INTODUCTION TO FINANCIAL STATEMENTS

Accounting is the process of identifying, measuring and

communicating economic information to permit informed
judgments and decisions by users of information. It involves
recording, classifying and summarizing various business
transactions. The end products of the business transactions are
the business financial statements comprising primarily the
position statement or the balance sheet and the income or the
profit and loss account. These statements are the outcome of
summarizing process of the accounting and are; therefore, the
sources of information on the basis of which conclusions are
drawn about the profitability and the financial position of the
concern. Financial statements are the basis of decision making by
the management as well as other outsiders who are interested in
the affairs of the firm such as investors, creditors, customers,
suppliers, financial institution, employees, potential investors,
government and general public. The analysis and interpretation
of the financial statements depends upon the nature and the type
of the information available in the statements.

MEANING OF FINANCIAL
STATEMENTS

A Financial statement is the collection of the data organized

according to logical and consistent accounting procedures. Its
purpose is to convey an understanding of some financial aspects
of a business firm. It may show a position at a moment in time, as
in the case of a balance sheet, or many reveal a series of

1
activities over a given period of the time, as in income statement.
Thus the term “Financial statements” generally refer to two
statements:-

1. The Position statement or the Balance sheet.

2. The Income statement or the Profit and Loss account.

These statements are used to convey to the

management and the other interested outsiders the profitability
and financial position of the firm.

Financial statements are the outcome of summarizing process of

accounting. In other words of John N Myer, “Financial
statements provide a summary of the accounts of a
business enterprise, the balance sheet reflecting the
assets, liabilities and capital as on a certain date and the
income statements showing the results of the operations
during a certain period”. Financial statements are prepared as
an end result of financial accounting and major sources of
financial information of an enterprise.

Smith and Asburne define financial statements as, “the end

product of financial accounting of a business enterprise
the purport to reveal the financial position of an
enterprise, the result of its recent and an analysis of what
has been done with earnings.”

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Financial statements are also called financial reports. In the
words of Anthony, “financial statements essentially are the
interim reports, presented annually and reflect a division
of the life of an enterprise into more or less arbitrary
accounting period – more frequently a year.”

NATURE OF FINANCIAL STATEMENTS

The Financial statements are prepared on the basis of recorded

facts. The recorded facts are those, which can be expressed in
monetary terms. The statements are prepared for a particular
period of time, generally a year. The transactions are recorded in
a chronological order, as and when the events happen. The
accounting records and financial statements are prepared from
these records are based on historical costs. The Financial
statements are by nature, summaries of the items recorded in
the business and these statements are prepared periodically
generally for a period. The following points explain the nature of
financial statements:

1. RECORDED FACTS :

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 The term “recorded facts” refer to the data taken out from the
accounting records. These are maintained on the basis of
actual cost data. The original cost or historical cost is the basis
of recording various transactions. The figures of various
accounts such as cash in hand, cash at bank, bills receivable,
sundry debtors, fixed assets etc are taken as per figures
recorded in the accounting books. The assets purchased are
different times and at different prices are put together and
shown at costs prices. As recorded facts are not based on
replacements costs, the financial statements do not show the
current financial condition of the concern.

2. ACCOUNTING CONVENTIONS :

Certain accounting conventions are followed while preparing

statements. The conventions of valuing inventory at cost or
market price, whichever is lower followed. The valuing of assets
at cost less depreciation principle for making balance sheet
purpose is followed. The convention of materiality is followed in
dealing with small items like pencils, pens and postage stamps.
The use of accounting conventions makes financial statements
realistic, simple and comparable.

3. POSTULATES :

4
The accountant makes certain assumptions while making
accounting records. One of these assumptions is that an
enterprise is treated as a going concern. The alternative
postulate to this that the concern is to be liquidated another
important assumption is presume that the value of the money will
remain the same in different periods. The realization postulates
assumes that while preparing the profit and loss account, the
revenue is treated in the year in which sale was undertaken even
though the price may be received in a number of years. Thus
preparation of financial statements involves assumptions many of
postulates.

4. PERSONAL JUDGEMENTS :

Even though certain standard accounting convections are

followed in preparing financial statements but still personal
judgment of the accountant plays an important part. For
example, in applying the cost or market value whichever is less
to inventory valuation the accountant will have to use his
judgment in computing the cost in a particular case. Thus we can
make out that personal judgment also plays a very important and
crucial role in preparation of financial statements.

OBJECTIVES OF FINANCIAL
STATEMENTS

Financial statements are sources of information on the basis of

which conclusions are drawn about the profitability and financial
position of a concern. They are the major means of employed by

5
firms to present their financial situation of owners, creditors and
general public. The primary objective of financial statements is to
assist in decision making. The Accounting Principles Broad of
America (APB) states that the following objectives of financial
statements:

a) To provide reliable financial information about economic

resources and obligations of a business firm.

b) To provide other needed information about the changes in

such economic resources and obligations.

c) To provide reliable information about changes in net

resources (resources less obligations) arising out of business
activities.

d) To provide financial information that assists in estimating

the earning potentials of business.

e) To disclose, to the extent possible, other information related

to financial statement that is relevant to the needs of the
users of these statements.

TYPES OF FINANCIAL STATEMENTS

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 Financial statements primarily compromise two basic
statements:
(i) The Position statement or Balance sheet
(ii) The Income statement or Profit and Loss account.

However, Generally Accepted Accounting Principles (GAAP)

specify that a complete set of financial statements must include :

1. Income Statement or Profit and Loss Account.

2. Statement of Financial Position or Balance Sheet.
3. Statement of Retained Earnings or Profit and Loss
Appropriation Account.
4. Statement of Changes of Financial Position(Fund Flow
Statement and cash Flow statement).

Moreover, to supplement the data contained in the financial

statements, certain schedules are also prepared, schedule
of Fixed Assets, Schedule of Debtors, Schedule of Creditors,
Schedule of Inventories, Schedule of Long Term Investments
etc. these schedules are considered as a part of financial
statements.

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 INCOME STATEMENT OR PROFIT AND LOSS ACCOUNT

Profit is the incentive for business; without profit people would

not bother. Profit is the reward for taking risk; generally speaking
high risk = high reward (or loss if it goes wrong) and low risk =
low reward. People won’t take risks without reward. All business
is risky (some more than others) so no reward means no
business. No business means no jobs, no salaries and no goods
and services.
This is an important but simple point. It is often forgotten when
people complain about excessive profits and rewards, or when
there are appeals for more taxes to pay for eg more policemen
on the streets.
Profit also has an important role in allocating resources (land,
labour, capital and enterprise). Put simply, falling profits (as in a
business coming to an end eg black-and-white TVs) signal that
resources should be taken out of that business and put into
another one; rising profits signal that resources should be moved
into this business. Without these signals we are left to guess as to
what is the best use of society’s scarce resources.
People sometimes say that government should decide (or at least
decide more often) how much of this or that to make, but the
evidence is that governments usually do a bad job of this e.g. the
Dome.
The Task of Accounting - Measuring Profit
The main task of accounts, therefore, is to monitor and measure
profits.
Profit = Revenue less Costs
So monitoring profit also means monitoring and measuring
revenue and costs. There are two parts to this:-
1) Recording financial data. This is the ‘book-keeping’ part of
accounting.

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2) Measuring the result. This is the ‘financial’ part of
accounting. If we say ‘profits are high’ this begs the question
‘high compared to what?’ (You can look at this idea in more detail
when covering Ratio Analysis)
Profits are ‘spent’ in three ways.
1) Retained for future investment and growth.
2) Returned to owner’s example a ‘dividend’.
3) Paid as tax.
Parts of the Profit and Loss Account
The Profit & Loss Account aims to monitor profit. It has three
parts.
1) The Trading Account.
This records the money in (revenue) and out (costs) of the
business as a result of the business’ ‘trading’ ie buying and
selling. This might be buying raw materials and selling finished
goods; it might be buying goods wholesale and selling them
retail. The figure at the end of this section is theGross Profit.

2) The Profit and Loss Account proper

This starts with the Gross Profit and adds to it any further costs
and revenues, including overheads. These further costs and
revenues are from any other activities not directly related to
trading. An example is income received from investments.
3) The Appropriation Account. This shows how the profit is
‘appropriated’ or divided between the three uses mentioned
above.

Uses of the Profit and Loss Account.

1) The main use is to monitor and measure profit, as discussed
above. This assumes that the information recording is accurate.
Significant problems can arise if the information is inaccurate,
either through incompetence or deliberate fraud.

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2) Once the profit (loss) has been accurately calculated, this can
then be used for comparison i.e. judging how well the business is
doing compared to itself in the past, compared to the managers’
plans and compared to other businesses.
STATEMENT OF FINANCIAL POSITION OR BALANCE
SHEET

A balance sheet is a statement of the

total assets and liabilities of an organisation at a particular
date - usually the last date of an accounting period.
The balance sheet is split into two parts:
(1) A statement of fixed assets, current assets and
the liabilities (sometimes referred to as "Net Assets")
(2) A statement showing how the Net Assets have been financed,
for example through share capital and retained profits.
The Companies Act requires the balance sheet to be included in
the published financial accounts of all limited companies. In
reality, all other organisations that need to prepare accounting
information for external users (e.g. charities, clubs, partnerships)
will also product a balance sheet since it is an important
statement of the financial affairs of the organisation.
A balance sheet does not necessary "value" a company, since
assets and liabilities are shown at "historical cost" and some
intangible assets (e.g. brands, quality of management, market
leadership) are not included.

