SUMMER PROJECT 2011

PROJCT TITLE: RATIO ANALISYS PROJECT ON: ABB LTD. PROJECT GUIDE: Mr. SUNIL RATNAPARKHI PROJECT BY: 1} Mr. PRAKASH GITE 2} Mr. KISHOR JADHAV 3} Mr. PRAYAG ROKADE 4} Mr. BHUSHAN BORSE

1|Page

Introduction to the Topic:

I have chosen the topic named as ratio analysis to study the performance of the ABB. Ltd. Because it is very necessary to check the performance of any firm / company, there is always need of tool like ratio analysis which gives real information about any firm / company and which is very beneficial to shareholders, creditors and general public to take some important decisions regarding to their own interest.

The financial statements may not be realistic because certain basic concepts and conventions prepare them. These statements are interim reports and not the final reports. The final picture can be known only when the business is closed.

Therefore, there is need of analysis and interpretation of financial statements. This is necessary to find out the realistic picture of the business. This is also necessary to analyze the business from various angles like liquidity, profitability, solvency etc.

2|Page

Company Profile:

y Highlights:

Company dedicated to supply quality products to varied clientele, embracing an assortment of market segments. Quality in product being innate company try to focus on the opportunity in business associations. Buoyed by a dedicated & diligent task force to meet the most stringent standards & commitment schedules. Companies accomplishment an increasing number of very satisfied clients.

y The Organization:
A vanguard establishment with state of the art machinery, R & D backed by world class manufacturing facilities & stringent quality control ERDA certifies products for Indian Standards for their quality & performance. ABB (www.abb.com) is a leader in power and automation technologies that enable utility and industry customers to improve performance while

3|Page

lowering environmental impact. The ABB Group of companies operates in around 100 countries and employs about 124,000 people.

y Products:

1. Automatic Power Factor Control (APFC) / RTFC Panels

2. Low Voltage (LV) & Medium Voltage (MV) Panels

3. Energy monitoring systems for lighting

4. Compact secondary substation

5. Electrical & Telecommunication Towers

6. Scaffolding

7. Hot dip Galvanizing

4|Page

8. AERATED Concrete Panels (ACP)

9. Export & Merchandising

Corporate Mission Statement:

Availability of sufficient quality energy for nation with sage & green environment as adherent part of bus, building profits by providing measured solutions in the field of Energy Transmission& Distribution, Infrastructure & international Business activities.

y To companys customers:

An organization to the phenomenon of bringing in & incorporating the latest in technology, in its products. At ABB, the company understands the meaning of the word Prompt, & knows that companys customers want accurate advice today- not a response later, hence a nationwide marketing & service network- providing a high level of customer interaction & efficient attendance to the service requirements.

5|Page

y To companys values:

Maintain customer satisfaction throughout the product life cycle & create an environment of immeasurable value based on mutual trust & high standard of business conduct.

Companys Specialization:

1. Thyristor Switched Automatic Power Factor correction system

2. Energy Monitoring system

3. Compact Power station

4. Structural Steel Towers & Hardware

5. Panels as per customer specification

6|Page

6. AERATED Concrete Panels (ACP)

7. International Business Activities

Quality Policy:

ABB. Ltd. Is engaged in design & development, manufacture, supply & serving of APFC Panels & in manufacturing, supplying of automotive sheet metal components & its assemblies, transmission & distribution products such as switchgear, LV, HV & MV electrical control panels, telecommunications & transmission towers, substation structures & other similar structures & scaffoldings.

The company shall increase satisfaction of its valuable customers by supplying products

7|Page

at optimum price as per their specifications, packaging them & delivering as per agreed schedule all the time. This shall be achieved through:

Continual improvement in all the areas of operations. Establishing & reviewing measurable quality objectives.

Ensuring minimum waste generation, proper disposal of waste generated during various processes & safe operating practices for & through all employees.

Emphasis on employee involvement & empowerment.

Objectives of Study:

An objective of project shows purpose of project. Design of project is totally depend upon objectives of that project.

The important objectives of project are as under:

1} to explain importance of Analysis of Financial Statement as well to find out different

8|Page

ratios of company.

2} To know the profile of ABB. Ltd.

3} To study Financial Statement & prepare Comparative Balance Sheet.

4} To prepare Comparative Income Statement.

