RESEARCH METHODOLOGY

R e s e a r c h m e t h o d o l o g y i s a w a y t o s y s t e m a t i c a l l y s o l v e t h e r e s e a r c h probl
em. It may be understood as a science of studying how research is done scientifically. So, the
research methodology not only talks about the research methods but also considers the logic
behind the method used in the context of the research study.

6.1 Research Design:

Descriptive research is used in this study because it will ensure the minimization of bias and
maximization of reliability of data collected. The researcher had to use
facta n d i n f o r m a t i o n a l r e a d y a v a i l a b l e t h r o u g h f i n a n c i a l s t a t e m e n t s o f
e a r l i e r y e a r s a n d analyse these to make critical evaluation of the available material.
Hence by making the type of the research conducted to be both Descriptive and Analytical in
nature.
From the study, the type of data to be collected and the procedure to be used
for this purpose were decided.

6.2 Data Collection:

The required data for the study are basically secondary in nature and the data are collected
from the audited reports of the company.

6.2.1 Primary Data:

Primary data are those data, which is originally collected afresh. In this project,
Questionnaire Method and Interview Method has been used for gathering required information.

6.2.2 Sources of Data:

The sources of data are from the annual reports of the company from the
year 20013-20014 to 2015-2016.
6.3 Methods of Data Analysis:
The data collected were edited, classified and tabulated for analysis. The
analytical tools used in this study.
6.3.1 Analytical Tools Applied:
The study employs the following analytical tools:
Comparative statement.
Common Size Statement.
Trend Percentage.

Ratio Analysis.

RATIO ANALYSIS
7.1 Financial Analysis:
Financial analysis is the process of identifying the financial strengths and weaknesses of
the firm and establishing relationship between the items of the balance sheet and
profit & loss account. Financial ratio analysis is the calculation and comparison of ratios,
which are derived from the information in a companys financial statements. The
level and h i s t o r i c a l t r e n d s o f t h e s e r a t i o s c a n b e u s e d t o m a k e i n f e r e n c e s
a b o u t a c o m p a n y s financial condition, its operations and attractiveness as an
investment. The information in the statements is used by
Trade creditors, to identify the firms ability to meet their claims i.e. liquidity
position of the company.
Investors, to know about the present and future profitability of the company and
its financial structure.
Management, in every aspect of the financial analysis. It is the responsibility
of the management to maintain sound financial condition in the company.

7.2 Ratio Analysis:

The term Ratio refers to the numerical and quantitative relationship between two items or
variables. This relationship can be exposed as
Percentages
Fractions
Proportion of numbers.
Ratio analysis is defined as the systematic use of the ratio to interpret the f i n a n c i a l
statements. So that the strengths and weaknesses of a firm, as well as
i t s historical performance and current financial condition can be determined. Ratio reflects a
quantitative relationship helps to form a quantitative judgment.

7.3 Ratios Are Useful For Several Parties Such As:

1) Investors, both present as well as potential investors.
2) Financial analyst.
3) Mutual funds.
4) Stock broker and stock exchange authorities.
5) Government.
6) Tax department.
7) Competitors.

8) Research analysts and students.

9) Companys management.
10) Creditors and Suppliers
11) Lending Institutions Banks and Financial Institutions
12) Financial Manager
13) Other Interested parties like credit rating agencies etc.

7.4 Nature of Ratio Analysis:

Ratio analysis is a technique of analysis and Interpretation of financial statements.
It is the process of establishing and interpreting various ratios for helping in making certain
decisions. It is only a means of understanding of financial strengths and
weaknesses of a firm. There are a number of ratios which can be calculated from
the information given in the financial statements, but the analyst has to select the appropriate
data and calculate only a few appropriate ratios. The following are the four steps involved in
the ratio analysis.
S e l e c t i o n o f r e l e v a n t d a t a f r o m t h e f i n a n c i a l s t a t e m e n t s d e p e n d i n g u p
o n t h e objective of the analysis.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios with the ratios of the same firm in the past, or the
ratios developed from projected financial statements or the ratios of some
other firms or the comparison with ratios of the industry to which the
f i r m belongs.