Definition of Assets
An asset is any right or thing that is owned by a business. Assets
include land, buildings, equipment and anything else a business
owns that can be given a value in money terms for the purpose of
financial reporting.
Definition of Liabilities
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To acquire its assets, a business may have to obtain money from
various sources in addition to its owners (shareholders) or from
retained profits. The various amounts of money owed by a
business are called its liabilities.
Long-term and Current
To provide additional information to the user, assets and
liabilities are usually classified in the balance sheet as:
- Current: those due to be repaid or converted into cash within 12
months of the balance sheet date;
- Long-term: those due to be repaid or converted into cash more
than 12 months after the balance sheet date;
Fixed Assets
A further classification other than long-term or current is also
used for assets. A "fixed asset" is an asset which is intended to
be of a permanent nature and which is used by the business to
provide the capability to conduct its trade. Examples
of "tangible fixed assets" include plant & machinery, land &
buildings and motor vehicles. "Intangible fixed assets" may
include goodwill, patents, trademarks and brands - although they
may only be included if they have been "acquired". Investments
in other companies which are intended to be held for the long-
term can also be shown under the fixed asset heading.
Definition of Capital
As well as borrowing from banks and other sources, all companies
receive finance from their owners. This money is generally
available for the life of the business and is normally only repaid
when the company is "wound up". To distinguish between the
liabilities owed to third parties and to the business owners, the
latter is referred to as the "capital" or "equity capital" of the
company.
In addition, undistributed profits are re-invested in company
assets (such as stocks, equipment and the bank balance).
Although these "retained profits" may be available for distribution
to shareholders - and may be paid out as dividends as a future

11
date - they are added to the equity capital of the business in
arriving at the total "equity shareholders' funds".

STATEMENT OF CHANGES IN OWNER’S EQUITY OR

RETAINED EARNINGS

The statement of changes in owners’ equity may also be called

the statement of changes in retained earnings, or the statement
of changes in capital stock.

This financial statement has something important in common

with the income statement, namely that it focuses on a period of
time.

There are two main elements of the owners’ equity explained by

the statement: paid-in capital and retained earnings.

Paid-in capital is the amount that the entity’s owners have

invested in it. (For a publicly traded company, the “owners” will
be shareholders.)

Retained income is the net income that the entity retains for use.

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 STATEMENT OF CHANGES IN FINANCIAL
POSITION

The statement of changes in financial position is one of the

four main financial statements, and it is also known as the
statement of cash flows. The other three statements are the
balance sheet, the retained earnings statement and the
income statement. The statement of changes in financial
position focuses on reporting changes in the amount of cash
that the company holds.

I. Funds Flow Statement: It explains changes in funds or

changes in working capital. It explains the working
capital position of the company which gives an idea to
the top management about the liquidity position of the
company.

II. Cash Flow Statement: Cash flow statements and

projections express a business's results or plans in
terms of cash in and out of the business, without
adjusting for accrued revenues and expenses. The cash
flow statement doesn't show whether the business will
be profitable, but it does show the cash position of
the business at any given point in time by measuring

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 revenue against outlays.

USE & IMPORTANCE OF FINANCIAL

STATEMENTS

The financial statements are mirror, which reflect the financial

position and operating strength or weakness of the concern.
These statements are useful to management, investors, creditors,
bankers, workers and government and public at large. George O
may points out the following major uses of financial statements:

1. As a report of stewardship.
2. As a basis of fiscal policy.
3. To determine the legality of dividends.
4. As a guide to advice dividend action.
5. As a basis for the granting of credit.
6. As an informative for the prospective investors of an
enterprise.
7. As a guide to the value of investment already made.
8. As an aid to government supervision.
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 9. As a basis for price rate and regulation.
10. As a basis for taxation.

The utility of financial statements to different parties is as follows:

1. Management:
The financial statements are useful for assessing the
efficiency for different costs centers. The management is
able to exercise cost control through these statements. The
efficient and inefficient spots are brought to the notice of
the management. The management is able to decide the
course of action to be adopted in future.

2. Creditors:
The trade creditors are to be paid in short periods. This
liability is met out of current assets. The creditors will be
interested in current solvency of the concern. The
calculation of the current ratio and liquid ratio will enable
the creditors to assess the current financial position of the
concern in relation to their debts.

3. Bankers:
The banker is interested to see that the loan amount is
secure and the customer also able to pay the interest

15
 regularly. The banker will analyze the balance sheet to
determine the financial strength of the concern and profit
and loss account will also be studied to find out the earning
position.
A banker has a large number of customers and it is not
possible to supervise their business activities. It is through
the financial statements that a banker can keep a watch on
the business plans and performance of its customers. These
statements also help the banker to determine the amount of
securities it will ask from the customers as a cover for the
loans.

4. Investors:
The investors include both short term and long-term
investors. They are interested in the security of principle
amount of loan and regular interest payment by the
concern. The investor will study the long term solvency of
the concern with the help of the financial statements. The
investors will not only analyze the present financial position
but will also study the future prospectus and expansion
plans of the concern. The possibility of paying back the loan
amount in case of liquidation of the company is also taken
into consideration.

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 5. Government:
The Financial statements are used to assess tax liabilities of
business enterprises. The Government studies the economic
situation of the country from these statements. These
statements enable the government to find out whether the
business enterprises are following certain rules or not. These
statements also become a base for framing and amending
various laws for regulation of the business.

6. Trade Associations:
These associations provide service and protection to its
members. They may analyze the financial statements for the
purpose of providing facilities to its members. They may
develop standard ratios and design uniform system of
accounts.

7. Stock Exchange:
The Stock exchange deals in purchase and sale of securities
of different companies. The financial statements enable the
stock brokers to judge the financial position of different
concerns. The fixation of prices for securities, etc is also
based on these statements.

LIMITATION OF FINANCIAL STATEMENTS

Some of the limitations of the financial statements are as follows:

1. As the historical costs and money measurement concepts

govern the preparation of the balance sheet and
income statements, hence these financial statements are
essentially statements reflecting historical facts. It ignore

17
 inflationary trend and does not reflect the true current worth
of the enterprise,

2. Certain important qualitative elements are omitted from

the financial statements because they are incapable of
being measured in monetary terms like the quality and
reputation of the management team, employee and other,
3. There are still items in the assets side of the balance
sheet which has no real value and are merely deferred
charges to future incomes like preliminary / pre-
incorporation expenses and other.

4. There are still the following issues or challenges in

preparing the financial statements which may amount to
overstatement of the accounting profit of an entity.

5. When to and how much to recognize revenue in the

Income statement.

6. The constant challenge of when to expense or to

capitalize the expenses. It is important to determine
definitely what is revenue expenditure and capital
expenditure otherwise the accounting profit will be
overstated or understated - for example, capitalization of
borrowing costs, etc.

7. Method of depreciations and the rates to

depreciate into the income statement are selected by

18
 management to suit their business needs. Are the rates
intentionally been made lower or the depreciated rates are
higher to accelerate the depreciation of the fixed assets.

8. Adequacy of provisions and method of providing for

doubtful debts. Are the trade debtors recoverable and to
what extent the accounting method for provision for
doubtful debts shows the realistic picture.

9. Basis of valuation of assets- when can costs change to

reflect current values? Using replacement or current costs?
Such question arises when assets are valued.

10. Consolidation challenges -what to eliminates to reflects

the overall group performance. Some items might be
omitted to show a higher accounting profits.

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 FINANCIAL STATEMENT ANALYSIS

Financial statements present a mass of complex data in absolute

monetary terms and reveal little about the liquidity, solvency
turnover and profitability of the in business. In financial analysis
the data given in the financial statements is given into simple
groups and a comparison of various groups is made one another
to segregate the strong points and weak points of a business. The
focus of financial analysis is on key figures in the financial
statements and significant relationship that exists between them.
The analysis of financial statements is the process of evaluating
relationships between components parts of financial statements
to obtain a better understanding of the firm’s position and
performance. Thus, financial analysis is the process of selection,
relation and evaluation.

DEFINITION

In words of Myres, “Financial statements analysis is largely a

study of relationship among various financial factors in a
business as discovered by a single set of statements and a study
the trend of these factors as shown in series of statements.”

In other words of Metcalf and Titard, “Analyzing a financial

statements is a process of evaluating the relationship between
components parts of a financial statement to obtain a better
understanding of a firm’s position and performance.”

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 STEPS INVOLVED IN THE ANALYSIS OF FINANCIAL
STATEMENTS

From a study of the meaning of analysis of the financial

statements, it is clear that work of analysis of financial
statements involves three steps or process they are:

1. Analysis
2. Comparison
3. Interpretation

ANALYSIS

The data shown in the financial statements are either the

balances of individual accounts or groups of balances of many
accounts. As a result they lack homogenize and comparable data
(i.e. inter connected data) for judging the profitability and the
financial position of the concern. So, to obtain the desired
homogenous and comparable data (i.e. the inter-connected data)
the figures founding the financial statements have to be
analyzed.

COMPARISON

Mere splitting up or regrouping of the figures found in the

financial statements into the desired components parts is not
sufficient for judging the profitability and the financial status of

21
an enterprise. After the figures contained in the financial
statements are dissected or split into the required comparable
compound parts (i.e. the inter-connected figures) must be
compared with each other and their relative magnitudes (i.e.
their relationship must be measured).

INTERPERTATION

After the financial statements are analyzed or discussed into

comparable component parts and the relative magnitudes of the
comparable component parts (i.e. the relations hip of the
interconnected components parts) is measured through
comparison, the results (i.e. the relationship between the
interconnected component parts) must be interpreted.

SIGNIFICANCE OF FINANCIAL ANALYSIS

1. Help in Screening: Financial analysis can serve as a

preliminary screening tool in the selection of investments. It
greatly helps the investors in studying 3P’s i.e. Prospectus,
Payments, and Protection. The prospectus of a firm can be
judged by looking to both of its present and future
profitability. The capacity can be judged on the basis of
present and prospective rigidity of the firm. The protection
can be judged on the basis of tangible assets backing, which
the firm enjoys.

2. Help on forecasting: It can be used as a forecasting tool for

the future profitability and financial soundness of the
business.

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 3. Helps in Diagnosis: It helps the management in identifying
the factors responsible for creating managerial, operational
and other problems.