5} To study application of various ratios.

6} To assess the financial stability of concern.

y Limitations of the Project:

1]. Due to confidentiality some important information, which are important for the project, could not be collected.

2].Some of the information is lack of accuracy, due to which approximately values where used for the analysis. Hence, the results also reveal approximate values.

3]. As the duration of project was only two months, therefore it was not sufficient for the study. 9|Page

Research Methodology:

Intensive research has been done during this project to find out the necessary information regarding both the Ratio analysis in ABB. Ltd. While working in the organization, I could gather much information during practical work being carried out by me. Apart from this, the

methodology applied to collect the necessary information is discussed below.

Research can be done primarily with the help of two types of data: -

Primary Data: -

This is mainly concerned with first hand information. It consists of preparing the taking interviews, Based on the information received from the answer in the interviews detailed reports is being prepared.

Secondary Data: -

This is mainly concerned with first hand information. It consists of collecting the

10 | P a g e

relevant information from different documents, books, journals, previous reports etc.

During my project, there was a use of the second method i.e. Secondary data for my research. I used books, documents, previous year reports etc to get the detailed information regarding financial statements.

Questionnaire Method:

To study the project, Critical Analysis of Financial Statements of, questionnaire was used as I asked few questions to the Finance Executive and other staff for the relevant information.

The history of the company

Numbers of staff working for the company.

Other company related information.

Areas of operations.

11 | P a g e

Financial Statements:

y Meaning:

Financial statements are prepared for the purpose of presenting a periodical review or report on the progress by the management and deal with the status of the investment in the business & result achieved during the period under review. The data exhibited in these financial statements are the result of combined effect of:

Recorded facts; Accounting conventions; Assumptions made to implement conventional procedures; Personal judgments used in the applications of conventions & assumptions; Accounting standards and guidance notes.

y Characteristics of Financial Statements:

1) Financial Statements provide reliable financial information about economics resources and obligations of a business enterprise.

12 | P a g e

2) Financial Statements provide reliable information about the net resources (resources less obligations) of an enterprise that result from its activities.

3) Financial Statements provide financial information that assist in estimating the earning potentials of a business.

4) Financial Statements provide other needed information about changes in economic resources or obligation.

5) Financial Statements disclose, to the extent possible, other information related to the financial statements that is relevant to the needs of the users of these statements.

y Importance of Analysis & Interpretation:

Published financial statements are only the source of information about the activities & affairs of a business entity available to the public, share holder, investors & creditors, & the governments. These various groups are interested in the progress, position & prospects of such entity in various ways. But these statements however, correctly & objectively prepared, by themselves do not reveal the significance, meaning & relationship of the information contained therein. For this purpose, financial statements have to be carefully studied, dispassionately analyzed & intelligently interpreted. This enables a forecasting of the prospects for future

13 | P a g e

earnings, ability to pay interest, debts maturities both current as well as long-term, & probability of sound financial & dividend policies.

y Comparative Statements:

These financial statements are so designed as to provide time perspective to the various elements of financial position contained therein.

i. Absolute money values of each items separately for each of the period stated.

ii. Increase & decrease in absolute data in terms of money values.

iii. Increase & decrease in terms of percentages.

iv. Comparison expressed in ratios.

v. Totals of percentages.

Such comparative statements are necessary for the study of trends & direction of movement in the financial position & operating results. This call for a consistency in the practice of preparing these statements, otherwise comparability may be distorted. Comparative statements

14 | P a g e

enable horizontal analysis of figures.

There are two important types of comparative statements:

A]. Comparative Balance Sheet:

A comparative balance sheet shows the balance of accounts of assets & liabilities & different date & also the extent of their increase & decrease between these dates throwing light on the trends & direction of the changes in the position over period. This help in predicting about the position of the business in future.

B]. Comparative Profit & Loss Account or Income Statements:

Comparative income statement shows the operating result for a number of accounting periods & change in data significantly in absolute money terms as well as in relative percentage.

15 | P a g e

Ratio Analysis:

y Introduction:

Ratio can be defined as numerical or an arithmetical relationship between two figures. It is expressed when one figure is divided by the other.

For example: if 5000 is divided by 10000, the ratio can be expressed as 0.5 or 50%.