7.5 Classification of Ratios:

A) Liquidity Ratios
It is also known as liquidity ratios. It includes the following
1) Measures ability of a company to meet its current obligations.
2) Indicates short term financial stability of a company.
3) Indicates present cash solvency and ability to remain solvent
i n t i m e s o f adversities. To measure the liquidity of a firm the following ratios can be
calculated

Current ratio
Quick (or) Acid-test (or) Liquid ratio

(a) Current Ratio:

Current ratio is useful to find out solvency of the company. High current ratio indicates
that company will be able to pay its debt maturity within a year. Low current ratio
indicates that company will not be able to meet its short term debts. Minimum standard
current ratio is 2:1.
Current Assets
Current Ratio =
Current Liabilities
(b) Quick Ratio:
Quick ratio is also known as acid test ratio. It indicates immediate ability of a company to
pay off its current obligations. And also shows the solvency and financial
soundness of the business. Greater the ratio stronger the financial position of the company.
The standard quick ratio should be 1:1
Quick Assets
Quick Ratio=
Quick Liabilities

B) Profitability Ratios:
T h e p r i m a r y o b j e c t i v e s o f b u s i n e s s u n d e r t a k i n g a r e t o e a r n p r o f i t s . Becau
se profit is the engine that drives the business enterprise. It measures the overall
efficiency of the business. It indicates whether utilization of business assets and funds
are done efficiently and best way or not, so as to generate adequate profits or returns.
Profitability ratios fall in two categories:

a) Related To Sales:
1) Gross Profit Ratio:
It shows the operating efficiency of the business. It measures the efficiency of production
as well as pricing. Decrease in the ratio indicates reduction in selling price or
increase in the cost of production or decline in the business activity.
Increase in the ratio indicates increase in the selling price or reduction in the
cost of production.

Gross Profit
Gross Profit Ratio =

X 100
Sales

2) Operating Profit Ratio:

It indicates profitability of entire business after meeting all operating cost including direct
and indirect cost of administrative and distribution expenses.
Operating Profit
Operating Profit Ratio =

X 100
Sales

3) Net Profit Ratio:

It shows the overall efficiency of the business. Higher the ratio
indicatesh i g h e r e f f i c i e n c y o f b u s i n e s s a n d b e t t e r u t i l i z a t i o n o f t o t a l r e s o
u r c e s . I n a d d i t i o n i t indicates efficiency of financing operations as well as
tax management.
Net profit after tax
Net Profit Ratio =

X 100
Sales

b) Related To Investment Of Capital Employed:

1) Return On Investment:
It measures the overall performance of the company that is utilization of total resources and
funds available with the company. Higher the ratio better utilization of funds. It
indicates earning capacity of the business. It measures the management performance.
EBT But AT
Return on Investment =

X 100
Total Assets/ Liability

2) Return On Net Worth Or Proprietors Funds:

It measures the productivity of shareholders funds. Higher the ratio ind
i c a t e s b e t t e r utilization of shareholders funds or higher productivity of
owners funds. It helps to investor to compare the earning capacity of company with that
of other companies.
Net Profit after Tax
Return on Net Worth =

X 100
Equity Shareholder Fund

C) Turnover Ratio:
It measures how efficiently the assets are employed. These ratios are
expressed in number of times the assets is used during the period.
1) Inventory Turnover Ratio:
It indicates number of times the replacement of inventory during the given period usually
a year. Higher the ratio more efficient is the management of inventory. But higher
inventory turnover ratio is not always good if it is lower level of inventory because it
invites problem of frequency stock outs and loss of sales and customer or goodwill
Cost of Goods Sold
Inventory Turnover Ratio =
Average Stock in Hand
2) Average Collection Period:
It indicates credit and collection policy and also indicates efficiency in
management

of debtors. Smaller no. of dates,

higher

will

be the

e f f i c i e n c y o f t h e collection department. Avg. collection period should not exceed 1.5

times the credit period allowed.
Receivable (Debtors)
Avg. Collection Period =
Average Sales per Day.
3) Receivable Turnover Ratio:
The ratio indicates average credit period enjoyed by debtors.
Debtors + Bills Receivable
Receivable Turnover Ratio =

X 100
Total Credit Sales

4) Fixed Asset Turnover Ratio:

It indicates efficiency in the utilization of fixed assets like plant and
m a c h i n e r y b y management.
Net Sales
Fixed Assets Turnover Ratio =
Fixed Assets

5) Total Asset Turnover Ratio:

It indicates how efficiently the assets are employed overall. It indicates
relationships between the amount invested in the assets and the result accrues in terms
of sales.
Net Sales
Total Asset Turnover Ratio =
Total Assets
6) Creditors Turnover Ratio:
It indicates the how the credit period enjoyed by the creditors.
Net Credit Purchases
Creditors Turnover Ratio =
Average Creditors

