance either with the industry average or with the
competitors, the firm can seek to identify the probable reasons & in light, take
remedial measures.

6] TREND ANALYSIS:
Finally, ratio analysis enables a firm to take the time dimension into account. In
other words, whether the financial position of a firm is improving or deteriorating
over the years. This is made possible by the use of trend analysis. The
significance of the trend analysis of ratio lies in the fact that the analysts can
know the direction of movement, that is, whether the movement is favorable or
unfavorable. For example, the ratio may be low as compared to the norm but the
trend may be upward. On the other hand, though the present level may be
satisfactory but the trend may be a declining one.
ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the identification of significant

accounting data relationships, which give the decision-maker insights into the
financial performance of a company. The advantages of ratio analysis can be
summarized as follows:

• Ratios facilitate conducting trend analysis, which is important for decision

making and forecasting.
• Ratio analysis helps in the assessment of the liquidity, operating
efficiency, profitability and solvency of a firm.
• Ratio analysis provides a basis for both intra-firm as well as inter-firm
comparisons.
• The comparison of actual ratios with base year ratios or standard ratios
helps the management analyze the financial performance of the firm.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below:

1] Information problems
• Ratios require quantitative information for analysis but it is not decisive
about analytical output. The figures in a set of accounts are likely to be at
least several months out of date, and so might not give a proper indication
of the company’s current financial position.
• Where historical cost convention is used, asset valuations in the balance
sheet could be misleading. Ratios based on this information will not be
very useful for decision-making.

2] Comparison of performance over time

• When comparing performance over time there is needed to consider the
changes in price. The movement in performance should be in line with the
changes in price.
• When comparing performance over time there is needed to consider the
changes in technology. The movement in performance should be in line
with the changes in technology.
• Changes in accounting policy may affect the comparison of results
between different accounting years as misleading.
3] Inter-firm comparison

• Companies may have different capital structures and to make comparison

of performance when one is all equity financed and another is a geared
company it may not be a good analysis.
• Selective applications of government incentives to various companies
may also distort inter company comparison. Comparing the performance
of two enterprises may be misleading.
• Inter-firm comparison may not be useful unless the firms compared are of
the same size and age, and employ similar production methods and
accounting practices.
• Even within a company, comparisons can be distorted by changes in the
price level.
• Ratios provide only quantitative information, not qualitative information.
• Ratios are calculated on the basis of past financial statements. They do
not indicate future trends and they do not consider economic conditions.

PURPOSE OF RATIO ANLYSIS:

• To identify aspects of a businesses performance to aid decision making

• Quantitative process – may need to be supplemented by qualitative
Factors to get a complete picture.
• 5 main areas:-

1) Liquidity – the ability of the firm to pay its way

2) Investment/shareholders – information to enable decisions to be
made on the extent of the risk and the earning potential of a
business investment
3) Gearing – information on the relationship between the exposures
of the business to loans as opposed to share capital
4) Profitability – how effective the firm is at generating profits given
sales and or its capital assets
5) Financial – the rate at which the company sells its stock and the
efficiency with which it uses its assets
ROLE OF RATIO ANALYSIS:
It is true that the technique of ratio analysis is not a creative technique in the
sense that it uses the same figure & information, which is already appearing in
the financial statement. At the same time, it is true that what can be achieved by
the technique of ratio analysis cannot be achieved by the mere preparation of
financial statement.
Ratio analysis helps to appraise the firm in terms of their profitability & efficiency
of performance, either individually or in relation to those of other firms in the
same industry. The process of this appraisal is not complete until the ratio so
computed can be compared with something, as the ratio all by them do not mean
anything. This comparison may be in the form of intra firm comparison, inter firm
comparison or comparison with standard ratios. Thus proper comparison of ratios
may reveal where a firm is placed as compared with earlier period or in
comparison with the other firms in the same industry. Ratio analysis is one of the
best possible techniques available to the management to impart the basic
functions like planning & control. As the future is closely related to the immediate
past, ratio calculated on the basis of historical financial statements may be of
good assistance to predict the future. Ratio analysis also helps to locate & point
out the various areas, which need the management attention in order to improve
the situation. As the ratio analysis is concerned with all the aspect of a firms
financial analysis i.e. liquidity, solvency, activity, profitability & overall
performance, it enables the interested persons to know the financial &
operational characteristics of an organization & take the suitable decision.

SUGGESTIONS:
• Advanced payment should be avoided. If at all advanced payments are
required, it should be against securities like banks, guarantee, etc.

•
SUMMARY OF FINANCIAL POSITION OF NEYCER INDIA LTD.

After going through the various ratios, I would like to state that:

• The short-term solvency of the company is quite satisfactory.

• Immediate solvency position of the company is also quite satisfactory. The
company can meet its urgent obligations immediately.
• Credit policies are effective.
• Over all profitability position of the company is quite satisfactory.
• Stock turnover rate is satisfactory. Stock of the company is moving fast in
the market.
• The Company is paying promptly to the suppliers.
• in du Pont analysis the ratio is at 15 which states the ratio are ideal and
company is strong enough in the market.
• Effective selling technique or product modification may be adopted to face
the competitors and to improve the financial position of the company by
taking appropriate decisions.

CONCLUSION:

The focus of financial analysis is on key figures contained in the financial

statements and the significant relationship that exits. The reliability and
significance attach to the ratios will largely on hinge upon the quality of data on
which they are best. They are as good for as bad as the data it self. Financial
ratios are a useful by product of financial statement and provide standardized
measures of firm’s financial position, profitability and riskiness. It is an important
and powerful tool in the hands of financial analyst.
By calculating one or other ratio or group of ratios he can analyze the
performance of a firm from the different point of view. The ratio analysis can help
in understanding the liquidity and short-term solvency of the firm, particularly for
the trade creditors and banks. Long-term solvency position as measured by
different debt ratios can help a debt investor or financial institutions to evaluate
the degree of financial risk. The operational efficiency of the firm in utilizing its
assets to generate profits can be assessed on the basis of different turnover
ratios. The profitability of the firm can be analyzed with the help of profitability
ratios.
However the ratio analyses suffer from different limitations also. The
ratios need not be taken for granted and accepted at face values. These ratios
are numerous and there are wide spread variations in the same measure. Ratios
generally do the work of diagnosing a problem only and failed to provide the
solution to the problem.
REFERENCES

TEXTS REFERRED

• I M Pandey, 2007. Financial Management. New Delhi: Vikas Publishing

House Pvt Ltd.

• S. David Young and Stephen F O’Brien, EVA and Value Based

Management – A Practical Guide to Implementation.

• SHASHI K. GUPTA & R. K. SHARMA, 2005. Management Accounting

Principles and Practice.

• BREALEY MYERS, 2003. Principles of Corporate Finance. New Delhi:

Tata McGraw Hill Publishing Co. Ltd.