Absolute figures are no doubt, valuable but standing alone, they do not convey any meaning unless they are compared with each other. Accounting ratios show an interrelationship, which exists among various figures shown in the financial statements?

y Importance of Ratio Analysis:

1]. The ratios are very useful in inter-firm & intra-firm comparisons. Inter-firm

16 | P a g e

comparison is necessary to find out the exact position of a firm / company as compared to other firm / companies in the same industry. Intra-firm comparison is also necessary to compare the performance of a firm of current year with that of previous years.

2]. The ratios are calculated for a number of years, which helps in setting future plans & forecasting. I.e. Net Profit as expressed as a percentage of sales can be forecasted on the basis of the past percentage of the same.

3]. The ratios are of great assistance in locating the weak spots in the business. This weakness may exist in a business in spite of a satisfactory performance otherwise. i.e. if a firm / company finds that increase in selling & distribution expenses is more than proportionate to the results expected or achieved, remedial steps can be taken to overcome this situation.

4]. Accounting ratios reveal the financial position of a business firm / company. This helps banks, insurance companies as well as other financial institutions in assessing a firm / company before sanctioning any loan to them. Similarly, the ratios are also helpful to investors for finding the profitability of a firm / company.

Classification of Ratios:

17 | P a g e

y Profitability Ratio

y Turnover Ratio

y Financial Ratio

18 | P a g e

ABB. Ltd

Comparative Balance Sheet (As on 31st March, 2007 & 2008)(Rs. In ,000)

Sc Particulars h. 31-03-2007

Increase 31-03-2008 decrease Amts.

or Increase or in decrease in %

Sources of funds

Share Capital

423,817

423,817

Reserve & surplus

15,839,626

20,765,715

Secured loans

5,660

202

Unsecured loans

Deferred tax liabilities

128,034

38,034

19 | P a g e

Total

16,397,137

21,227,768

4,830,631

29.46

Application funds

of

Fixed Assets

Gross Block

5,769,125

7,664,819

Less: Depreciation

2,249,827

2,206,494

Net Block

3,519,298

5,458,325

1,939,027

55.09

Capital progress

work

in 1,059,418 1,375,145 _ _

Total Fixed Assets

4,578,716

6,833,470

2,254,754

49.24

20 | P a g e

Investments

704,546

611,244

(-)93302

(-)13.24

Current

Assets

&

Loans & Advances

Inventories

4,887,102

6,426,534

Sundry debtors

24,235,625

29,758,869

5,523,244

22.79

Cash and bank

6,428,636

3,482,313

Other current assets

2,753,603

3,812,881

Loans & advances

2,802,023

3,517,663

Less: Current liabilities and Provision

Current liability

29,314,878

31,618,924

2,304,046

7.86

21 | P a g e

Provision

678,236

1,596,282

Net Current Assets

29,993,114

33,215,206

Total

16,397,137

21,227,768

4,830,631

29.46

22 | P a g e

ABB. Ltd

Comparative Income Statement (For the year ended 31st March 2007 & 2008)

(Rs. In ,000)

Sch Particulars .

31-03-2007 31-03-2008

Increase decrease Amts.

or Increase or in decrease in %

INCOME

Sales and Services

63,832,682

73,402,391

9,569,709

14.99

Less - Excise duty

4,529,568

5,032,076

Sales and Services(Net)

12

59,303,114

68,370,315

9,067,201

15.28

Other Income

13

710,454

1,304,192

593,738

83.57

23 | P a g e

Total

60,013,568

69,674,507

9,660,939

16.09

Expenditure

Cost of Material And erection Services

42,920,333

49,504,181

Personal Exp

14

3,060,684

4,029,637

Other exp.

15

6,075,802

7,138,790

Depreciation/Amortizati on

324,057

366,805

Interest Expenses

68,123

346,600

278477

408.78

Total

52,448,999

61,342,067

8,875,068

16.92

Profit Before Tax

7,564,569

8,332,440

767,871

10.15

24 | P a g e

Provision for Tax:

Current Tax

2,563,879

2,858,210

Deferred tax

(11,000)

(90,000)

Fringe Benefit tax

95,000

90,100

Profit After Tax

4,916,690

5,474,130

557,440

11.33

Add: Balance brought forward

519,255

627,930

Appropriation

General Reserve

4,250,000

5,000,000

Proposed Dividend

466,198

466,198

Corporate Dividend Tax

79,230

79,230

25 | P a g e

Corporate Dividend Tax -2006

12,587

Balance carried forward

627,930

556,632

Basic Earnings

and per

Diluted Equity

23.20

25.83

2.63

11.33

Share(in Rs.)

