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Project ii

  1. 1. Chapter – I INTRODUCTIONMIT - ISBJ Page 1
  2. 2. 1.1 BACKGROUND OF THE STUDYI am grateful to my college for giving me an opportunity to conduct a research for my finalproject. This will help me to enable to have a practical exposure and help me in my career. This project is on “Ratio Analysis”. The management of finance is important inany type of organization irrespective of the industry to which the organization belongs. TheFinance Management is very important because it deals with the cash for run day to daybusiness activities. So various aspects are required to be taken into consideration whilecalculating Ratio analysis. The reason for selecting this topic as project because there is lot of scope in thissubject to learn various calculations. Preparation of statement, from those calculations onecan find out the company is having problem in its day to day functioning & what is thecurrent position of the company. The organizational structure being flexible the communication between the interdepartment is very effective. The working environment within the company is very good. Thecompany has good infrastructure which is further managed by a good management. Theproject given to me is Ratio Analysis of the company using financial statements. The mainintention was to group or regroup the various figures and/or information appearing on thefinancial statements (either Profitability Statement or Balance Sheet or Both) to draw thefruitful conclusion there from.MIT - ISBJ Page 2
  3. 3. 1.2 BACKGROUND OF THE TOPIC  Ratio analysis has emerged as the principal technique of the Analysis of financial Statement (AFS).  A ratio is a relationship expressed in mathematical terms between two individuals or groups of figure connected with each other in some logical manner.  A financial ratio helps to summarize a large mass of financial data into a concise form and to make meaningful interpretations and conclusion about the performance and positions of a firm.  Ratio analysis is an important and powerful tool in the hands of financial analyst.  It provides standardize measure of firm‟s financial position, profitability and riskiness. By calculating different group of ratio we can analyze the performance of the firm from different point of view.  Ratio analysis can help in understanding the liquidity and short term solvency of the firm, as well as overall capital structure and leverage position of the company in terms of assessing perceived business risk.  Different debt ratio can help a debt investor or financial institution to evaluate the degree of financial risk.  The operational efficiency of the firm in utilizing its assets to generate the profit can be accessed on the basis of different turn over ratios.   The profitability of the firm can be analyzed with the help of profitability ratios.MIT - ISBJ Page 3
  4. 4.  The long term profitability of the firm can be judged on the basis of the activity ratios and the profitability ratios.Ratio analysis can be used to answer the particular question namely:  Are the owners receiving an adequate return on their investment?  How liquid is the firm?  How is the firm financing its assets?  For prospective investor ratio analysis helps in securities analysis.MIT - ISBJ Page 4
  5. 5. 1.3 COMPANY PROFILEIntroductionM/s Silvassa Packaging is a partnership firm promoted by Shri Ajay K Desai, Smt Kalpana VDesai and M/s Nagar Haveli real estate Pvt. Ltd. In the year 1998, the partner haveundertaken implementation of project of manufacturing of Corrugated rolls, CorrugatedBoxes, Corrugated Sheets and Accessories with an installed capacity of 2000 MT PA.Afterwards on 24th November 2004, entire partners firm was sold to new partners ShriBirendra Amarsingh Yadav and Shri Netrapal yadav. New partners took over firm incash consideration of Rs 40 lakh which was paid in 1 year.All new partners are assisted by a team of experienced persons from the field of production,accounts and marketing. The quality of management is considered balanced for execution &running the project successfully.Management & experienceShri birendra amar singh yadav is partner in the firm. He is the key person and he is lookingafter the whole management. He has got experience of 6 years in these industries (i.e.manufacturing of corrugated rolls, corrugated boxes. He is B.A with good knowledge. Helooks at the financial matters of the company and also keeps watch on the working capitalrequirementShri Netrapal Yadav. He is also the partner of the firm he has good experience of market. Sohe basically looks to the marketing of the product. He is also the production incharge.The firm has also appointed qualified and experienced staff at executive level to look afterthe technical as well as managerial, financial, administration and marketing aspect of thefirm.MIT - ISBJ Page 5
