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Project on ratio analysis


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Project on ratio analysis in "PIDILITE INDUSTRIES LTD "

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Project on ratio analysis

  1. 1. C O M P A N Y P R O F I L E<br /><ul><li> Since its inception in 1959, Pidilite Industries Limited has been a pioneer in consumer and specialties chemicals in India. Over two-third of the company’s sales come from products and segments it has pioneered in India.  The industries’ product range includes : Adhesives and Sealants, Construction and Paint Chemicals,Automotive Chemicals, Art Materials, Industrial Adhesives,Industrial and Textile Resins and Organic Pigments and Preparations. H I G H L I G H T SThe Group's turnover is about US $ 350 Million for the year 2006-07. In a recent report by Economic Times, Pidilite ranked 131st amongst the top 500 listed companies in India. Pidilite Industries is the market leader in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions in India. The brand name Fevicol has become synonymous with adhesives to millions in India and is ranked amongst the most trusted brands in India. Pidilite is also growing it's International presence through acquisitions and setting up manufacturing facilities and sales offices in important regions around the world. Fevicol is now the largest selling adhesives brand in Asia.</li></ul> Customer Relations :<br />The Company continued to take several initiatives to increase awareness of its products and brands, increase consumption of its products and to strengthen relationship with customers, influencers and end-users.<br />Pidilite has reached where it is today mainly due to the close team-work of their employees and due to their shared value system which emphasizes commitment to excellence, closeness to customers, and the spirit of innovation.<br /> <br /> <br /> R A T I O A N A L Y S I S<br />Meaning and definition of ratio analysis :<br />Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term “ratio” refers to the numerical or quantitative relationship between two variables.<br />Significance or Importance of ratio analysis <br /><ul><li>It helps in evaluating the firms performance:
  2. 2. With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e. whether the management has utilized the firm’s assets correctly, to increase the investor’s wealth. It ensures a fair return to its owners and secures optimum utilization of</li></ul> firms assets.<br /><ul><li>It helps in inter-firm comparison:
  3. 3. Ratio analysis helps in inter-firm comparison by providing necessary data. An interfirm comparison indicates relative position.It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may be identified and if results are negative, the action may be intiated immediately to bring them in line.
  4. 4. It simplifies financial statement:
  5. 5. The information given in the basic financial statements serves no useful Purpose unless it s interrupted and analyzed in some comparable terms. The ratio analysis is one of the tools in the hands of those who want to know something more from the financial statements in the simplified manner.
  6. 6. It helps in determining the financial position of the concern:
  7. 7. Ratio analysis facilitates the management to know whether the firms financial position is improving or deteriorating or is constant over the years by setting a trend with the help of ratios The analysis with the help of ratio analysis can know the direction of the trend of strategic ratio may help the management in the task of planning, forecasting and controlling.
  8. 8. It is helpful in budgeting and forecasting:
  9. 9. Accounting ratios provide a reliable data, which can be compared, studied and analyzed.These ratios provide sound footing for future prospectus. The ratios can also serve as a basis for preparing budgeting future line of action.
  10. 10. It is helpful in determining Liquidity position:
  11. 11. With help of ratio analysis conclusions can be drawn regarding the Liquidity position of a firm. The liquidity positon of a firm would be satisfactory if it is able to meet its current obligation when they become due. The ability to met short term liabilities is reflected in the liquidity ratio of a firm.
  12. 12. It is helpful in determining Long term solvency:
  13. 13. Ratio analysis is equally for assessing the long term financial ability of the Firm. The long term solvency is measured by the leverage or capital structure and profitability ratio which shows the earning power and operating efficiency, Solvency ratio shows relationship between total liability and total assets.
  14. 14. It is helpful in determining Operating efficieny:
  15. 15. Yet another dimension of usefulness or ratio analysis, relevant from the view point of management is that it throws light on the degree efficiency in the various activity ratios measures this kind of operational efficiency.</li></ul>Q U I C K R A T I O<br />The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. <br /> The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.<br />Formula :<br />Quick Assets = Current Assets – Stock in Trade Quick Liabilities = Current Liabilities – Bank Overdraft<br />Analysis : The standard ratio in this case is 1 : 1. This means that for every Re.1 of Current Liabilities, there should be Re.1 of Current Assets. This ratio is also used for testing the solvency of the enterprise. In the year 2007-2008, that the companies position is solvent and the company is not utilizing all of it’s current assets .<br /> Cause : In 2007-2008, the Liquid Assets are proportionately higher than the year 2006-2007.<br />D E B T - E Q U I T Y R A T I O<br />The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.  <br />Similar to the debt ratio, a lower percentage means that a company is using less leverage and has a stronger equity position. Formula: <br /> <br />Long Term Debt = Secured Loans + Unsecured Loans<br />Shareholder’s Fund = Share Capital + Reserve<br /> <br />Analysis : The standard ratio in this case is . 