26 | P a g e

ABB. Ltd

Comparative Balance Sheet (As on 31st March, 2008 & 2009) (Rs. In ,000)

Sch Particulars . 31-03-2008

Increase 31-03-2009 decrease Amts.

or Increase or in decrease in %

Sources of funds

Share Capital

423,817

423,817

Reserve & surplus

20,765,715

23,813,515

3,047,800

14.67

Secured loans

202

Unsecured loans

Deferred tax liabilities

38,034

27 | P a g e

Total

21,227,768

24,237,332

Application funds

of

Fixed Assets

Gross Block

7,664,819

8,792,636

Less: Depreciation

2,206,494

2,061,340

Net Block

5,458,325

6,731,296

1,272,971

23.32

Capital progress

work

in 1,375,145 1,163,391 _ _

Total Fixed Assets

6,833,470

7,894,687

1,061,217

15.53

Investments

611,244

168,792

-442,452

-72.38

28 | P a g e

Current

Assets

&

Loans & Advances

Inventories

6,426,534

7,294,061

Sundry debtors

29,758,869

28,577,298

Cash and bank

3,482,313

5,241,405

Other current assets

3,812,881

3,203,027

Loans & advances

3,517,663

3,176,861

Less: liabilities Provision

Current and

Current liability

10

31,618,924

29,869,326

-1,749,598

-5.53

Provision

11

1,596,282

1,450,439

29 | P a g e

Net Current Assets

13,783,054

16,172,887

2,389,833

17.34

Total

21,227,768

24,237,332

ABB. Ltd

Comparative Income Statement

(For the year ended 31st March, 2008 & 2009)

(Rs. In ,000)

Sch. Particulars

31-03-2008 31-03-2009

Increase decrease Amts.

or Increase or in decrease in %

INCOME

Sales and Services

73,402,391

64,945,710

30 | P a g e

Less - Excise duty

5,032,076

2,573,696

Sales and Services(Net)

68,370,315

62,372,014

-5,998,301

-8.77

Other Income

1,304,192

725,696

-578,496

-44.35

Total

69,674,507

63,097,710

Expenditure

Cost of Material And erection Services

49,504,181

45,178,728

-4,325,452

-8.73

Personal Exp

4,029,637

3,892,346

Other exp.

7,138,790

8,026,815

Interest Expenses

366,805

256,242

31 | P a g e

Capitalized Exp.

15,473

Depreciation/Amortizat ion

346,600

485,058

Total

61,342,067

57,823,716

-3,518,351

-5.73

Profit Before Tax

8,332,440

5,273,994

Provision for Tax:

Current Tax

2,858,210

1,805,255

Deferred tax

(90,000)

(39,000)

Fringe Benefit tax

90,100

(38,652)

Profit After Tax

5,474,130

3,546,391

32 | P a g e

Add:

Balance

627,930

556,632

brought forward

Appropriation

General Reserve

5,000,000

3,000,000

Proposed Dividend

466,198

423,817

Corporate Tax

Dividend

79,230

72,028

Balance forward

carried

556,632

607,178

Basic

and

Diluted

25.83

16.74

-9.09

-35.19

Earnings per Equity Share(in Rs.)

33 | P a g e

Interpretation of Comparative Balance Sheet:

Analysis of balance sheet changes between 2008 and 2009 reveal as under:

There is increase both in fixed assets and current assets. The total fixed assets have increase by Rs.1,061,217 i.e. by 15.53 % and the total current assets by Rs.494,392i.e by 1.05 % because of there is increase in current assets such as increase in inventories and cash balance the company remains excess working capital for meeting their requirements.

The current liabilities have been decreased by Rs.1,749,598 i.e. by 5.53% because of there is decrease in sundry creditors as well as bills payable whereas the increase in current assets of Rs.2,389,833 i.e.by17.34%. Though from the view point of absolute figures the total current assets have been increased more than the total current liabilities.

The proprietors funds have been increased by Rs.3,047,800 because of increase in Reserve and Surplus. So far as the current liabilities are concerned, the creditors have been decreased by Rs.1,716,352 by 10.40 %.