  6. 6. Technical ViabilityProduct & useFirm is manufacturing 2ply corrugated rolls, corrugated boxes, corrugated sheets &accessories. The requirement of corrugated cartoons, paper tube etc, is increasing day by day.Corrugated packaging has proved that it is better and cheaper than wooden and plastic.Presently from household to industrial consumer product are packed. In corrugated packagingmaterial.LocationThe factory is located at plot no 38 Dan Udyog, sahakari sangh, Industrial Estate piparia,Silvassa D&NH a well developed industrial area, having Textiles, plastic, bulk drug,engineering units and big corporate etc, which is about 150 km from Mumbai and 120 kmfrom Surat. In deciding the above location, due care has been taken for availability of power,water, labor, raw material and transportation. The location is also suitable from the viewpointof environmental aspect. So many industries localized in silvassa and surrounding areas.Manufacturing processRaw material is received in our factory premisis like kraft paper, duplex, etc. Firstly we haveto put raw material on the standing machine, and then start for corrugated in the corrugationmachine, after corrugation cut the boxes as per requirement size by the “cutting machine”another activity is of pasting by pasting machine as per ply.After pasting the material goes to the process of scoring where the size of the box is set.The last process is pinning. After pinning it is ready to dispatchRaw MaterialsRaw material is used in manufacturing of corrugated rolls, corrugated boxes corrugatedsheets and accessories are Kraft paper /board, stitching wire, gum (corrugation and pasting),binding cloth, duplex board oil, colour dyes other chemicals to mix in gum for improvinggum quality and any other material to improve finished goods.MIT - ISBJ Page 6
  7. 7. EmploymentThe unit generates employment of 30 persons which include 5 operators, 1 supervisor, 12office staff and rest workers. The unit works in 3 shifts of 8 hr each. There is no requirementof supervisor in day shift as such partners themselves manage the production 1 supervisor isrequired to manage night shift. The semi-skilled / unskilled labour are sourced from thesurrounding areas, where adequate labour force is available owining to extensiveindustrializationStatutory/ other licenses / permission / approval requirementThere is no license required for setting up the unit. The unit has obtained followingregistration Provisional registration as SSI Unit with DIC, Silvassa Sales Tax number from Silvassa Dept. Pan No. NOC from pollution Dept.Economic ViabilityMarketThe corrugated industries in small scale sector in the country now a day‟s presents a broadand important spectrum compromising a large number of units producing varied andextensive range of packaging material from simple to sophisticated nature. The requirementof corrugated cartoons, paper tube, etc is ever increasing. Corrugated packaging has provedbetter and cheaper than wooden and plastic . presently from household, children toys toindustrial goods are packed.The partners are in the field of manufacturing of corrugated rolls, corrugated box, corrugatedsheets industry. And their existing customers are also demanding for the proposed products,the confidence of the promoters for marketing the product is very high. The promoters are notenvisaging any difficulty in marketing the product.MIT - ISBJ Page 7
  8. 8. 1.4 NEED OF THE STUDY  Financial performance is necessary to identify the financial strength and weakness of the firm. Financial analysis with the help of ratio analysis is the starting point for making plans before using any sophisticated forecasting and planning procedures. In financial analysis ratio is used as a benchmark for evaluating the financial position and performance of the firm.  To decide about the future prospectus of the firm.  To understand there credit worthiness of the company as how they are making payment to their creditors.MIT - ISBJ Page 8
  9. 9. 1.5 SCOPE OF THE STUDYFinancial analysis includes ratio analysis, preparation of comparative statements, trendanalysis, and preparation of common size statements. The scope of my study is limited toratio analysis to due limitation in time.I have tried my best to interpret all the ratios and also presented them in graphs for betterunderstanding. As mentioned earlier, there are four major types of ratio. I have analyzed allthe major ratios which are relevant to analyze company‟s financial strength.To give more meaning to the ratios, it is always essential to interpret them and find the reasonfor increase or decrease in particular ratio. Furthermore, one can do trend analysis andprepare common size statements to analyze financial statements in more meaningful way.MIT - ISBJ Page 9
  10. 10. 1.6 OBJECTIVE OF THE STUDY To analyze the various ratio of SILVASSA PACKAGING to determine the overall financial position of the company. The primary objective of financial analysis is to forecast and/or determine the actual financial status and performance. This is to enable the firm to combine that information with all other pertinent data (technical, economic, social, etc.) to assess the feasibility, viability, and potential economic benefits, of a proposed or continuing lending operation. To examine overall financial health, effectiveness and efficiency of the company. To determine long term and short term liquidity of the firm. To estimate the earning capacity of the firm. To allow comparisons to be made which assist in predicting the future. To investigate the reasons for the changes. To construct a simple explanation of a complicated financial statement by its expression in one figure. To provide indicators of a firm‟s past performance in terms of its operational activity and profitability; and near-present financial conditions. To provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements are prepared for this purpose to meet the common needs of most users.MIT - ISBJ Page 10
  11. 11. Chapter- II REARCH METHODOLOGYMIT - ISBJ Page 11