4. Helps in Evaluation: IT is an important tool for evaluating the

performance of both the management and the organization.

TYPES OF FINANCIAL STATEMENT ANALYSIS

1. ON THE BASIS OF THE NATURE OF THE ANALYSIS AND THE

MATERIALS USED:

a. External Analysis:
Those persons who are not connected with the enterprise
make it, they do not access to the enterprise, they do not have
access I detailed record of the company and have to depend
mostly on published statements, such as types of analysis in

23
 made by investors, creditors, credit agencies and research
scholar.
b. Internal Analysis:
Is made by those people who have access to the books of
accounts they are the members of the organization. Analysis of
financial statements or other financial data for managerial
purpose is the internal type of analysis. The internal analyst
can give more reliable result than the external analyst can,
because every type of information is at his disposal.

1. ACCORDING TO THE OBJECTIVES OF THE ANALYSIS:

a. Long-term analysis:
This analysis is made in order to study the long term
financial stability, solvency and liquidity as well as
profitability and earning capacity of a business concern.
b. Short-term analysis:
This is made to determine the short term solvency, stability
and liquidity as well as earning capacity of a business
concern.

1. ACCORDING TO THE MODUS OPERANDI OF THE ANALYSIS:

a. Horizontal (or Dynamic Analysis):

This analysis is made to review and analyze financial
statements of a number of years and therefore based on
financial day taken from several years. This is very useful for

24
 long term trend analysis planning. Comparative Financial
statement is an example to this type of analysis.

b. Vertical (or static) Analysis:

This analysis is made to review and analyze the financial
statement of one particular year only. Ration analysis of the
financial year relating to a particular accounting year is an
example of this type of analysis.

MEATHODS, TOOLS AND TECHNIQUES OF FINANCIAL

ANALYSIS

1. Comparative Financial statements (or Analysis)

2. Common Measurement statements (or Analysis)
3. Trend Percentage Analysis
4. Fund Flow Statements (or Analysis)
5. Cash Flow Statements (or Analysis)
6. Networking Capital Analysis
7. Cost-volume - Profit Analysis
8. Ratio Analysis

1. COMPARATIVE FINANCIAL STATEMENTS

Comparative financial statements provide information to

assess the direction of change in the business. To know
25
whether the business is moving in a favorable or unfavorable
direction, figures of the current year are compared with those
of the previous years. The amount and percentage of
increase or decrease is calculated and then compared. In
common size statements, the sales figure is assumed to be
100 and all figures are expressed as a percentage of sales in
the income statements. In the Balance Sheet, the total of the
assets or liabilities is taken as 100 and all the figures are
expressed as a percentage of this total. Using the past theory
for comparison is called as trend analysis. Trend percentages
are calculated only for some important items which can be
logically connected with each other. Under this technique,
information for a number of years is taken up and one year,
which is usually the first year, is taken as the base year. Each
item of the base year is taken as 100 and on that basis, the
percentage for other years are calculated.

2. Common Measurement statements (or Analysis)

The common-size statement is a financial document that is

often utilized as a quick and easy reference for the finances
of a corporation or business. Unlike balance sheets and
other financial statements, the common-size statement does
not reflect exact figures for each line item. Instead, the
structure of the common size statement uses a common base
figure, and assigns a percentage of that figure to each line
item or category reflected on the document.

26
 3. Trend Percentage Analysis

This analysis is an important tool of horizontal financial

analysis. This method is immensely helpful in making a
comparative study of financial statement of several years.
Under this method trend percentage is calculated for each
items of the financial statement taking the figures of the base
year as 100. The starting year is usually taken as the base
year. The trend percentage shows the relationship of each
item with its preceding year’s percentage. This percentage
can also be presented in the form of index number showing
relative changes in the financial of certain year.

4. Fund Flow Statements (or Analysis)

Fund Flow Statements summarize a firm’s inflow and outflow

of funds. Simply put, it tells investors where funds have come
from and where funds have gone. The statements are often
used to determine whether companies efficiently source and
utilize funds available to them.

5. Cash Flow Statements (or Analysis)

In financial accounting, a cash flow statement, also

known as statement of cash flows or funds flow statement, is
a financial statement that shows how changes in balance
sheet accounts and income affect cash and cash equivalents, and
breaks the analysis down to operating, investing, and financing
activities. Essentially, the cash flow statement is concerned with
the flow of cash in and cash out of the business. The statement
captures both the current operating results and the
27
accompanying changes in the balance sheet.[1] As an analytical
tool, the statement of cash flows is useful in determining the
short-term viability of a company, particularly its ability to pay
bills.

6. Networking Capital Analysi

Working capital (abbreviated WC) is a financial metric which

represents operating liquidity available to a business,
organization, or other entity, including governmental entity.
Along with fixed assets such as plant and equipment, working
capital is considered a part of operating capital. Net working
capital is calculated as current assets minus current liabilities. It
is a derivation of working capital that is commonly used in
valuation techniques such as DCFs (Discounted cash flows). If
current assets are less than current liabilities, an entity has a
working capital deficiency, also called a working capital deficit.

7. Cost-volume - Profit Analysis

It is an important tool of profit planning. It studies the
relationship between cost volume of production sales and profit
of course, it is not strictly a technique used for analysis of
financial statements.

8. Ratio Analysis

A tool used by individuals to conduct a quantitative analysis of

information in a company's financial statements. Ratios

28
are calculated from current year numbers and are then compared
to previous years, other companies, the industry, or even the
economy to judge the performance of the company. Ratio
analysis is predominately used by proponents of fundamental
analysis.

RESEARCH DESIGN

TITLE OF THE STUDY

“A STUDY ON FINANCIAL PERFORMANCE OF RUCHI SOYA LIMITED
ON THE BASIS OF RATIO AND TREND ANALYSIS”.

STATEMENT OF THE PROBLEM

For any company, the key to success is the proper distribution of

resources. In this competitive era, to be successful requires not
only huge investment but also efficient management. Thus it is
very important for the company to understand the financial
position as on any given day, which makes it very important for
the management to do a detailed evaluation of the financial
statement. Financial statements contain a large volume of

29
financial figures. From the study of these absolute figures it is not
possible to form a precise idea about the financial significance
and business position. Performance evaluation is necessary from
the point of view of the investors, creditors, public, government
and organization. So, why a company does not perform well for
years? Why net profit fell down even after greater gross profit
and increased sales? Where the raised funds are invested? What
about the liquidity and solvency position of the company? The
pressure of the company o perform well in the face of severe
competition has pressurized them to decrease the margin. So,
how to increase the margins? To answer these questions and the
form a precise idea about the data contained in various financial
statements it is very much necessary to establish a relationship
between the financial figures. These relationships can be well
established through accounting ratios.

An attempt has been made to evaluate the financial performance

of “RUCHI SOYA LIMITED”. With the help of ratios and tried to
study its trend over a period of 5 years.

OBJECTIVITY OF THE STUDY

1. The primary objective is to analyze the financial position of
RUCHI SOYA LIMITED for the past 5 years – to analyze, compare
and interpret the financial statements using ration analysis.

2. To analyze the liquidity position of the company.

3. To analyze the solvency position of the company.

4. To analyze the profitability position of the company.

5. To draw meaningful conclusions based on the findings.

30
6. To suggest the means to improve the performance of the
company.

SCOPE OF THIS STUDY

Scope of the study is with respect to the interpretation and

analysis of the five years (2006-2010) for RUCHI SOYA LIMITED.

SOURCES OF DATA

This project makes extensive use of secondary data collected in

the form of audited annual reports of the company, which
includes balance sheet, profit and loss account and various other
financial data. This being a detailed analytical study, several
books also referred to get a comprehensive view of the study.
Further, the information was compiled by using the primary data
which is collected by means of detailed discussion with the help
of the top financial officers of the company.

MEATHODOLOGY

This analytical study is based primarily on the data provided in

the annual reports of the company for the years 2006-2007 to
2009-2010. In addition supplementary information was gathered
from the company officials during the personal visits and
discussions with them.

31
Though the company is having multi activities, entire unit was
considered as a sample and financial performance was analyzed.
Ratio and trend analysis is the technique used to evaluate the
company’s overall performance.

The data collected from each of the annual reports and books
collected in the form of table and graphs so as to present a
readily format and to give a clear understanding of the trend of
the company. The ratios of the past 5 years are calculated and
the relative trend is elaborated.

TECHNIQUES OF ANALYSIS

In this report the different techniques of ratio analysis has been

adopted to know the relative performance of business in relation
to liquidity, turnover, profitability and leverages more
comprehensive and to arrive at the conclusion.

LIMITATION OF THE STUDY

32
1. This study extensively uses the data provided in the
financial reports of the company and is basically theoretical
in nature.
2. The study is limited to one company only.
3. The qualitative aspects in ratio analysis are ignored.
4. This being an academic study suffers from time and cost
constraint.
5. The data was collected for five years only and hence it is not
an accurate measure of the company’s soundness.
6. The conclusions of this study may not directly reflect the
management policies as policies are influenced by many
factors that are beyond the scope of the study.
7. Different people may have different opinions on the analysis
and may interpret the ratios in completely diverse manner.
8. Ratios are one of the means of financial analysis and hence
it does not help in giving a comprehensive picture of the
company.

33
 HISTORY

In early 1960s Mr. Mahadeo Shahra created awareness on the

potential of soya crop amongst the farmers in the state of
Madhya Pradesh in India. He was instrumental in bringing up a
small green revolution in the state, by introducing and
encouraging soyabean cultivation on a commercial scale. Shahra
family was in the business of commodities trading and
subsequently entered the business of ginning and oil milling. The
family's efforts, along with that of the others, resulted in soya
revolution in Madhya Pradesh. Today Madhya Pradesh is
considered as Soya bowl of the country, and contributes to
approximately 60% of its production.