Total investment have decreased by Rs.442,452 i.e. by 72.38 %, & Net Current Assets increased by Rs.2,389,833 i.e. by 17.34%

34 | P a g e

Interpretation of Comparative Income Statement:

The turnovers for the year 2009 have been decreased by Rs.3,518,351 i.e. by 5.37 % over the turnover for 2008. Thus the turnover indicates the unfavorable position. Material decreased by Rs.4,325,452 i.e. by 8.73 %.

Other incomes have decreased by Rs.578,496 i.e. by 44.35 %.

1}. Profitability Ratio:

This ratio gives an idea about the profitability of a business firm / company. Profit & Profitability differ from each other as profit is the difference between income & expenditure while profitability is measured by comparing the profit with some other parameter like sales, capital employed, total assets etc. The ratios falling under this category are usually expressed in percentage.

I].Gross Profit Ratio:

35 | P a g e

Gross Profit is the difference between the net sales (sales less sales returns) & the cost of goods sold. This ratio is calculated with the help of the following formulae:

Gross Profit Ratio = Gross Profit / Net Sales * 100

Year 2007

= 7,564,569 / 59,303,114 * 100

= 12.75%

Year 2008

=8,332,440 / 68,370,315* 100

= 12.18%

Year 2009

= 5,273,994/62,372,014 * 100

= 8.45%

36 | P a g e

Gross Profit Ratio

14 12 10 8 6 4 2 0 2007 2008 2009 Gross Profit Ratio

This ratio shows the margin left after meeting the purchases & manufacturing costs. It measures the efficiency of production as well as pricing. A high gross profit ratio means a high margin for covering other expenses like administrative, selling & distribution expenses, i.e. other than the cost of goods sold. Therefore, higher the ratio, the better it is.

Interpretation:

Gross Profit Ratio shows that company has unable to maintained the cost arises for the production, & this is almost same for the all three years. It is not good sign for the company to maintain the profitability.

37 | P a g e

II]. Net Profit Ratio:

This ratio shows the earnings left for shareholders (equity & preference) as a percentage of net sales. It measures efficiency of all the functions of a business firm / company like production, administration, selling, financing, pricing, tax management etc. This ratio is very useful for prospective investors because it reveals the overall profitability of the firm / company. Higher the ratio, the better it is because it gives an idea of overall efficiency of the firm / company. This ratio is calculated as follows:

Net Profit Ratio

= Net Profit / Net Sales * 100

Year 2007

= 4,916,690/59,303,114 * 100

= 8.29%

Year 2008

= 5,474,130/68,370,315 * 100

= 8%

38 | P a g e

Year 2009

= 3,546,391/ 62,372014 * 100

= 5.69%

9 8 7 6 5 4 3 2 1 0 2007 2008 2009 Series 2

Interpretation:

Net Profit Ratio shows that the company has unable to controlled all direct as well as indirect expenses so that the ratio is decreases from year 2007 to 2009, it rapidly declines in

39 | P a g e

year 2009 because there is decrease in net profit due to increase in expenses.

III]. Return on Capital Employed:

This ratio indicates the percentage of net profits before interest & tax to total capital employed. The capital employed is calculated as follows.

(Capital Employed = Equity Capital + Preference Capital + Reserve & Surplus + Long Term Debt Fictitious Assets)

This ratio is calculated as follows,

Return on Capital Employed =

Net Profit before Interest & Tax / Capital Employed * 100

Year 2007

= 7,564,569 / 16,263,443 * 100

= 46.51%

Year 2008

= 8,332,440 /21,189,532 * 100

40 | P a g e

= 39.32%

Year 2009

= 5,273,994 /24,237,332* 100

= 21.76%

Return on Capital employed

50 45 40 35 30 25 20 15 10 5 0 2007 2008 2009 Return on Capital employed

This ratio is considered to be a very important one because it reflects the overall efficiency with which capital is used. This ratio of a particular business should be compared with other business firms / companies in the same industry to find out the exact position of the business.

41 | P a g e

Interpretation:

This ratio gives healthy sign in the year 2007, but it drastically decreases in next year from 46.51% to 39.32%. And in next year it again decline from39.32% to 21.76%

IV] Return on Equity:

This ratio, also known as return on shareholders funds or return on proprietors funds or return on net worth, indicates the percentage of net profit available for equity shareholders to equity shareholders funds.