  12. 12. 2.1 SOURCES OF DATA COLLECTIONThe researcher can gather secondary data, primary data or both. Primary data are datagathered for a specific purpose or for a specific research project.What is primary data?Primary data are those data which are collected afresh and for the first time through which itgives more light on the problem or research. The source for the Primary data of SilvassaPackaging was collected during the formal/informal discussion with the Internal Guide.Queries arising in due course of the project brought into the notice of concerned authority andnecessary explanation and solutions are adapted.What is secondary data?Secondary data are those data which is already been collected by someone else and whichhave already been pass through statistical process. I have mainly used this already availabledata from various sources such as CMIE data etc.For the completion of the report the source for the secondary data were, the financialstatement of various years. The only way to complete the project was mainly the facts andfigure provided by Silvassa Packaging.Secondary data are in the form of finished goods. It includes: a. Financial statements b. Journals c. BooksThe source of data which is required for the study is secondary data and appropriate source istaken under consideration.MIT - ISBJ Page 12
  13. 13. 2.2 LIMITATIONThe following are the main limitations of accounting ratios: 1. Limited Comparability: Different firms apply different accounting policies. Therefore the ratio of one firm cannot always be compared with the ratio of other firm. Some firms may value the closing stock on LIFO basis while some other firms may value on FIFO basis. Similarly there may be difference in providing depreciation of fixed assets or certain of provision for doubtful debts etc. 2. False Results: Accounting ratios are based on data drawn from accounting records. In case that data is correct, then only the ratios will be correct. For example, valuation of stock is based on very high price, the profits of the concern will be inflated and it will indicate a wrong financial position. The data therefore must be absolutely correct. 3. Effect of Price Level Changes: Price level changes often make the comparison of figures difficult over a period of time. Changes in price affects the cost of production, sales and also the value of assets. Therefore, it is necessary to make proper adjustment for price-level changes before any comparison. 4. Qualitative factors are ignored: Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative factors, which may be important in decision making. For example, average collection period may be equal to standard credit period, but some debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis. 5. Effect of window-dressing: In order to cover up their bad financial position some companies resort to window dressing. They may record the accounting data according to the convenience to show the financial position of the company in a better way. 6. Costly Technique: Ratio analysis is a costly technique and can be used by big business houses. Small business units are not able to afford it. 7. Misleading Results: In the absence of absolute data, the result may be misleading. For example, the gross profit of two firms is 25%. Whereas the profit earned by one is just Rs. 5,000 and sales are Rs. 20,000 and profit earned by the other one is Rs. 10,00,000 and sales are Rs. 40,00,000. Even the profitability of the two firms is same but the magnitude of their business is quite different. 8. Absence of standard university accepted terminology: There are no standard ratios, which are universally accepted for comparison purposes. As such, the significance of ratio analysis technique is reduced.MIT - ISBJ Page 13
  14. 14. FEW MORE LIMITATION OF RATIO ANALYSIS: Financial statements suffer from a number of limitations. When ratios are constructed from those financial statements, ratios suffer from the inherent weaknesses of the accounting system itself. By using ratios, forecast of a future of a business may not prove correct. This is because, ratios are all based on past happenings and not future probabilities. They are subject to change in future. Ratios are not free from individual bias, because accounting is man-made. Two identical business units with the same level of operations and investments may show highly in comparable financial results. There is lack of proper standards for ideal ratios. There are many rules of thumb, since it is not possible to establish well accepted absolute standards. While constructing ratios, arithmetic window dressing is possible by concealing vital facts and presenting the financial statements in such a fashion as to show the business in a better position. Computation of ratio in isolation is of little value. It should be compared with base year ratio or standard ratio, the computation of which is very difficult because of difficulties involved in base year and fixation of standards. By using ratios, forecast of a future of a business may not prove correct. This is because, ratios are all based on past happenings and not future probabilities. They are subject to change in future. Accounting ratios are simply clues. They do not indicate the cause of difference. Therefore they are not considered as basis for immediate conclusion.Ratios are calculated from past financial statements and they do not indicate future trend. Theeconomic conditions are also ignored.MIT - ISBJ Page 14