Despite all odds, Ruchi is now a leading player in the country in

edible oils, soya foods and processed foods categories. This is
largely due to its strict adherence to quality and continuous
innovation to keep with the times. Also, Ruchi has evolved from
being a large manufacturing firm to a respected brand, keeping
in line with the FMCG players. Its Nutrela and Ruchi Gold brands
have captured leading positions in the soya foods and edible oils
categories respectively. Ruchi has also ventured into other
businesses like bakery specialties, where it foresees a big
potential for growth. With its innate manufacturing and logistics
advantages, and its foray into the branded sector, one only sees
immense potential for the growth of Ruchi in the future

The Company was incorporated on 6th January, 1986. It was

promoted by General Goods Pvt. Ltd. and Ruchi Pvt. Ltd; of the
Shahra Group of Industries. It manufactures Soya proteins,
Speciality Soya products, Soya snack foods and Nutrela.

34
1986

During September, the Company offered 4, 46,666, 13.5%

convertible
debentures of Rs 150 each on rights/private placement basis, the
proportion of rights being 35 debentures for every 100 equity
shares held.

Only 1,87,126 debentures were taken up by shareholders. The

balance 2,59,540 debentures were allotted on private placement
basis. Additional 64,554 debentures were also allotted on
private placement basis to retain over-subscription. Another
22,333 debentures were allotted to employees/workers of the
Company and those of the associated companies on an equitable
basis. A total of 5,32,543-13.5% convertible debentures of
Rs 150 each were thus allotted for Rs 7,98,81,450.

As per the terms of the issue, Rs 50 out of each debentures

ofRs. 150 was automatically converted into 5 No. of equity
shares of Rs 10 each of the Company at par on 20th July, 1987.
The
balance of Rs 100 per debentures shall be redeemed at par in
three annual instalments on the expiry of 7th, 8th and 9th
years from the date of allotment.

70 shares subscribed for by the signatories to the Memorandum

of

35
Association, 12,49,930 shares were then issued at par
(including 25% retention) of which 4,99,930 shares were reserved
and
allotted to promoters, directors at par. Out of the
remaining 7,50,000 shares, the following shares were reserved
for
preferential allotment; (i) 62,500 shares to employees of the
company (4,500 shares taken up); (ii) 12,000 shares to
business associates of the company (all were taken up) and (iii)
2,40,000 shares to NRIs (only 2,36,800 shares taken up).
The balance 4,35,500 shares along with the unsubscribed portion
of 61,200
shares out of the preferential quota were offered for public
subscription during February-March 1986.

1987
26,62,715 No. of equity shares allotted at par in part
Conversion of debentures on 20.07.1987.

1988
The Company proposed to expand its capacity from 6,000 tonnes
per
annum to 12,000 tonnes per annum.

1989
New texturised soya protein plants near Noida, U.P. and near
Indore, M.P. were commissioned.

During November-December, the Company offered 2,69,949-

13.5%
secured fully convertible debentures of Rs 150 each on `Rights
basis' in the proportion 1 debenture: 15 No. of equity shares
held. Additional 19,464 debentures were allotted to retain

36
oversubscription.

Another 1,34,970 - 13.5% debentures were issued to the

employees/workers of the Company and associate companies.

Rs 70 of the face value of each debenture was automatically and

compulsorily converted into 5 No. of equity shares of Rs 10
each at a premium of Rs 4 per share during 1990-91.

The remaining Rs 80 of the face value of each debenture was

converted into four equity shares of Rs 10 each, at a premium
of Rs 10 per share, during 1991-92.

1991
The Company increased the texturised soya protein capacity
from 12,000 TPA to 24,000 TPA and vanaspati from 7,500 TPA to
15,000 TPA.
1992
During August, the Company offered 65,17,432 No. of equity
shares of Rs 10 each at a premium of Rs 50 per share on Rights
basis
in the proportion 1:1. Out of this, 65,07,678 shares were
allotted to shareholders/renounces leaving a balance of 9,754
shares.
Application were received for additional shares upto
26,94,800 shares from shareholders/renounces, the balance of
9,754
Shares were allowed to lapse as the allotment of these shares
would
have created fractions and odd lots.

1994
The Company embarked upon an expansion programme with
emphasis
on value addition. It was proposed to expand the capacity of

37
TVP (Nutrela) plant to increase the range of products. Also the
additional capacity of 200 TPD of refininng soya oil using
state-of-the-art technology was to be commissioned during the
year.

1995
The Company proposed to enter into marketing tie up with a
reputed international firm. Also, it was proposed to set up
a EOU for soya processing with a capacity of 4,50,000 TPA with
a view to enhancing the total manufacturing capacity.
Steps were taken to set up a captive power plant for optimum
utilisation of plant. The Company issued 17.5% - 4,00,000 non-
Convertible debentures of Rs 100 each on Private Placement with
GIC. These are
Redeemable in four equal half yearly instalments commencing at
the end
Of one and half years from date of allotment i.e. 20.12.1993.
Also 1,00,000-19% non-Convertible debentures were partially
placed
with UTI. These are redeemable at a premium of 5% of the
face value in three equal yearly instalments commencing at the
end
of 6th years from the date of allotment i.e. 9th January, 1992.

1996
The company was also planning to set up an oil refinery on
the southern coastal region of India.

1997
1,000,000-12.5% and 1,400,000-13% CR Pref. shares issued
during the year.

2000

38
A fire accident occurred on December 25 at the refinery
section of the company located at village Talawali Chanda,
District
Indore (M.P.), in which the plant and machinery of the refinery
section were
damaged.

2001
The Board has allotted 40,98,545 No. of equity shares of Rs 10
each at a premium of Rs 32 per share to overseas corporate
bodies and
Indian companies on preferential basis. Ruchi Soya Industries Ltd
introduces high portein defatted soya flour Nutrela Profilo

2004
Ruchi Soya Industries Ltd purchases 75000 equity shares of Aneja
Solvex Pvt. Ltd. for Rs.201 lacs. Aneja Solvex Pvt. Ltd. becomes a
wholly owned subsidiary of the company.
Ruchi Soya Industries Ltd. has informed that the equity shares of
the company have been delisted from the Delhi Stock Exchange
Association Ltd., w.e.f. February 11, 2004.

2007
The Company has splits its face value from Rs10/- to Rs2/-.

Palm Plantation

39
Indian edible oil market is the world’s fourth largest after USA,
China and Brazil. A growing population with increasing rate of
consumption and continuously increasing per capita income are
some of the factors accelerating the demand for edible oil in
India. This has lead to increased dependence on import of palm
oil. To tackle this situation, Government of India has formed an
expert committee which has identified suitable land for palm
plantation all over India.

Palm plantation has multiple benefits as it has yield and income

per hectare are better than other oil seed crops. Once planted,
palm trees can be harvested for about 25 years. Reduced
dependency on imports conserves country’s foreign exchange
reserves and needless to state - Plantations are always
environmentally beneficial.

Ruchi has taken the initiative and consolidated its palm

plantation activities, by merging ‘Mac Oil Palm Limited’ and ‘Palm
Tech India Limited’ into Ruchi Soya Industries Limited. Ruchi has
acquired contract farming access to a total land bank of 1,69,000
ha, a 60 tph oil mill capacity for FFB processing and 15 nurseries.
Ruchi has palm plantations in Andhra Pradesh, Karnataka,
Mizoram, Gujarat, Orissa and Tamil Nadu.
Company is going aggressively in palm oil business for which the
company has acquired land in Ethiopia for palm plantation & also
in Indonesia.

40
Locations

 Factory/plant  Baikampady Industrial Area

Mangalore -
Karnataka - India

 Factory/plant  Village Esambe Taluka Khalapur

Raigad District -

 Factory/plant  Bijoyramchak Ward No. 9 P.O. Durgachak

Haldia -
West Bengal - India

 Factory/plant  C - 10, Phase II,

Noida - 0
Uttar Pradesh - India

 Factory/plant  Mangliagaon [This plant has the largest processing

capacity in the country & is also the largest soya
processing plant at single location]
Indore - 0
Madhya Pradesh - India

 Factory/plant  Village Butibori Tehsil

Nagpur -
Maharashtra - India

 Factory/plant  Akodia Road Industrial Area Shujalpur

Shajapur District -
Madhya Pradesh - India

41
 Factory/plant  Gram Mithi Rohar
Dist.Kachchh –
Gujarat – India

 Factory/plant  Village Dobhi

Dist.Mandla -
Madhya Pradesh - India

 Factory/plant  Village Dobhi

Mandi -
Himachal Pradesh – India

 Factory/plant  Village Kamti

Narasinghpur -
Madhya Pradesh – India

 Factory/plant  Kannigaiper Village

Thiruvallur District -
Tamil Nadu – India

 Factory/plant  RIICO Udyog Vihar

Sriganganagar -
Rajasthan - India

 Factory/plant  RIICO Industrial Area Govindpur Bawari Post Talera

Bundi District -
Rajasthan – India

 Factory/plant  Village Kamti Thaluka Gadarwada

42
 Narasinghpur -
Madhya Pradesh - India

 Factory/plant  Kannigaiper Village Uthukottai Taluk

Thiruvallur District -
Tamil Nadu – India

 Factory/plant  Gram Mithi Rohar Taluka Gandhidham

Bhuj -

 Registered  408 , Tulsiani Chambers Nariman Point

Office Mumbai - 400021

 Factory/plant  Mangliagaon A.B. Road

Indore - 0
Madhya Pradesh - India

 Head Office  301, Mahakosh House 7/5, South Tukoganj Nath

Mandir Road
Indore - 452001
Madhya Pradesh - India

 Factory/plant  Kusmoda, A B Road

Guna -
Madhya Pradesh - India

 Factory/plant  Kota Road,

Baran -

 Factory/plant  Rani Piparia

Hoshangabad District -

43
 Madhya Pradesh – India

 Factory/plant  SIDCO Industrial Estate, Bari Brahmana

Jammu -
Jammu & Kashmir - India

 Factory/plant  Village Daloda

Mandsaur -
Madhya Pradesh - India

 Factory/plant  Survey No. 178, Surkandi Road,

Wadi -
Karnataka – India

 Factory/plant  Village Dobhi,

Dist.Mandla -
Madhya Pradesh - India

 Factory/plant  Bapulapadu Mandal, Ampapuram Village, Krishna

District
Vijayawada -
Andhra Pradesh - India

 Factory/plant  Survey No. 178, Surkandi Road,

Washim -
Maharashtra - India

 Factory/plant  IDA, ADB Road, Peddapuram,

East Godavari Distri -
Andhra Pradesh - India

44
EXPORTS

Ruchi Soya Industries Limited is the Flagship Company of Ruchi

Group, a pioneer soya processor group, which started operating
back in 1972-73 and is the first exporter of Soyabean Meal from
India. Over the years, Ruchi has become one of the largest
crushers of soyabean in India and presently has installed crushing
capacity of about 4.1 million tons annually in 12 plants. Being a
leading crusher, Ruchi with its annual export of about 6 lacs tons
has also become one of the largest exporters of Indian Soyabean
Meal accounting for nearly 25% of the total soyabean meal from
India. Soyabean meal (de-oiled extractions / cake) is obtained
after crushing of seed and extraction of oil by solvent extraction
process. Soyabean meal is considered as one of the most
valuable raw material for preparing poultry / aqua / animal feed in
the world market as it contains a very high percentage of protein.
Ruchi produces different grades of soyabean meal viz. de-hulled,
high pro and normal FAQ varieties.