Return on Equity =

Net Profit after Interest, Income tax & Preference dividend if any / Equity shareholders fund * 100

Note: Equity shareholders fund = Equity capital + Reserve & surplus

Year 2007

= 4,916,690/ 16,263,443* 100

= 30.23%

42 | P a g e

Year 2008

= 5,474,130/ 21,189,532 * 100

= 25.83%

Year 2009

= 3,546,391/24,237,332* 100

= 14.63%

Return on Equity
35 30 25 20 15 10 5 0 2007 2008 2009 Return on Equity

This ratio indicates the productivity of the owned funds employed in the firm / company.

43 | P a g e

However, in judging the profitability of a firm / company, it should not be overlooked that during inflationary periods, the ratio may show an upward trend because the numerator of the ratio represents current values whereas the denominator represents historical values.

Interpretation:

This ratio again shows good % in the year 2007 & after that it decreases slightly & again decrease drastically. Where net profit increases but not in that proportion actually it requires. So that starting with 30.23% it goes down to 14.63%.

V]. Return on Total Assets:

This ratio compares the net profit after tax with the total assets. The formulae for calculation of this ratio are as follows:

Return on Total Assets = Net Profit After Tax / Total Assets * 100

Year 2007

= 4,916,690/ 5,769,125 * 100

44 | P a g e

= 85.22%

Year 2008

= 5,474,130/7,664,819 * 100

= 71.42%

Year 2009

= 3,546,391/8,792,636 * 100

= 40.33%

Return on Total Assets

90 80 70 60 50 40 30 20 10 0 2007 2008 2009 Return on Total Assets

45 | P a g e

Interpretation:

This ratio again shows good % in the year 2007 i.e. 85.22% & after that it decreases to i.e. 71.42% & again decline drastically i.e. 40.33% due to the merger. Where net profit increases as well as total assets also increases, But when we considering total assets it goes up tremendously so that it affects the overall returns on total assets.

VI] Earnings per Share (EPS):

This indicates the amount of profit available for distribution amongst the equity shareholders. This ratio is calculated as shown below:

Earnings per Share =

Net Profit after Interest, Income Tax & Preference Dividend / Number of Equity Shares

Year 2007

= 4,916,690,000/ 211,908,375

46 | P a g e

= Rs.23

Year 2008

= 5,474,130,000/ 211,908,375

= Rs.25

Year 2009

=3,546,391,000 / 211,908,375

= Rs.16

EPS
30 25 20 15 EPS 10 5 0 2007 2008 2009

If EPS increases, the possibility of a higher dividend per share also increases. However,

47 | P a g e

the dividend payment depends on the policy of the company.

Interpretation:

This ratio shows positives sign for the company where starting with Rs.23 it goes up to Rs.25 dues to increase in Net Profit. But this rally stop and EPS start falling in 2009 which is not as per expectation.

2}. Turnover Ratio:

These ratios are also known as activity ratios or asset management ratios. These ratios are very important for a business concern to find out how well the facilities at the disposal of the concern are being used. These ratios are usually calculated on the basis of sales or cost of goods sold. High turnover ratios indicate better utilization of resources.

Required figures for Turnover Ratio are as follows:

Particulars

Year 2007

Year 2008

Year 2009

Working Capital

8,990,088

11,861,673

14,446,465

48 | P a g e

Average Debtors

15,702,677+24,235,625 / 2 24,235,625+29,758,869 / 2 29,758,869+90110473 / 2 =19969151 = 26,997,247 = 59,934,671

I}. Working Capital Turnover Ratio:

This ratio compares the net sales with net working capital of the business firm / company. The indication given by this ratio is the number of times working capital is turned around in a particular period. The ratio is calculated with the help of the following formulae:

Working Capital Turnover Ratio = Net Sales / Net Working Capital

(Net Working Capital = Current Assets Current Liabilities)

Year 2007

= 59,303,114 / 8,990,088

= 6.60 Times

Year 2008

= 68,370,315 / 11,861,673

= 5.76 Times

49 | P a g e

Year 2009

= 62,372,014/ 14,446,465

= 4.31Times

Working Capital Turnover Ratio

7 6 5 4 3 2 1 0 2007 2008 2009 Working Capital Turnover Ratio

The higher this ratio, the better is the utilization of the working capital & also indication of lower working capital. However, a very high working capital turnover ratio is a sign of over trading & a firm / company may face shortage of working capital. A firm / company should compare this ratio with the ratio of other firm / companys in the same industry & also with the

50 | P a g e

industry average to find out its position as compared to other firm / companys.