  16. 16. What is Ratio Analysis?Meaning of Ratio: - A ratio is simple arithmetical expression of the relationship of onenumber to another. It may be defined as the indicated quotient of two mathematicalexpressions.According to Accountant‟s Handbook by Wixon, Kell and Bedford, “a ratio is an expressionof the quantitative relationship between two numbers”.Ratio Analysis: - Ratio analysis is the process of determining and presenting the relationshipof items and group of items in the statements. According to Batty J. Management Accounting“Ratio can assist management in its basic functions of forecasting, planning coordination,control and communication”.Ratio analysis is a systematic use of ratio to interpret/assess the performance and status of thefirm. A ratio is a relationship expressed in mathematical terms between two individual ndgroup of figures connected with each other in some logical manner.It is helpful to know about the liquidity, solvency, capital structure and profitability of anorganization. It is helpful tool to aid in applying judgment, otherwise complex situations.Ratio analysis can represent following three methods.Ratio may be expressed in the following three ways: 1. Pure Ratio or Simple Ratio: - It is expressed by the simple division of one number by another. For example, if the current assets of a business are Rs. 200000 and its current liabilities are Rs. 100000, the ratio of „Current assets to current liabilities‟ will be 2:1. 2. „Rate‟ or „so Many Times: - In this type, it is calculated how many times a figure is, in comparison to another figure. For example , if a firm‟s credit sales during the year are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison to debtors.MIT - ISBJ Page 16
  17. 17. 3. Percentage: - In this type, the relation between two figures is expressed in hundredth. For example, if a firm‟s capital is Rs.1000000 and its profit is Rs.200000 the ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%The ratio can be compared with three different ways. Combined analysis Time-series analysis Cross section analysisCombined analysis:If the cross section analysis and time series analysis, both are combined together to study thebehavior and pattern of ratio, then meaningful and comprehensive evaluation of theperformance of the firm can definitely be made.Time-series analysis:The analysis is called time series analysis when a performance of a firm is evaluated over aperiod of time. By comparing present performance of a firm with performance of the samefirm over last few years. The information generated by time series analysis help firm to planfor future operations.Cross section analysis:One way of comparing the ratio is to compare them with the ratio of some other selected firmin the same industry at the same point of time. So it involves the comparison of two or morefirm‟s financial ratio at the same point of time.The cross section analysis helps analyst to find out as to how a particular firm performs inrelation to its competitor. It is easy to be undertaken as most of the data required for this maybe available in the financial statement of the firm.MIT - ISBJ Page 17
  18. 18. Ratios can be classified into six broad groups. i. Liquidity ratios. ii. Capital structure/leverage ratio. iii. Profitability ratios. iv. Activity/Efficiency ratios. v. Integrated analysis of ratios vi. Growth ratiosImportance of ratio analysis:The importance of ratio analysis lies in present fact on comparative basis assessing aperformance of the firm in related to the following aspects.Operation efficiency:It throws the light on degree of efficiency of management and utilization of its assets. Thevarious activity ratios measure this kind of operational efficiency. In fact solvency of a firmdepend upon the sales revenue generated by the use of assetsLiquidity position:With the help of ratio analysis conclusion can be drawn regarding the liquidity position of afirm. The liquidity position of a firm would be satisfactory if it is able to meet its currentobligation when they become due. A firm can be said to have the ability to meet its short termliabilities if it has sufficient liquid funds to pay the interest on its short term maturing debtusually within a year as well as to repay the principal. The ability is reflected in the liquidityratio of the firm. The liquidity ratios are particularly useful in credit analysis by banks andother suppliers of short term loans.Overall profitability:Unlike the outside parties which are interested in one aspect of financial position of the firm,the management is concerned about the overall profitability of the enterprise. That is they areconcerned about the ability of the firm to meet its short term as well as long term obligationsto its creditorsMIT - ISBJ Page 18
  19. 19. Long term solvency:Ratio analysis is equally useful for assessing the long-term financial viability of a firm. Thelong term solvency is measured by the profitability/leverage ratios which focus on earningpower and operating efficiency. Leverage ratio indicates whether the firm has reasonableproportion of various sources of finance or it is heavily loaded with debt. In this casesolvency is exposed to serious.Advantage of Ratio Analysis: Helpful in analysis of Financial Statements. Helpful in comparative Study. Helpful in locating the weak spots of the business. Helpful in Forecasting. Estimate about the trend of the business. Fixation of ideal Standards. Effective Control. Study of Financial Soundness.Limitation of Ratio Analysis: Ratios are meaningful only in conjunction with the firm‟s past performance or other firm or industry average. Difficulty in comparison with a view of difference depreciation methods( straight line v/s written down basis) Ratio fails to account for the changes in accounting policies adopted by the firm. Such changes may be relating to depreciation policies, inventory valuation policy, treatment of foreign exchange transactions, evaluation of fixed assets etc. Ratio generally, does the work of diagnosing a problem and fails to provide the solution to the problem. By itself, a ratio provides only limited information.MIT - ISBJ Page 19