Ruchi has been able to create a strong niche in the international

market for its soyabean meal which is in high demand particularly
by the quality feed producers in South East Asia, Far East and
Middle East markets.

Besides, Ruchi is also able to export high end value added

products like edible de-fatted soya flour, full fatted edible flour,
soya lecithin, soya granules, soya flakes and soya chunks etc.
All the products produced by Ruchi enjoy ready accessibility in
the export market namely, Japan, Vietnam, Indonesia, Thailand,
Philippines, South Korea, Taiwan, Middle East countries apart

45
from Indian Sub continent countries namely Bangladesh,
Pakistan, Nepal, Sri Lanka Iran,etc.

Expansion:-

Ruchi Soya Industries Limited has expanded its refining and

crushing capacities. Ruchi now has over 2.2 million metric tons
per anum of refining and over 4.1 million metric tons per anum of
crushing capacities, spread over strategic locations across India.

We are one of the few edible oil companies in the country that
has a balanced mix of inland and port based refineries. This
enables us to optimize production depending upon the availability
of various alternatives – local oilseeds or imported crude oil.
Moreover, multi- location refineries have reduced road travel
costs leading to significant transportation cost advantage. We
have 5 refineries at various locations and 12 inland crushing
plants out of which most are attached with refinery.

Featuring among the top five FMCG players in India, with a

turnover crossing Rs. 13,000 crores, Ruchi Soya Industries
Limited is the flagship company of Ruchi Group of Industries.
Besides being a leading manufacturer of high quality edible oils,
vanaspati, bakery fats and soya foods, Ruchi is also the highest
exporter of soya meal and lecithin from India. Nutrela (soya
chunks, granules and soya flour) is the largest selling soya foods
brand in the country.

46
Ruchi is a leading branded edible oil supplier. Nutrela Soyumm
(Soyabean Oil), Ruchi Gold (Palmolein Oil), Mahakosh, Sunrich
(Sunflower Oil) and Mandap (Mustard Oil) and new healthy oil
variants like Nutrela Vitamin Sunflower oil and Nutrela Groundnut
oil make Nutrela a trusted option in edible oils.

Superior procurement and trading skills, continuous innovation,

an endeavor to meet consumer needs and stringent quality
control standards have enabled Ruchi to emerge as a highly-
respected and admired Indian company.
Over the years, Ruchi Soya Industries Limited has grown to
become a multi-million US Dollar company. Two of our strongest
brands, Nutrela and Ruchi Gold are category leaders.

Nutrela, the most respected soya foods brand in the country,

enjoys sizeable market share. It has enjoyed the trust of
consumers for last 24 years now, and continues to expand its
range to cater to varying needs of its consumers. It has become
generic to the soya category. We have effortlessly strived to
educate people about health and goodness of soya as our firm
commitment is to provide healthy solutions to the consumers.

Our edible oils brands like Ruchi Gold and Nutrela Soyumm enjoy
mass acceptability and acclaim from the people. Ruchi Gold is the
leader in the palmoline category. As a part of packaged goods
thrust, Ruchi Gold was introduced in Chennai. Today, it enjoys
leadership position in branded palmoline oil category.

Mahakosh Refined Soyabean Oil is known for its purity and

premium taste, its nutritional qualities enhance its health
quotient. It contains fats that may help in reducing serum
cholesterol levels and omega-3 fatty acids that protect against
heart diseases.

Nutrela Soyumm ranks in one of the most popular oils in the

47
category, and continues to strive to reach the top position. Both
brands symbolize health and quality.

We are also a leading vanaspati manufacturer with brands like

Ruchi No. 1 and have also ventured into bakery and special fats
category.

The extensive distribution network, built over the years, is a

major strength for Ruchi Soya Industries Limited. Catering
nationally through over 6.25 Lac retail stores, with 96 Company
depots, over 3200 distributors and a sales staff of over 200, Ruchi
has attempted to penetrate depth wise, along with opening new
markets. With its emphasis on providing value goods to
consumers, dual strategy of Ruchi on popular and premium range
works well. ‘Ruchi Gold’ and ‘Sunrich’ are our value for money
offering but with no compromise in quality. This positioning helps
generate large sales volumes for the products. Our Nutrela series
is more premium, and offers healthy options in soya foods and
edible oils. This dual strategy is based on our cultivated
understanding of the Indian consumer psyche.

With undivided focus on new channels of distribution, we have a

firm footing in modern retail and prestigious hotel chains.
Company has alliances with like Pantaloon and visible presence in
all leading national and regional supermarkets.

48
49
 Ratio analysis

Is a method or process by which the relationship of items or

groups of items in the financial statements are computed,
and presented. Is an important tool of financial analysis. Is
used to interpret the financial statements so that the
strengths and weaknesses of a firm, its historical
performance and current financial condition can be
determined

Ratio

A mathematical yardstick that measures the relationship

between two figures or groups of figures which are related
to each other and are mutually inter-dependent. It can be
expressed as a pure ratio, percentage, or as a rate.

Words of caution

A ratio is not an end in itself. They are only a means to get

to know the financial position of an enterprise. Computing
ratios does not add any information to the available figures.
It only reveals the relationship in a more meaningful way so
as to enable us to draw conclusions there from.

Utility of Ratios

Accounting ratios are very useful in assessing the financial

position and profitability of an enterprise. However its utility
lies in comparison of the ratios.

50
Utility of Ratios

Comparison may be in any one of the following forms:

• For the same enterprise over a number of years

• For two enterprises in the same industry
• For one enterprise against the industry as a whole
• For one enterprise against a pre-determined standard
• For inter-segment comparison within the same
organisation

Classification of Ratios

Ratios can be broadly classified into four groups namely:

• Liquidity ratios
• Capital structure/leverage ratios
• Profitability ratios
• Activity ratios

Liquidity ratios

These ratios analyse the short-term financial position of a

firm and indicate the ability of the firm to meet its short-
term commitments (current liabilities) out of its short-term
resources (current assets). These are also known as
‘solvency ratios’. The ratios which indicate the liquidity of a
firm are:

• Current ratio
• Liquidity ratio or Quick ratio or acid test ratio

51
Current ratio

It is calculated by dividing current assets by current

liabilities.

Current ratio = Current assets

Current liabilities

Conventionally a current ratio of 2:1 is considered

satisfactory

CURRENT ASSETS

Includes:–

Inventories of raw material, WIP, finished goods, stores and

spares, sundry debtors/receivables, short term loans
deposits and advances, cash in hand and bank, prepaid
expenses, incomes receivables and marketable investments
and short term securities.

CURRENT LIABILITIES

Include: –

Sundry creditors/bills payable, outstanding expenses,

unclaimed dividend, advances received, incomes received

in advance,
52
provision for taxation, proposed dividend,

instalments of loans payable within 12 months,

bank overdraft and cash credit.

Quick Ratio or Acid Test Ratio

This is a ratio between quick current assets and current

liabilities (alternatively quick liabilities).

It is calculated by dividing quick current assets by current

liabilities (quick current liabilities)

Quick ratio = quick assets

Current liabilities (quick liabilities)

Conventionally a quick ratio of 1:1 is considered

satisfactory.

QUICK ASSETS & QUICK LIABILITIES

QUICK ASSETS are current assets (as stated earlier)

less prepaid expenses and inventories.

QUICK LIABILITIES are current liabilities (as stated earlier)

less bank overdraft and incomes received in advance.

53
Capital structure/ leverage ratios

These ratios indicate the long term solvency of a firm and

indicate the ability of the firm to meet its long-term
commitment with respect to repayment of principal on
maturity or in predetermined instalments at due dates and
periodic payment of interest during the period of the loan.

The different ratios are:

• Debt equity ratio

• Proprietary ratio

• Debt to total capital ratio

• Interest coverage ratio

• Debt service coverage ratio

Debt equity ratio

54
This ratio indicates the relative proportion of debt and equity
in financing the assets of the firm. It is calculated by
dividing long-term debt by shareholder’s funds.

Debt equity ratio = long-term debts

Shareholders’ funds

Generally, financial institutions favour a ratio of 2:1.

However this standard should be applied having regards to

size and type and nature of business and the degree of risk
involved.

LONG-TERM FUNDS are long-term loans whether secured

or unsecured like – debentures, bonds, loans from financial
institutions etc.

SHAREHOLDER’S FUNDS are equity share capital plus

preference share capital plus reserves and surplus minus
fictitious assets (eg. Preliminary expenses, past
accumulated losses, discount on issue of shares etc.)