D) Financial Ratio:
1) Capital Gearing Ratio:
This ratio indicates the relationship between preferential capital, debenture. Term loan
and capital which does not carry fixed rate of interest or dividend. When the ratio is more
than one then the capital is said to be highly geared that mean slow equity
share capital and greater amount of preference share capital, debenture, long-term
loan. When the ratio is less than one then the capital is said to be very lowly
geared that means low earning per share. Equity shareholder will control the company. It
results in over capitalization.
Preferential Capital + Debenture + Term Loan
Capital Gearing Ratio:
Equity Share Capital + Reserve and Surplus
2) Proprietary Ratio:
It measures the relationship between funds invested in business by the owners
with the total funds invested in business. It indicates long run solvency of the
business. High ratio means company is less dependent on outside funds
and company is quite solvent. Low ratio indicates company is more dependent on outside
funds solvency and solvency may be danger.
Proprietary Fund
Proprietary Ratio =
Total Assets
3) Stock Working Capital Ratio:
It indicates weightage of stock in the current assets or in the working
funds. It indicates strength and weaknesses of working capital; high ratio indicates slow
movement in stock and also reflects better management of inventory as well as working
capital
Stock
Stock Working Capital Ratio =
Working Capital

E) Financial Leverage Ratio:

It indicates financial structure of the organization that is proportion of debts as
compare to owners fund.
1) Debt Equity Ratio:
Higher the ratio less secured is the creditors, lower the ratio creditors
enjoy higher degree of safety.
Debt
Debt Equity Ratio =
Equity
2) Debt Asset Ratio:
It indicates

the percentage of the total asset created by the

company

through short term and long term debt. Higher the ratio less safe is the creditors and
viceversa.
Debt
Debt Asset Ratio =
Total Assets
3) Long Term Debt to Total Capitalization:
It explains the relationship between long term debts borrowed from outsiders with
owners contribution. Lower the ratio better is the solvency of the business and safer is the
creditor so far as his repayment.
Long Term Debt
Long Term Debt to Total Capitalization =
Total Capital Employed
4) Interest Coverage Ratio:
This indicates earning capacity of the business to pay its interest burden. Higher
the ratio business can easily pay the interest. Earnings before
Interest and Tax
Interest Coverage Ratio =
Interest

F) Dividend Ratio:
These ratios for a particular company are relevant for an investor for m a k i n g a n
investment decision as to whether he should invest in the share
o f t h e company.
1) Earnings per Share:
This ratio indicates weather over a given period there have been change in the wealth per
share holder. Other the ratio increases the possibility for the higher dividends and
increase in the market price of the shares.
Earnings after Tax Preference Dividend
Earnings per Share =
No. Of Shares Paid Up
2) Price Earnings Ratio:
It indicates relationship between market price of the share and the current earnings per share.
It helps to determine the future price of the share.
Market Price per Share
Price Earnings Ratio =
Earning Per Equity Share
3) Pay-out Ratio:
It indicates how much proportion of the earning per share is retaining for plaguing back and
portion distributed as dividend to the shareholder.
Dividend per Equity Shares
Pay-out Ratio =
Earnings per Share
4) Dividend Yield Ratio:
It indicates the ultimate current return which investor will get as a percentage of
is investment. It indicates the feature like the profitability and dividend policy of

the company. When dividend yield is lower than the expected return, market price
for the share may fall in future or vice versa.
Equity Dividend
Dividend per Share =
No. Of Equity Shares
Dividend per Share
Dividend Yield =
Market Price per Share

7.6 Interpretation of the Ratios:

T h e I n t e r p r e t a t i o n o f r a t i o s i s a n i m p o r t a n t f a c t o r. T h e i n h e r e n t l i m i t a t i
o n s o f r a t i o analysis should be kept in mind while interpreting them. The impact
of factors such as price level changes, change in accounting policies, window dressing etc.
7.7 Guidelines or Precautions for Use of Ratios:
The calculation of ratios may not be a difficult task but their use is not easy.
Following guidelines or factors may be kept in mind while interpreting various
ratios is
Accuracy of financial statements
Objective or purpose of analysis
Selection of ratios
Use of standards should also be kept in mind when attempting to interpret ratios.

8. DATA ANALYSIS AND INTERPRETATION

8.1Financial stability Ratios:
To measure the liquidity of a firm the following ratios can be calculate the following ratio
a) CURRENT RATIO
Current Asset
CURRENT RATIO =
Current Liabilities
( RS IN LAKHS )
YEAR
2013-2104
2014-2015
2015-2016

CURRENT ASSET
48468.47
51764.02
49807.77

CURRENT LIABILITY
21582.46
27739.78
32808.36

RATIO
2.2
1.18
1.5

CURRENT RATIO
2.5
2.2
2
1.5
1

1.5
1.18

0.5
0
2013-2014

2014-2015

2015-2016

ANALYSIS AND INTERPRETATION:

The current ratio of the firm measures the short term solvency. It indicates the rupees of
current asset available for each rupee of current liabilities. The above chart shows that decline
trend from the F.Y. 2013 to F.Y. 2016.This is mainly due to increasing creditors from F.Y.
2013 to F.Y. 2016. In the F.Y. 2013-14 it shows 2.2:1 which was higher than the standard ratio
i.e. 2:1.
There was continuous decline in the current ratio which is not good sign for the company.