  20. 20. Ratio are subjected to misinterpretation for example, it might seems that a higher current ratio is always better and therefore a firm striving for this may ultimately result in insufficient use of resources of the firm. Since financial statement is based on historical cost concept and suffers from the limitation of not covering the inflation; the ratio also suffers from the same because most of the ratios are calculated on the basis of the information contained in financial statement. Comparison not possible if different firms adopt different accounting policies. Ratio analysis becomes less effective due to price level changes. Ratio may be misleading in the absence of absolute data. Limited use of a single data. Lack of proper standards. False accounting data gives false ratio. Ratios alone are not adequate for proper conclusions. Effect of personal ability and bias of the analyst.MIT - ISBJ Page 20
  22. 22. CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES TABLE 3.01 2008 2009 2010 YEAR CURRENT RATIO 1.40 1.25 1.15 GRAPH 3.01 Current ratio 1.6 1.4 1.2 1 0.8 Current ratio 0.6 0.4 0.2 0 2008 2009 2010Current Ratio is one of the important accounting ratios for finding out the ability of thebusiness fleeces to meet the short-term financial commitments. The ratio establishes therelationship between the current assets and current liabilities.The ideal norm is 2:1 which means that every one rupee of current liability is appropriatelycovered by two rupee of current assets.According to me, the above ratio of this company is declining over the years so incase ofneed or emergency the company would not be able to meet its current liabilities efficiently.MIT - ISBJ Page 22
  23. 23. CASH RATIO = CASH EQUIVALENT + CASH CURRENT LIABILITIES TABLE 3.02 2008 2009 2010 YEAR CASH RATIO 0.03 0.04 0.02 GRAPH 3.02 CASH RATIO 0.045 0.04 0.035 0.03 0.025 0.02 CASH RATIO 0.015 0.01 0.005 0 2008 2009 2010The ratio of a companys total cash and cash equivalents to its current liabilities, the cash ratiois most commonly used as a measure of company liquidity. It can therefore determine if, andhow quickly, the company can repay its short-term debt. A strong cash ratio is useful tocreditors when deciding how much debt, if any, they would be willing to extend to the askingparty.From the above graph we can see that the ratio has increased in 2009 as compared to 2008 itmeans that the company capacity to pay liabilities has increased but it significantly decreasedin the year 2010 describing that the company ability sudden decrease. It might be because thecash might be getting blocked in some other assets.MIT - ISBJ Page 23
  24. 24. II. PROFITABILITY RATIO: GROSS PROFIT RATIO = GROSS PROFIT *100 NET SALES TABLE 3.03 2008 2009 2010 YEAR GROSS PROFIT RATIO 23.35 15.98 18.85 GRAPH 3.03 GROSS PROFIT RATIO 25 20 15 10 GROSS PROFIT RATIO 5 0 2008 2009 2010This is the ratio between gross profit and net sales. The gross profit is the difference betweenNet sales and Cost of goods sold (i.e., the direct cost of sales). Net sales mean total sales lessreturns. This ratio is expressed as a percentage of sales. The more the gross profit earned thebetter. The gross profit of the company must cover its operating and other expenses. Itmeasures the efficiency of production, purchase and pricing as well.From the above table and diagram we can see that the profit of the company decrease in theyear 2009 as compared to 2008 it means that the company profit decrease in 2009 may bebecause of recession and also due to increase in the direct expense of the company but by theyear 2010 the company profit started showing steady growth.MIT - ISBJ Page 24
  25. 25. NET PROFIT RATIO = NET PROFIT * 100 NET SALES TABLE 3.04 2008 2009 2010 YEAR NET PROFIT 14.30 8.60 10.76 RATIO GRAPH 3.04 NET PROFIT RATIO 16 14 12 10 8 NET PROFIT RATIO 6 4 2 0 2008 2009 2010This is the ratio between net profit and net sales. Net profit is excess of Total sales of a giveaccounting period over total expense of that period. A good net profit margin indicatesmanagement‟s ability to operate with sufficient success not only to cove cost of production,expenses including depreciation, but also to leave a margin of reasonable compensation forowners- who have provided funds at a risk.The Net Profit ratio of the company shows the similar effect as that of the Gross Profit Ratioas it directly affect the Net Profit of the firm.MIT - ISBJ Page 25
  26. 26. RETURN ON TOTAL ASSETS RATIO = NET INCOME TOTAL ASSETS TABLE 3.05 2008 2009 2010 YEAR RETURN ON ASSETS RATIO 0.40 0.33 0.39 GRAPH 3.05 RETURN ON ASSETS RATIO 0.45 0.4 0.35 0.3 0.25 RETURN ON 0.2 ASSETS RATIO 0.15 0.1 0.05 0 2008 2009 2010It is the relationship between Earnings before Interest and Tax (EBIT) and Capital Employed.The long-term fund providers are very concerned about the rate of return on capitalemployed. It measures how well the firm is using all of its assets- both those provided by itsowner and those provided by its lenders. Capital employed includes – shareholders‟ fundsand long-term loan. The higher ratio shows the firm‟s ability to use available resources togenerate income.From the above table and graph we can see that the firm ability to use its assets has increaseeffectively in the year 2010 as compared to that of 2009 means the company has use it assetswisely and using it assets to its maximum to gets the maximum returns.MIT - ISBJ Page 26