Proprietary ratio

This ratio indicates the general financial strength of the firm

and the long- term solvency of the business.

This ratio is calculated by dividing proprietor’s funds by total

funds.

Proprietary ratio = Proprietor’s funds

55
 Total funds/assets

As a rough guide a 65% to 75% proprietary ratio is

advisable

PROPRIETOR’S FUNDS are same as explained in shareholder’s

funds.

TOTAL FUNDS are all fixed assets and all current assets.

Alternatively it can be calculated as proprietor’s funds plus

long-term funds plus current liabilities.

Debt to total capital ratio

In this ratio the outside liabilities are related to the total

capitalisation of the firm. It indicates what proportion of the
permanent capital of the firm is in the form of long-term
debt.

Debt to total capital ratio =long- term debt

Shareholder’s funds + long- term debt

Conventionally a ratio of 2/3 is considered

satisfactory.

Interest coverage ratio

This ratio measures the debt servicing capacity of a firm in

so far as the fixed interest on long-term loan is concerned.
It shows how many times the interest charges are covered
by EBIT out of which they will be paid.

Interest coverage ratio = EBIT

Interest

56
 A ratio of 6 to 7 times is considered satisfactory.
Higher the ratio, greater the ability of the firm to pay
interest out of its profits.

Debt service coverage ratio

This is a more comprehensive measure to compute the debt

servicing capacity of a firm. It shows how many times the
total debt service obligations consisting of interest and
repayment of principal in instalments are covered by the
total operating funds after payment of tax.

Debt service coverage ratio =

EAT+ interest + depreciation + other non-cash exp

Interest + principal instalment

EAT is earnings after tax.

Generally financial institutions consider 2:1 as a

satisfactory ratio.

Profitability ratios

57
 These ratios measure the operating efficiency of the firm
and its ability to ensure adequate returns to its
shareholders.

The profitability of a firm can be measured by its profitability

ratios.

Further the profitability ratios can be determined in relation

to sales and in relation to investments

Profitability ratios in relation to sales:

• Gross profit margin

• Net profit margin

• Expenses ratio

Profitability ratios in relation to investments:

• Return on assets (ROA)

• Return on capital employed (ROCE)

• Return on shareholder’s equity (ROE)

• Earnings per share (EPS)

• Dividend per share (DPS)

• Dividend payout ratio (D/P)

• Price earnings ratio (P/E)

58
Gross profit margin

This ratio is calculated by dividing gross profit by sales. It is

expressed as a percentage.

Gross profit is the result of relationship between prices,

sales volume and costs.

Gross profit margin = gross profit x 100

Net sales

A firm should have a reasonable gross profit margin to

ensure coverage of its operating expenses and ensure
adequate return to the owners of the business i.e. the
shareholders.

To judge whether the ratio is satisfactory or not, it should be

compared with the firm’s past ratios or with the ratio of
similar firms in the same industry or with the industry
average.

Net profit margin

This ratio is calculated by dividing net profit by sales. It is

expressed as a percentage. This ratio is indicative of the
firm’s ability to leave a margin of reasonable compensation
to the owners for providing capital, after meeting the cost of
production, operating charges and the cost of borrowed
funds.

Net profit margin =

net profit after interest and tax x 100

59
Net sales

Another variant of net profit margin is operating profit

margin which is calculated as:

Operating profit margin =

net profit before interest and tax x 100

Net sales

Higher the ratio, greater is the capacity of the firm to

withstand adverse economic conditions and vice versa

Expenses ratio

These ratios are calculated by dividing the various expenses

by sales. The variants of expenses ratios are:

Material consumed ratio = Material consumed x 100

Net sales

Manufacturing expenses ratio = manufacturing expenses

x 100

Net sales

Administration expenses ratio = administration expenses

x 100

60
 Net sales

Selling expenses ratio = Selling expenses x 100

Net sales

Operating ratio = cost of goods sold plus operating

expenses x100

Net sales

Financial expense ratio = financial expenses x 100

Net sales

The expenses ratios should be compared over a period of

time with the industry average as well as with the ratios of
firms of similar type. A low expenses ratio is favourable.

The implication of a high ratio is that only a small

percentage share of sales is available for meeting financial
liabilities like interest, tax, dividend etc

Return on assets (ROA)

This ratio measures the profitability of the total funds of a

firm. It measures the relationship between net profits and
total assets. The objective is to find out how efficiently the
total assets have been used by the management.

61
Return on assets = net profit after taxes plus interest x
100

Total assets

Total assets exclude fictitious assets. As the total assets at

the beginning of the year and end of the year may not be
the same, average total assets may be used as the
denominator.

Return on capital employed (ROCE)

This ratio measures the relationship between net profit and

capital employed. It indicates how efficiently the long-term
funds of owners and creditors are being used.

Return on capital employed =

net profit after taxes plus interest x 100

Capital employed

CAPITAL EMPLOYED denotes shareholders funds and long-

term borrowings.

To have a fair representation of the capital employed,

average capital employed may be used as the denominator.

62
Return on shareholder’s equity

This ratio measures the relationship of profits to owner’s

funds. Shareholders fall into two groups i.e. preference
shareholders and equity shareholders. So the variants of
return on shareholder’s equity are

Return on total shareholder’s equity =

net profits after taxes x 100

Total shareholder’s equity

TOTAL SHAREHOLDER’S EQUITY includes preference

share capital plus equity share capital plus reserves and
surplus less accumulated losses and fictitious assets. To
have a fair representation of the total shareholder’s funds,
average total shareholder’s funds may be used as the
denominator.

Return on ordinary shareholders equity =

net profit after taxes – pref. dividend x 100

Ordinary shareholders equity or net worth

ORDINARY SHAREHOLDERS EQUITY OR NET WORTH

includes equity share capital plus reserves and surplus
minus fictitious assets.

63
Earnings per share (EPS)

This ratio measures the profit available to the equity

shareholders on a per share basis. This ratio is calculated
by dividing net profit available to equity shareholders by the
number of equity shares.

Earnings per share =

net profit after tax – preference dividend

Number of equity shares

Dividend per share (DPS)

This ratio shows the dividend paid to the shareholder on a

per share basis. This is a better indicator than the EPS as it
shows the amount of dividend received by the ordinary
shareholders, while EPS merely shows theoretically how
much belongs to the ordinary shareholders

Dividend per share =

Dividend paid to ordinary shareholders

Number of equity shares

Dividend payout ratio (D/P)

64
This ratio measures the relationship between the earnings
belonging to the ordinary shareholders and the dividend
paid to them.

Dividend pay out ratio =

total dividend paid to ordinary shareholders x 100

Net profit after tax –preference dividend

OR

Dividend pay out ratio = Dividend per share x 100

Earnings per share

Price earning ratio (P/E)

This ratio is computed by dividing the market price of the

shares by the earnings per share. It measures the
expectations of the investors and market appraisal of the
performance of the firm.

Price earning ratio = market price per share

Earnings per share

Activity ratios

65
 These ratios are also called efficiency ratios / asset
utilization ratios or turnover ratios. These ratios show the
relationship between sales and various assets of a firm. The
various ratios under this group are:

• Inventory/stock turnover ratio

• Debtors turnover ratio and average collection period

• Asset turnover ratio

• Creditors turnover ratio and average credit period

Inventory /stock turnover ratio

This ratio indicates the number of times inventory is

replaced during the year. It measures the relationship
between cost of goods sold and the inventory level. There
are two approaches for calculating this ratio, namely:

Inventory turnover ratio = cost of goods sold

Average stock

AVERAGE STOCK can be calculated as

Opening stock + closing stock

Alternatively

Inventory turnover ratio = sales

Closing inventory

66
A firm should have neither too high nor too low inventory
turnover ratio. Too high a ratio may indicate very low level
of inventory and a danger of being out of stock and incurring
high ‘stock out cost’. On the contrary too low a ratio is
indicative of excessive inventory entailing excessive
carrying cost.

Debtors turnover ratio and average collection period

This ratio is a test of the liquidity of the debtors of a firm. It

shows the relationship between credit sales and debtors.

Debtors turnover ratio =

Credit sales

Average Debtors and bills receivables

Average collection period =

Months/days in a year

Debtors turnover

67
These ratios are indicative of the efficiency of the trade
credit management. A high turnover ratio and shorter
collection period indicate prompt payment by the debtor.
On the contrary low turnover ratio and longer collection
period indicates delayed payments by the debtor.

In general a high debtor turnover ratio and short

collection period is preferable.

Asset turnover ratio

Depending on the different concepts of assets employed,

there are many variants of this ratio. These ratios measure
the efficiency of a firm in managing and utilising its assets.

Total asset turnover ratio = sales/cost of goods sold

Average total assets

Fixed asset turnover ratio = sales/cost of goods sold

Average fixed assets

Capital turnover ratio = sales/cost of goods sold

Average capital employed

Working capital turnover ratio = sales/cost of goods sold

Net working capital

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 Higher ratios are indicative of efficient management and
utilisation of resources while low ratios are indicative of
under-utilisation of resources and presence of idle capacity.

Creditors turnover ratio and average credit period

This ratio shows the speed with which payments are made
to the suppliers for purchases made from them. It shows
the relationship between credit purchases and average
creditors.

Creditors turnover ratio =

credit purchases Average

creditors & bills payables

Average credit period = months/days in a year

Creditors turnover ratio

Higher creditors turnover ratio and short credit period signifies

that the creditors are being paid promptly and it enhances the
creditworthiness of the firm.

LIQUIDITY RATIO

1. CURRENT RATIO = Current ratio = Current assets

69
 Current liabilities

CURRENT CURRENT
ASSETS LIABLITIES
YEAR CURRENT
S (Rs Crore) (Rs Crore) RATIO

2006 2,415.83 1,586.50 1.52 : 1

2007 2,919.39 1,700.10 1.71: 1

2008 4,491.38 3,108.93 1.44: 1

2009 4,563.45 3,152.61 1.44: 1

2010 5,278.28 3,228.94 1.63: 1

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IDEAL RATIO: The ideal ratio should be 2:1 so that at any given
time the entire current liabilities can be off and surplus above 1 is
considered as margin of safety.