5 : 1.( Long-Term Debt : Shareholder’s Fund ). The position of the creditors will be uncomfortable if the ratio is higher than this.The analysis for the years 2007-2008 and 2008-2009 says that the position of the creditors is uncomfortable. Cause : In the years 2006-2007 and 2007-2008 both Secured and Unsecured loans have increased more than proportionately. In the year 2007-2008 only Secured loan increased more than proportionately.<br />N E T P R O F I T <br /> T O <br />P R O P R I E T O R S F U N D R A T I O<br />The ratio shows the ratio of return on the proprietors’ fund. The higher the ratio, the greater is the return. The ratio is helpful to measure the earning capacity of the concern.<br />Formula :<br /> <br /> <br />Analysis : The ratio is indicating that the earning capacity of the concern is decreasing from 2007-2008 to 2008-2009.<br />Cause : Comparing 2007 and 2008-2009 , that Net Profit in 2008-2009 is proportionately smaller than 2007-2008.<br />N E T P R O F I T T O F I X E D A S S E T S R A T I O<br />The ratio is helpful in comparing the Net Profit of the business with its Fixed Assets. This ratio reveals the extent of utilization of Fixed Assets.<br />Formula :<br />Analysis : The ratio analysis is showing less utilization of fixed assets in the year 2008 -2009 from the previous two years 2007-2008 and 2006-2007.<br />Cause : Comparing the ratios of the years 2007-2008 and 2008-2009 with respect to the year 2006-2007 ,Fixed Assets of 2007-2008 and 2008-2009 is proportionately higher than in the year 2006-2007.<br />T U R N O V E R T O T O T A L A S S E T S R A T I O <br />This ratio is used for comparing Sales to the total Assets of the business. It also reveals the extent of utilization of the the total assets in the business. The ratio proves the efficiency of the management operational activities. The higher the ratio , the larger is the rate of return on capital invested in total assets. <br />Formula<br /> <br />Analysis : During 2006-2007 and 2007-2008 the ratio proves the inefficiency of the management in operational activities. The rate of return on capital investment is not sufficient of the company in the year 2007-2008.<br />Cause : Comparing 2006-2007 and 2007-2008 , we see that Total Assets ( specially Fixed Assets ) is proportionately higher in the year 2007-2008 than in 2006-2007. <br /> <br /> D E B T O R ’ S T U R N O V E R R A T I O <br /> A N D <br /> A V E R A G E C O L L E C T I O N P E R I O D<br />The ratio reveals the number of days the debtors enjoyed as credit period allowed to them. It shows how quickly receivables or debtors are converted into cash. It is a test of the liquidity of the debtors of a firm. This ratio is also analyzed to study the debt collection policy of an enterprise. A large credit period indicates a very bad collection policy. Average collection period is nothing but the number of days in a year divided by debtors’ Turnover ratio.<br />Formula :<br />Analysis : The ratio analysis is saying that the collection policy of the year 2006-2007 is in favour of the management.<br />Cause : Debtors turnover ratio is inversely proportional to Average Collection Period. Average Collection Period is increasing continuosly from 2006-2007 to 2008-2009 as Debtors Turnover Ratio falls continuosly.<br />W O R K I N G C A P I T A L T U R N O V E R R A T I O<br />It measures the number of times Sales is achieved to Working Capital. The higher the ratio the better is the utilization of Working capital.<br />Formula :<br /> Working Capital = Current Assets – Current Liabilities <br /> <br />Analysis : The ratio of 2007-2008 is least than the previous two years 2006-2007 and 2008- 2009, so it is indicating the bad utilization of Working Capital during the year 2007-2008.<br />Cause : In 2007-2008 , Working Capital is proportionately higher compared to 2006-2007.<br />C O N C L U S I O N<br />On a final note , I would like to conclude that Pidilite Industries Ltd. has a decent financial management.<br />Still then , there’s enough room for improvement and further strengthening of it’s financial position.<br />By conducting “ RATIO ANALYSIS” of the concern I have observed that the following areas or items need special attention :<br /><ul><li>Proper utilization of Resources.
  16. 16. Timely using Current Assets.
  17. 17. Securing the position of Creditors by keeping Secured and Unsecured lines within a particular limit.
  18. 18. Increasing return on Capital Assets.
  19. 19. Average collection period should be minimized.
  20. 20. Proper utilization of Working Capital.</li></ul>B I B L I O G R A P H Y<br />The relevant financial data of Pidilite Industries Ltd. for the financial year :-<br />2006-2007, 2007-2008 and 2008-2009 was acquired by referring to the following Annual<br />Reports / Websites:-<br /><ul><li>Pidilite Industries Annual Report : 2006-2007, 2007-2008 , 2008-2009
  21. 21.</li></ul>A C K N O W L E D G E M E N T<br />To undertake such a huge project and to achieve the desired goals one needs quite a lot of guidance and support . Firstly ,<br /><ul><li>I am very much obliged and indebted to Mr. Atulya Das, Regional Sales Manager of Pidilite Industries Limited , for granting me the permission to work in the organization and providing various sorts of assistance required for preparing the project.
  22. 22. I express my deep sense of gratitude to Mr. Shyamal Dutta, Administrative Officer, for his valuable guidance , consistent help and personal interest during my project work.
  23. 23. I would like to express my profuse thanks to our respected Co-ordinator, Mrs. Rupa Bhattacharya for her exuberant encouragement during the course of the project.
  24. 24. I would also like to thank our respected faculty , Mr.Ashok Basu , Mr.Shankar Bhaduri and Mr. Sudip Ghosh for their valuable suggestions throughout the project.</li></ul>I am sure that the knowledge imparted will go a long way in enriching my career.<br />