Interpretation:

This shows net sales are 6.60 times more than the net working capital in the year 2007 & it decreases 5.76 Times in the year 2008 & after that it again decreases as it shows that how the net working capital is used with the net sales as it decreases means there is no better utilization of net working capital.

3} Financial Ratios:

These ratios are calculated to judge the financial position of a business firm / company from the long- term as well as the short- term angle.

Required figures for Financial Ratios are as follows:

Particulars

Year 2007

Year 2008

Year 2009

Current Assets

38,304,966

43,480,597

44,315,691

51 | P a g e

Current Liabilities

28,336,307

31,618,924

29,829,326

Quick Assets

38,304,966 - 4,887,102 =

43,480,597 - 6,426,534 =

44,315,691 - 7,294,061 =

33,417,864

37,054,063

37,021,730

I] Current Ratio:

This ratio is calculated by dividing current assets by current liabilities. Current ratio is also known as solvency ratio as it indicates how the expected current claims are covered by current assets. This ratio is calculated with the help of the following formulae:

Current Ratio = Current Assets / Current Liabilities

Year 2007

= 38,304,966/ 28,336,307

= 1.35 Times

Year 2008

= 43,480,597/ 31,618,924

52 | P a g e

= 1.38 Times

Year 2009

=44,315,691 / 29,829,326

= 1.49 Times

Current Ratio
1.55 1.5 1.45 1.4 Current Ratio 1.35 1.3 1.25 2007 2008 2009

Normally it expected that the current ratio should be 2:1, which indicates that current assets should be twice as compared to the current liabilities. A very high current ratio will not indicate a favorable position as it means that there is an excessive investment in current assets is made. This will result in decrease in profitability due to blocking of large funds in working

53 | P a g e

capital.

Interpretation:

This ratio indicates the proportion of current assets available for meeting the current liabilities. Here in the year 2007, the current assets are 1.35 times than current liabilities, after that it gradually increases from 1.38 times to 1.49 times respectively in the year 2008 & 2009, It indicates company is in good position.

II] Liquid / Quick / Acid Test Ratio:

This ratio is used to measure the ability to honor day-to-day commitments. It is the ratio between the liquid assets & liquid liabilities. From the Balance Sheet, liquid assets are calculated by deducting inventories from current assets. Liquid liabilities are current liabilities less bank overdraft & cash credit. The formulae for calculation of this ratio are as follows:

Liquid / Quick / Acid Test Ratio =

Liquid Current Assets / Liquid Current Liabilities

(Current Assets, Loans & Advances Inventories / Current Liabilities & Provisions -

54 | P a g e

Bank Overdraft - Cash Credit)

Year 2007

= 33,417,864/

= 1.25 Times

Year 2008

= 37,054,063/

= 1.11 Times

Year 2009

=37,021,730 /

= 1.11 Times

Liquid / Quick / Acid Test Ratio

1.25

1.11

1.11

Year 2007

Year 2008

Year 2009

55 | P a g e

The ideal liquid ratio is considered to be 1:1, which means that liquid current assets should be equal to the liquid current liabilities.

This ratio indicates whether the firm / company has the ability to pay its short-term liabilities or not.

Interpretation:

The ideal liquid ratio should be 1:1, but here in 2007, it indicates the liquid current assets are 1.25 times than liquid current liabilities; Means Company

III] Debt-Equity Ratio:

This ratio is calculated to measure the comparative proportion of borrowed funds & shareholders funds invested in the firm / company. A firm / company raises funds through owned funds, which are also called as shareholders funds or proprietors funds as well as borrowed funds. The proportion between these two sources should be properly balanced; otherwise the firm / company may face problems. This ratio indicates this proportion & calculated as shown below:

Debt-Equity Ratio = Long Term Debt / Shareholders Funds

56 | P a g e

Year 2007

= 0/ 16,263,443

= 0:1

Year 2008

= 0 / 21,227,768

= 0:1

Year 2009

= 0 / 24,237,332

= 0:1

Ideally this ratio should be 2:1, which means that debt can be twice as compared to the owned funds. A ratio less than 2:1 will indicate that the firm / company is not taking any risk & is mainly using shareholders funds for financing its requirements. However, if this ratio is above 2:1, it will indicate that the firm / company is using mainly borrowed funds to finance its requirements. This may prove to be more risky in the future & hence a firm / company should keep a constant watch on this ratio.