Graph No.1

Graphical representation of Current Ratio

INTERPRETATION OF CURRENT RATIO

Since for all the five years, the Current ratio has been above 1.33
(bench mark level), therefore the company is in a very strong
position to pay off all of its’ current obligation in the desired time
and is also capable of acquiring several surplus.

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2. QUICK RATIO

FORMULA: Quick assets/Current liabilities.

Quick assets = Current assets – Assets which cannot be

realised immediately i.e. Inventory.

YEARS 2006 2007 2008 2009 2010

CURRENT
ASSETS 2,415.83 2,919.39 4,491.38 4,563.45 5,278.28

(less)
INVENTORIES 869.91 957.87 2,138.23 1,509.33 1,587.28

1,961.5 2,353.1 3,054.1 3,691.0

QUICK ASSETS 1,545.92 2 5 2 0

CURRENT
ASSETS 1,586.50 1,700.10 3,108.93 3,152.61 3,228.94

QUICK RATIO 0.97 : 1 1.15 : 1 0.75 : 1 0.96 : 1 1.14 : 1

72
Graph no.2
Graphical representation of Quick Ratio

INTERPRETATION

If the actual quick ratio is equal to or more than the standard

quick ratio of 1:1, the conclusion can be that the company is
liquid and it can payoff its short-term liabilities out of its quickly
realisable assets without any difficulty. On the other hand, if the
quick ratio is less than the standard, the conclusion can be that
the company is not liquid.

The above table indicates that the company has not taken
adequate steps to bring the quick ratio closer to the standard
prescribed ratio except in the years 2007 and 2010. However the
recent trend has been towards correction as it has now moved to
1.14 in 2010. It should be noted that it is always better to have a
quick ratio higher than the prescribed standard than to have a
lower ratio as in this case where the ratio is lower than the
prescribed limit.

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LEVERAGE RATIOS

1. DEBT EQUITY RATIO = LONG TERM

DEBT/SHAREHOLDER’S FUND

LONG TERM SHARE HOLDER'S DEBT EQUITY

YEARS DEBTS FUND RATIO

2006 1,076.36 800.05 1.34 : 1

2007 1,469.76 888.39 1.65 : 1

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2008 1,559.58 1,106.63 1.40 : 1

2009 1,720.84 1,185.37 1.45 : 1

2010 2,346.36 1,924.79 1.21 : 1

IDEAL RATIO:

The ideal ratio is 1:2. This implies that the share holder’s fund
should be twice the long term debt in order to ensure the long-
term solvency of the company.

Graph no.3

Graphical representation of Debt Equity Ratio

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INTERPRETATION

The debt equity ratio is an important tool of financial analysis to

appraise the financial structure of the company. If this ratio is
high, it means that owners are putting in relatively less money of
their own. It is a danger signal for creditors because if the project
fails, the creditors will lose heavily. This may also lead to
irresponsible behaviour from the management. Thus, greater the
ratio, greater the risk to the creditors. A high proportion of debt in
the capital structure would lead to inflexibility in operations of the
company as the creditors may interfere in the management. Also
a high proportion of debt implies a heavy burden of interest
payments.

The long term debt of the company as compared to the

shareholder’s fund has not been well contained and the company
has a very little leverage to raise further long term from the
market. This is because, the debt equity ratio has been
constantly high in past 5 years.

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2. PROPERIETORY RATIO

FORMULA: SHARE HOLDER’S FUND/TOTAL ASSETS

TOTAL ASSETS = FIXED ASSTES + CURRENT ASSETS

SHARE HOLDER'S TOTAL PROPREITORY

YEARS FUND ASSETS RATIO

2006 800.05 1,876.43 0.42

2007 888.39 2,358.15 0.37

2008 1,106.63 2,666.20 0.41

2009 1,185.37 2,906.22 0.40

2010 1,924.79 4,271.15 0.45

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IDEAL RATIO

Generally, a ratio of 0.5:1 is considered ideal. Higher the

proprietor ratio, the stronger financial position of the company
and vice- versa.

Graph no.4

Graphical representation of Proprietary RATIO:

INTERPRETATION

It can be seen that the ratio over the five years is not in
accordance with the ideal ratio i.e. 0.34:1. We can also see that
the ratios are tried to keep at their ideal value but still it is rising.
This implies that the extent to which the shareholder’s fund is
used to finance the assets of the company is decreasing. But, the
overall financial position of the company can be considered quite
well.

78
PROFITABILITY RATIO

1. GROSS PROFIT RATIO = (Gross Profit/ Net sales)*100

GROSS GROSS PROFIT

YEARS PROFIT NET SALES RATIO(%)

2006 233.76 7,498.64 2.14

2007 295.98 8,582.06 2.46

2008 428.5 10,983.92 2.86

2009 283.63 12,148.81 1.39

2010 410.85 13,489.14 2.51

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GRAPH NO.5

Graphical representation of Gross Profit ratio:

INTERPRETATION

The above graph shows that there has been a heavy downfall in
the gross profit ratio from the year 2008 to 2009. But in the year
2010, gross profit ratio has increase substantially from 1.39% to
2.51%.

2.NET PROFIT RATIO

FORMULA=(NET PROFIT/NET SALES)*100

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 NET PROFIT
YEAR NET PROFIT NET SALES RATIO(%)

82.82
2006 7,498.64 1.09

100.70
2007 8,582.06 1.16

159.23
2008 10,983.92 1.43

93.28
2009 12,148.81 0.76

172.47
2010 13,489.14 1.27

GRAPH NO.6

Graphical representation of Net Profit Ratio:

81
INTERPRETATION

A high net profit ratio adequate return to the owners as well as

enables the company to withstand adverse economic conditions.
A high net profit indicates that the profitability of the company is
good and vice-versa. The company has been maintaining a
healthy trend in net profit ratio, but a downfall in the year 2009
can be seen.

3. OPERATING PROFIT RATIO

FORMULA: (OPERATING PROFIT/NET SALES)*100

OPERATING OPERATING
YEARS PROFIT NET SALES PROFIT RATIO(%)

2006 203.73 7,498.64 2.71

2007 273.62 8,582.06 3.18

2008 389.74 10,983.92 3.54

82
2009 255.43 12,148.81 2.1

2010 439.41 13,489.14 3.25

GRAPH NO.7

Graphical representation of Operating Profit ratio:

INTERPRETATION

Operating profit ratio of the company has been more or less in 2-

4% range. But in the year 2010, the operating profit ratio has
been substantially increased. This is reflective of the fact that the
assets of the company are being put to better use and cost
control is exercised efficiently.

83
RATIOS WHICH ARE IMPORTANT FORM THE POINT OF VIEW
OF MARKET INVESTORS – PARTICULARLY FOR LISTED
COMAPNIES:

MEANING OF EARNING PER SHARE, DIVIDEND PER SHARE , BOOK

VALUE AND RESERVES.Earnings per share (EPS) is the ratio
between net profit available for equity share holders and the
number of equity shares. In other words, it means earning
received for one equity share. EPS is the widely used ratio in
determining the company’s financial standing. Higher EPS, better
is the soundness of the company and vice-versa. Hence, every
company tries to maximize its EPS. Yet, EPS as a measure of
profitability of a company from the owners point of view should
be cautiously done as it does not recognize the effect of increase
in equity capital as a result of retention of earnings.

EPS= PROFIT AVAILABLE TO EQUITY SHARE HOLDERS

NUMBER OF EQUITY SHARES

84
GRAPH NO.8

GRAPH NO.9

INTERPRETATION

The EPS has been consistently going down. But in the year 2010
a growth can be seen.

BOOK
VALUE FREE
EARNINGS DIVIDEND PER RESERVES
YEARS PER SHARE PER SHARE SHARE PER SHARE

2006 14.88 2.2 10 228.14

2007 18.82 2.4 10 211.32

2008 6.76 0.5 2 51.13

2009 2.3 0.5 2 55.28

2010 5.72 0.5 2 42.3

85
The Dividend per share has been constant for last 3 years (2008,
2009, 2010) which denotes the smooth running of the company.

The book value of the shares are in line with that of the market
price.

The free reserves of the company have been constantly

decreasing.

TURNOVER RATIOS

86
INVENTROY RUNOVER RATIO

= COST OF GOODS SOLD

AVERAGE INVENTORY

AVERAGE INVENTORY =

(CURRENT INVENTORY+PREVIOUS INVENTORY)

COST OF GOODS AVERAGE INVENTORY

YEAR SOLD INVENTORY TURNOVER RATIO

2006 7,294.90 631.89 8.68

2007 8,308.44 913.89 9.02

2008 10,594.18 1548.05 5.25

2009 11,893.38 1823.78 8.41

2010 13,049.73 1353.08 8.89

87
GRAPH NO. 10

INTERPRETATION

The inventory turnover ratio measures how quickly the inventory

is sold. It is test of efficient inventory management. The high ratio
of inventory turnover is considered better than a low ratio as it
implies good inventory management.

From the analysis, the inventory turnover ratio of the company

has been constantly rising since 2009 which indicates better
management of current assets yielding better return.

DEBTOR TURNOVER RATIO

DEBTORS TURNOVER (VELOCITY) RATIO = NET ANNUAL

SALES

AVERAGE
DEBTORS

88
 AVERAGE DEBTORS TURNOVER
YEARS SALES DEBTORS RATIO

2006 7,498.64 581.15 12.9

2007 8,582.06 743.57 11.54

2008 10,983.92 932.02 11.79

2009 12,148.81 1032.27 11.77

2010 13,489.14 1111.82 12.13

GRAPH NO. 11

INTERPRETATION

There is no ideal ratio for debtors turnover ratio as it may differ

from company to company depending upon the nature of

89
business and its activities. Generally, the shorter the average
collection period, the better the trade credit management and
better the liquidity of the debtors as this would imply prompt
payment on the part if the debtors.