  27. 27. RETURN ON NET ASSETS (RONA) = NET PROFIT AFTER TAX AVERAGE TOTAL ASSETS TABLE 3.06 2008 2009 2010 YEAR RONA 1.28 1.10 0.85 GRAPH 3.06 RONA 1.4 1.2 1 0.8 0.6 RONA 0.4 0.2 0 2008 2009 2010RONA or Return on Net Assets equals the Net Operating after Tax divided by the sum ofcash, the working capital requirement and the fixed assets. A strong virtue of using RONAcompared to traditional methods for measuring company success is that also considers theassets a company uses to achieve its output. The higher the return, the better the profitperformance for the companyRONA of the firm is getting on decreasing means that the firm is unable to utilize its netassets to its maximum ability. The firm has uses its Net assets most effectively in the year2008 but was unable to keep its good work and hence RONA of the firm went on decreasing.MIT - ISBJ Page 27
  28. 28. RETURN ON CAPITAL EMPLOYED = PROFIT AFTERTAX +INTEREST DEBT + EQUITY TABLE 3.07 2008 2009 2010 YEAR RETURN ON CAPITAL EMPLOYED 0.94 0.54 0.74 GRAPH 3.07 RETURN ON CAPITAL EMPLOYED 1 0.9 0.8 0.7 0.6 0.5 RETURN ON CAPITAL 0.4 EMPLOYED 0.3 0.2 0.1 0 2008 2009 2010A ratio that indicates the efficiency and profitability of a companys capital investments. Avariation of this ratio is return on average capital employed (ROACE), which takes theaverage of opening and closing capital employed for the time period.From the above chart and diagram, it is witnessed that the return generated from the totalcapital employee decreases in 2009 from 2008. This is mainly because that capital is utilizedfor acquiring more assets. However, the company was able to increase this ratio to someextent in the year 2010.MIT - ISBJ Page 28
  29. 29. COST OF GOOD SOLD = SALES - GROSS PROFIT TABLE 3.08 2008 2009 2010 YEAR COST OF GOOD SOLDS RATIO 37789148 40965739 43119672 GRAPH 3.08 COST OF GOODS SOLD 44000000 43000000 42000000 41000000 40000000 Series1 39000000 Series2 38000000 37000000 36000000 35000000 2008 2009 2010COGS are the costs that go into creating the products that a company sells; therefore, the onlycosts included in the measure are those that are directly tied to the production of the products.For example, the COGS for an automaker would include the material costs for the parts thatgo into making the car along with the labor costs used to put the car together. The cost ofsending the cars to dealerships and the cost of the labor used to sell the car would beexcluded. The exact costs included in the COGS calculation will differ from one type ofbusiness to another.From the above chart, we have seen that the COGS of the company are increasing over theyears.Thus indicates the inflationary trend in the company expenses.MIT - ISBJ Page 29
  30. 30. COST OF GOOD SOLDS RATIO = SALES - GROSS PROFIT SALES TABLE 3.09 2008 2009 2010 YEAR COST OF GOOD SOLDS RATIO 0.78 0.82 0.81 GRAPH 3.09 COST OF GOOD SOLDS RATIO 0.83 0.82 0.81 COST OF 0.8 GOOD SOLDS RATIO 0.79 0.78 0.77 0.76 2008 2009 2010This ratio indicates the relationship between total cost of goods sold and the effective /netsales of the firm. It directly reflects the profitability of the firm as lower the COGS and higherthe effective sales lead to increasing the profit and vice-versa.From the above chart and table, it has been witnessed that the ratio of COGS to sales hasincreased in the year 2009 from the year 2008. This means that the proportion of COGS tosales has increased dramatically. Thus affecting the profits of the company which we haveseen that the profit of the company has also decreased in these two years. The increase in theratio is an important factor leading to the decline in the profits. However, the company wasable to lessen this ratio in the year 2010 to some extent, indicating the management isthrowing lights on it and taking effective steps towards it.MIT - ISBJ Page 30
  31. 31. III. LEVERAGE RATIO CURRENT ASSETS TO NET WORTH RATIO = CURRENT ASSETS NET WORTH TABLE 3.10 2008 2009 2010 YEAR CURRENT ASSETS TO NET WORTH RATIO 1.14 1.10 1.00 GRAPH 3.10 CURRENT ASSETS TO NET WORTH RATIO 1.2 1.15 1.1 CURRENT ASSETS TO 1.05 NET WORTH RATIO 1 0.95 0.9 2008 2009 2010This ratio estimates the relationships between the current assets and net worth of the firm.Thus it‟s directly checks the leverage of the firm.From the above chart, it has been seen that the proportion of current assets to the total capitalof the company is increasing over the years. This is might be either because of increase in thecurrent assets or decrease in the total capital of the company. In our case, it is seen that thatthe company is utilizing its capital in building up the fixed assets value. Thus, it is signifyingthe better utilization of funds.MIT - ISBJ Page 31
  32. 32. PROPRIETORY RATIO = CAPITAL EMPLOYED/OWNERS EQUITY TOTAL ASSETS TABLE 3.11 2008 2009 2010 YEAR PROPRIETORY RATIO 0.89 0.61 0.53 GRAPH 3.11 PROPRIETORY RATIO 1 0.9 0.8 0.7 0.6 PROPRIETORY 0.5 RATIO 0.4 0.3 0.2 0.1 0 2008 2009 2010The total assets belonging to a concern are financed by a combination of resources providedby shareholders and creditors. The proportion of business assets financed by the shareholdersis measured by proprietary ratio. This ratio indicates more use of shareholder‟s fund inacquiring total assets of the business. It can be used to ascertain the solvency and financialstability of the firm in the long run. If it is too high (more than .9), it can be concluded thatthe firm is not willing to use more debt capital.From the above table and chart, it has witnessed that the capital of the company to its netassets is decreasing over the years. In our company, we have seen that the company is makinguse of revenues to acquire more fixed assets. Thus, the company is converting its capital intofixed assets.MIT - ISBJ Page 32