Interpretation:
57 | P a g e

This ratio in 2007,2008and 2009 shows total safe position, there was no long term debt, there may be short term loans. Means company is using more shareholders funds than borrowed fund. Means company doesnt want take any risk in the business.

IV] Proprietary Ratio:

It is primarily the ratio between the proprietors funds & total assets. This ratio is calculated with the help of the following formulae:

Proprietary Ratio = Proprietors Fund / Total Assets

Year 2007

= 16,263,443 / 46,290,251

= 0.35 Times

Year 2008

= 21,227,768/ 54,442,974

= 0.39 Times

Year 2009

= 24,237,332 /55,557,097

= 0.44 Times

58 | P a g e

Proprietary Ratio
0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2007 2008 2009 Proprietary Ratio

This ratio indicates the proportion of proprietors funds used for financing the total assets. As a very rough measure, it is suggested that 2/3rd to th of the total assets should be financed through the proprietors funds while the balance may be financed through borrowings. A high ratio will indicate high financial strength but a very high ratio will indicate that the firm / company is not using external funds adequately.

Interpretation:

The proprietors funds should be 0.35 times than total assets to finance the total assets; this is ideal proportion. In 2007, the ratio indicates almost ideal proportion i.e. 0.35 times.

59 | P a g e

But in 2008, ratio i.e. 0.39 times indicates that the firm / company is using more proprietors funds. Similarly in 2009, ratio is again 0.44 times which means the firm / company is using more proprietors funds & is not using external funds adequately. The ratio suggest that firm picking up more proprietors on year on year basis.

V]. Current Assets to Fixed Assets:

This ratio shows the proportion of current assets to fixed assets. As described in current ratio, current assets are held for converting them into cash in a short period of time while fixed assets are held for long-term purposes, i.e. to enhance the earning capacity of the firm / company. This ratio indicates the proportion between the two & is calculated with the help of the following formulae:

Current Assets to Fixed Assets = Current Assets / Fixed Assets

Year 2007

= 41,106,989 / 4,578,716

= 8.98 Times

60 | P a g e

Year 2008

= 46,998,260 / 6,833,470

= 6.88 Times

Year 2009

= 47,492,652 / 7,894,687

= 6.01 Times

Current Assets to Fixed Assets

10 9 8 7 6 5 4 3 2 1 0 2007 2008 2009 Current Assets to Fixed Assets

Interpretation:

This ratio shows the proportion between current assets & fixed assets where in 61 | P a g e

2007, current assets are 8.98 times than fixed assets means company has more short term asset which can be converted into cash within period of time; but in 2008, the ratio directly goes down to 6.88 times where major proportion of fixed assets than current assets. In 2009, it slightly goes up by 6.01 times. In short it shows the proportion between current assets & fixed assets.

Limitation of Ratio Analysis:

1].There are difficulties in the comparison between various firm / companys through ratio. This difficulty is due to the:

I]. There may be a difference between inventory valuation methods followed by various firm / companys.

II]. Firm / companys follow various methods for providing depreciation.

III]. There may be a difference in the capital structures of firm / companys.

Due to these variations, the financial statements of various firm / companys are not comparable & hence comparison through ratios becomes difficult.

2]. Inflationary factors are not taken into account in computing ratio analysis.

62 | P a g e

3]. Several concepts like capital employed, net worth, shareholders funds are not defined clearly & hence there may be differences in the practices followed across business firm / companys.

4]. Another objection to ratio analysis is that ratios show position only on a particular day & not the picture of the entire year. i.e. Current ratio which is calculated by dividing current assets by the current liabilities takes into account the figures of current assets & current liabilities on a particular day. It does not take into account the position, which was there throughout the year.

63 | P a g e

Bibliography:

 Financial Management  Author: Mr. Vechalekar  ABB India Annual Report 2007-08-09  www.abb.co.in
 www.google.com

64 | P a g e