From the above table, the debtors outstanding in last 4 years

have been consistently low as compared to debtors outstanding
in the year 2006.

TOTAL ASSETS TURNOVER RATIO

FORMULA: NET SALES/TOTAL ASSETS

IDEAL RATIO:

The ideal total assets turnover ratio cannot be defined universally

and this varies significantly with each industry. Some of the
industries are highly capita intensive reflecting lower ratio
whereas some of the activities – particularly trading – are very
low capital intensive.

TOTAL ASSETS
TOTAL TURNOVER RATIO
YEAR NET SALES ASSETS (in times)

2006 7,498.64 1,876.43 4

2007 8,582.06 2,358.15 3.64

90
2008 10,983.92 2,666.20 4.13

2009 12,148.81 2,906.22 4.19

2010 13,489.14 4,271.15 3.17

GRAPH NO.12

INTERPRETATION

As explained above, no definite indicator could be attributed as

ideal ratio. However, comparing the past trends the company has
been able to put its assets to better use as indicated in the
increasing ratio trend.

TOTAL CAPITAL TURNOVER RATIO

91
FORMULA: NET SALES/ CAPITAL EMPLOYED

CAPITAL EMPLOYED = TOTAL ASSETS – CURRENT

LIABLITIES

TOTAL CAPITAL
NET CAPITAL TURNOVER RATIO
YEAR SALES EMLPLOYED (in times)

2006 7,498.64 289.93 25.86

2007 8,582.06 658.05 13.04

2008 10,983.92 442.73 24.80

2009 12,148.81 246.39 49.30

2010 13,489.14 1042.21 12.94

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GRAPH NO. 13

INTERPRETATION

The table above shows that the total capital turnover ratio has
been fluctuating every year, which means that the capital is not
being utilised in the business operations efficiently.

The company should continue making efforts to ensure that it

uses its capital to the optimum level possible.

FIXED ASSETS TURN OVER RATIO

FORMULA: SALES/FIXED ASSETS

IDEAL RATIO

Here again are no universal ideal ratio can be defined. If the

activity of the company is capital intensive the ratio would be
lower. If the activity is low on capital i.e. more in the form of
trading etc, the ratio could be very high.

93
 FIXED ASSTES TURNOVER
FIXED RATIO
YEAR SALES ASSETS (in times)

2006 7,498.64 1,004.10 7.46

2007 8,582.06 1,057.84 8.11

2008 10,983.92 1,178.23 9.32

2009 12,148.81 1,334.76 9.10

2010 13,489.14 1,960.52 6.88

GRAPH NO. 14

INTERPRETATION

In operational terms, a high ratio would indicate that the

company would have to go in for additional fixed assets to grow
and increase its sales, whereas a low ratio would indicate that

94
there is presence of idle capacity in the company and it can
expand its activity level without making further capital
investment. The ratio may vary from one organisation to another
due to capitalized value of fixed assets and its total active
production life.

The fixed assets turnover ratio shows a gradual increase till the
year 2009.

CURRENT ASSETS TURNOVER RATIO

FORMULA: NET SALES/CURRENT ASSETS

CURRENT ASSETS TURNOVER

CURRENT RATIO
YEAR SALES ASSETS (in times)

2006 7,498.64 829.33 9.04

2007 8,582.06 1,219.29 7.03

95
2008 10,983.92 1,382.45 7.94

2009 12,148.81 1,410.84 8.61

2010 13,489.14 2,049.34 6.58

GRAPH NO.15

INTERPRETAION

A high current assets turnover ratio is an indication of a better

utilisation of current assets. On the other hand, a low ratio
suggest that the current assets have not been utilised effectively.

The current assets turnover ratio has been fluctuating and hence,
we can say that the current assets utilisation has been done as
per the changing market scenario.

FINDINGS

96
In this project, the technique of ratio and trend analysis is used to
interpret the financial performance of RUCHI SOYA INDUSTRIES
LIMITED. The various ratios used to ascertain the performance of
the company comprises of Liquidity ratios, Leverage ratios,
Profitability as well as Turnover ratios. These ratios are
exhaustive to study the health and efficiency of the company. By
interpreting the ratios for the five financial years i.e. 2006 to
2010, which is sufficient to cover any business cycle in the
industry, the following findings are made:

1. LIQUIDITY RATIO

When we analyse the liquidity ratios such as, Current ratio, Quick
ratio and bank Finance to working capital ratio, we observe that
though there has been fluctuations in the liquidity position of the
company during the five years financial years considered, the
changes have been in line with the external factors affecting the
working of the company i.e. strikes, lock outs and expansions by
way of capital expenditure carried out by the company. Despite
the cyclical changes over the 5 years ratio of the company have
been fluctuating, but the short-term solvency position of the
company is good. It is able to meet its short-term commitments
in time.

97
2. LEVERAGE

Leverage ratio also called long term solvency ratio refers to

ability of the company to meet its long term obligations on time.
The long term debts of the firm include the debenture holders,
funding from financial institution as well as the creditors.

The debt equity ratio is also used to indicate the long term
solvency of the firm. The debts of a company should not be too
large because this implies a heavy burden of the interest.

According to this study, the company has always maintained a

debt equity ratio of less than 2. This indicates that the company
still carries a large leverage for long term funds from the market
for funding any future activity. A proper analysis a leverage ratio
reveals that the long-term solvency of Ruchi Soya Industries Ltd.
is and the company is financially sound.

The lower the debt equity ratio, the better position it is in for
negotiating with the lenders and investors. Thus they are in
position to negotiate for finer rate of interest.

98
3. PROFITABILITY

The primary objective of a business is to earn profits. A business

needs payments not only to divide payments but also for
expansion and diversification. Profits are a measure of the overall
efficiency of a business.

The net profit of the company has been almost doubled in the
past 5 years. A ratio which was 1.09% in the year 2006 has
jumped to 1.27% in 2010. This clearly states that the company
has been earning profits in a very systematic and constant form.

Having achieved higher profitability and profits the company has

also been good to its investors. This can be seen from the
dividend payout ratio over the last 5 years and also the retention
ratios.

This is good for the company as the equity shareholders are

confirmed of a good return for the risk undertaken by them.

99
Overall, Ruchi Soya Industries Ltd. has been posting regular
profits and has been giving favourable return to its shareholders,
which means that the company is financially sound.

4. TURNOVER

A look at the inventory turnover ratio indicates that the inventory

turnover ratio has been steadily increasing for this company
indicating better management of current assets yielding better
returns.

Debtors turnover ratio is expressed both in ratio form and in

absolute terms as well as in months terms when it is also called
debtors velocity. Here in the comparison the debtors velocity
concept has been used and from the study, the debtors
outstanding in months terms has been consistently improving
indicating the efficiency of the collection method adopted by the
company. Alternatively, this also indicates the ‘Sellers’ market in
which the company is operating wherein it is able to dictate
terms to purchase.

Creditors turnover ratio is also expressed both in ratio form and

in absolute terms as well as in months’ term when it is also called
creditors velocity. Here in the comparison the debtors velocity
concept has been used and from the study the company has
been consistently able to take advantage of market credit.

100
The total assets and capital turnover ratios reveal that the
company is utilising its capital to its maximum extent and there is
optimum utilisation of assets. As far as the efficiency of the usage
of working capital is considered, it can be said that the company
is ensuring optimum utilisation of working capital resources. Cash
turnover ratio of the company is also excellent, huge balances
and kept both in forms bank balances and liquid cash. Hence,
company can utilise its cash efficiently.

5. REWARDING INVESTORS

An analysis of the EARNINGS PER SHARE, DIVIDEND PER SHARE,

BOOK VALUE AND FREE RESERVES indicate that Earnings per
share have been consistently increasing and the results of 2010
show an EPS of Rs. 5.72 which is appropriate in market parlance.

The company has also been increasing the Dividend per share
consistently over the years which will attract investors to its
portfolio.

The book value of shares are in line with that of market price.

101
The free reserves of the company in 2010 have been reduced to
Rs. 42.3 which means that the company have in fact converted it
into equity shares in the ratio of 1:2. Thus the reserves have been
converted into capital which enhanced the net worth and added
value to the investors.

Thus the company has been very investor friendly and definitely
attracts investors for further capital expansion.

SUGGESTIONS

The industry was going through a rough patch till the year 2005.
The overcome this, the company diversified into various other
activities. This proved to be a wise decision as the company’s
operations improved substantially.

102
The price earnings ratio and dividend payment records are in the
company’s favour as they are in the position to raise further
funds from the market to fund this expansion / modernization.

Even the debt equity ratio in the range of 1:1 gives them
tremendous leverage to raise further loans/long term borrowings
from the market to fund their modernization.

CONCLUSION

There have been fluctuations in the performance of the company

over five years from 2006-2010 mainly due to the combined
effect of the internal as well as the external factors, which
influence the activities of the company. The company on the

103
whole enjoys a high liquidity position and its short term as well as
long term solvency is good.

The company is continuously trying to enhance its financial

performance and stability by adopting latest technology and
expanding its operation in various other fields.

The company has posted profits and the earnings per share
available to the equity shareholders have also increased which is
good sign for the company and the wealth maximization for its
shareholders. The company is using its resources efficiently.

BIBLIOGRAPHY

BOOKS

104
KEY MANAGEMENT RATIOS : CIARAN WALSH

FINANCIAL MANAGEMENT (7TH EDITION) : I.M.PANDEY

COST AND MANAGEMENT ACCOUNTING : S.P.JAIN & K.L.NARANG

MANAGEMENT ACCOUNTING : R.S.PILLA & AGAVATI

WEBSITES

www.moneycontrol.com

www.investorwords.com

www.ruchisoya.com

www.rediff.money.cn

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