  33. 33. FIXED ASSTES TO NET WORTH RATIO = FIXED ASSTETS NET WORTH TABLE 3.12 2008 2009 2010 YEAR FIXED ASSETS TO NET WORTH 0.30 0.49 0.86 RATIO GRAPH 3.12 FIXED ASSETS TO NET WORTH RATIO 1 0.9 0.8 0.7 FIXED 0.6 ASSETS TO 0.5 NET WORTH 0.4 RATIO 0.3 0.2 0.1 0 2008 2009 2010A measure of the extent of an enterprises investment in non-liquid and often over valuedfixed assets (Fixed Assets / Liabilities + Equity). A ratio of .75 or higher is usuallyundesirable as it indicates possible over-investment and causes a large annual depreciationcharge that will be deducted from the income statement.From the above table and chart, it is witnessed that the proportion of net fixed assets of thecompany to its total capital is increasing over the years, thus signifying that that company ismaking use of profits/revenues to build up its balance sheet value by increasing the fixedassets value.MIT - ISBJ Page 33
  34. 34. INTEREST COVERAGE RATIO = EARNING BEFORE INTEREST AND TAX INTEREST TABLE 3.13 2008 2009 2010 YEAR INTEREST COVERAGE RATIO 46.89 44.84 43.97 GRAPH 3.13 INTEREST COVERAGE RATIO 47.5 47 46.5 46 45.5 45 INTEREST COVERAGE 44.5 RATIO 44 43.5 43 42.5 2008 2009 2010A ratio used to determine how easily a company can pay interest on outstanding debt. Theinterest coverage ratio is calculated by dividing a companys earnings before interest andtaxes (EBIT) of one period by the companys interest expenses of the same period. The lowerthe ratio, the more the company is burdened by debt expense. When a companys interestcoverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. Aninterest coverage ratio below 1 indicates the company is not generating sufficient revenues tosatisfy interest expenses.From the above chart and table, it is witnessed that the proportion of interest paid by thecompany over its revenues/profits in declining. That directly signifies that either the profits ofthe firm is decreasing or the interest payment in increasing. In over company, we have seenthat the profit of the company has declined over the years.MIT - ISBJ Page 34
  35. 35. IV. ACTIVITY RATIO STOCK TURNOVER RATIO = COST OF GOOD SOLD AVERAGE STOCK TABLE 3.15 2008 2009 2010 YEAR STOCK TURNOVER RATIO 10.35 5.04 10.11 GRAPH 3.15 STOCK TURNOVER RATIO 12 10 8 6 STOCK TURNOVER RATIO 4 2 0 2008 2009 2010This ratio measures how quickly inventory is sold, i.e., the number of times a business‟sstock turnover during a year. This ratio is likely to differ from one business to another. Thisindicates whether business is fast or slow moving. If there is sign decrease in stock turnover itis considered as a bad signal. A sharp increase in this ratio indicates stock accumulation,which is associated with risk of obsolesce.From the above chart and table, it has been seen that the ratio was higher in the year 2008which declined in the year 2009 indicating the poor performance of the firm. It signifies thatthe stock remains in the go down for the longer period of time. That means, the sales of thecompany were taking more time to take place. However, the ratio came back on the track inthe year 2010.MIT - ISBJ Page 35
  36. 36. DEBTORS TURNOVER RATIO = CREDIT SALES DEBTORS TABLE 3.16 2008 2009 2010 YEAR DEBTORS TURNOVER RATIO 35.50 40.44 32.42 GRAPH 3.16 DEBTORS TURNOVER RATIO 45 40 35 30 25 20 DEBTORS TURNOVER RATIO 15 10 5 0 2008 2009 2010It is the ratio between the credit sales and average (Avg) debtors plus average bills receivable.This ratio indicates the numbers of times per year that the average balances of debtors arecollected. A high ratio may indicate an improvement in business conditions, a tightening ofcredit policy, or improved collection procedure. A low ratio may be an indication of longcredit period, or slow realization from debtors.From the above table and chart, in the year 2009 this ratio increased as compared to that inthe year 2008 indicating that the collection from the debtors was taking more time or theperiod of collection was increasing. This signifies that the money was getting locked for moreperiod of time with the debtors.However, the ratio came down drastically in the year 2010, indicating the more efficientcollection cycle of the firm.MIT - ISBJ Page 36
  37. 37. CREDITORS TURNOVER RATIO = AVERAGE PAYABLE (IN DAYS) CREDIT PER SALE TABLE 3.17 2008 2009 2010 YEAR CREDITORS TURNOVER 51.23 52.24 53.44 RATIO GRAPH 3.17 CREDITORS TURNOVER RATIO 54 53.5 53 52.5 52 CREDITORS TURNOVER 51.5 RATIO 51 50.5 50 2008 2009 2010This is the ratio between the credit purchase and average (Avg.) creditors plus average billspayable. This ratio indicates the number of times per year that the average balance ofcreditors is paid. A high creditor turnover ratio may indicate strict credit terms granted bysuppliers. A low ratio may indicate liberal credit terms allowed by suppliers.In the above chart and diagram, we can see that the Creditors turnover ratio is increasing overthe years. Thus, the firm capability of paying off its debt is increasing in terms of number ofdays, i.e., the firm is utilizing its creditor‟s funds for a large period of time.This signifies that either the company is fetching more returns by investing this funds in someother business that can compensate the interest which has to be paid to creditors or is havinga poor recovery system of its debts from debtors that directly affects is paying capability to itscreditors.MIT - ISBJ Page 37
  38. 38. FIXED ASSTES TURNOVER RATIO = SALES FIXED ASSETS TABLE 3.18 2008 2009 2010 YEAR FIXED ASSTES TURNOVER 6.26 10.03 7.95 RATIO GRAPH 3.18 FIXED ASSTES TURNOVER RATIO 12 10 8 6 FIXED ASSTES TURNOVER RATIO 4 2 0 2008 2009 2010The ratio is useful to determine the amount of sales that are generated from the net fixedassets. This ratio illustrates how much the sales are generated by the total fixed assets in thecompany.Higher the fixed assets turnover ratio better is the position of the company in utilizing itsfixed assets and vice versa. This ratio is generally used by the companies in a growth stage todetermine whether the company is able to utilize its fixed assets completely or not.From the above diagram and table, it is witnessed that the firm is generating more returnsfrom its fixed assets over the years. This signifies that the firm is making a effective andefficient utilization of its fixed assets to generate more profits.MIT - ISBJ Page 38
  39. 39. TOTAL ASSETS TURNOVER RATIO = SALES TOTAL ASSETS TABLE 3.19 2008 2009 2010 YEAR TOTAL ASSTES TURNOVER RATIO 4.56 2.99 3.67 GRAPH 3.19 TOTAL ASSTES TURNOVER RATIO 5 4.5 4 3.5 3 TOTAL ASSTES 2.5 TURNOVER 2 RATIO 1.5 1 0.5 0 2008 2009 2010This ratio is useful to determine the amount of sales that are generated from each rupee ofassets. As noted above, companies with low profit margins tend to have high asset turnover,those with high profit margins have low asset turnover.Form the above table and chart, it is witnessed the firm was better utilizing its assets togenerate more sales in the year 2008. This ratio decreased in the year 2009 that signifies thatthe firm‟s capability of generating sales from its total assets decreased. As we have seen inthe previous ratio of sales over fixed asset being increasing over the years; the decline in theratio is due to increase in its current assets. The increase in current assets might have resulteddue to increase in debtors. However, the ratio started increasing again in the year 2010indicating the increase in the efficiency.MIT - ISBJ Page 39
  40. 40. Chapter – IV FindingsMIT - ISBJ Page 40
  41. 41. FINDINGS: 1. Net profit ratio of any should be always greater than the risk free return because if the net profit margin ration is less than the risk free return then it‟s of no loose to continue with the business as risk involved is much more. 2. The asset turnover should be always greater as the asset utilized is in a proper manner, which will help the companies to increase more profit. 3. Following ratios are less than the standard norms: Current assets ratio Interest coverage ratio 4. Company gets the amount from debtors within 32 days which is good for the company in the year 2009 –2010. 5. Financial year 2009 was not good for the company as compared to 2010 due to Recession.MIT - ISBJ Page 41
  42. 42. Chapter - V ConclusionsMIT - ISBJ Page 42
  43. 43. Conclusions:I have examined the balance sheet of SILVASSA PACKAGING as at 31 st march 2009 to 31stmarch 2010 and also Profit and Loss account for the same year. Here in this organization Ihave study different accounting ratio. The in-depth analysis of key financial ratios is this project helps in measuringthe financial strength, liquidity condition and operating efficiency of Silvassa Packaging. Italso provides valuable interpretation separately for each ratio that helps the organization inimplementing the findings that would help the organization to increase its efficiency. Ratio is only a post mortem analysis of what has happened between financialyears. For one thing, the position of the company in the interim period not revealed by ratioanalysis, moreover they give no clue about the future. Ratio analysis in view of its severallimitations should be considered only as a tool analysis rather than as an end in itself. Creditor‟s turnover ratio is increasing over the years. Thus, the firm capability of paying off its debt is increasing in terms of number of days, i.e. the firm is utilizing its creditor‟s funds for a large period of time. The company is making use of revenues to acquire more fixed assets. Thus, the company is converting its capital into fixed assets. COGS of the company are increasing over the years. Thus indicates the inflationary trend in the company expenses. The firm has uses its Net assets most effectively in the year 2008 but was unable to keep its good work and hence RONA of the firm went on decreasing. The Net Profit ratio of the company has increased in the year 2009 as compared to that of 2010, means that the company business is doing good and company should continuously focus on it.MIT - ISBJ Page 43
  44. 44. Chapter - VI RecommendationsMIT - ISBJ Page 44
  45. 45. Recommendations: 1. Fixed assets to Net worth ratio is low as compared to standard norms of the same ratio. So company should have to invest in fixed assets to increase this ratio. 2. Return on capital employed ratio is also lower than the standard norm. So to increase this ratio company has to increase Profit after Tax. 3. Since the requirement of corrugated cartoons, paper tube etc. is increasing day by day the company should try and install the automated version of the machine. In that case the company unit production cost will also come down as labor cost would come down and company could earn more profit.MIT - ISBJ Page 45
  46. 46. BIBILOGRAPHY 1. MANGEMENT ACCOUNTING Published by: Nirali Prakashan Author: Dr. Prakash S. Pardeshi 2. FINANCIAL MANAGEMENT Professional Education (Course: II) Board of Studies The Institute of Chartered Accountancy of India. 3. PRINCIPAL OF MANAGEMENT ACCOUNTING Published by: Sahitya Bawan Author: Dr. Manmohan Dr. S.N. GoyalWebsite:www.investopedia.comMIT - ISBJ Page 46