Introduction

1.1 Introduction to Ratio Analysis

Ratio analysis is a widely used tool of financial analysis. It is defined as the systemic
use of ratio to interpret the financial statements so that the strengths and weaknesses
of a firm, as well as its historical performance and current financial condition, can be
determined.
Ratios make the related information comparable. A single figure by itself has no
meaning but when expressed in terms of related figures it yields significant
inferences. Thus ratios are relative figures reflecting the relationship between related
variables.
Their use, as tools of financial analysis, involves their comparison as single ratios like
absolute figures are not of much use. A ratio is quotient of two numbers and is an
expression of relationship between the figures which are not of much use.
A ratio is a quotient of two numbers and is an expression of relationship between the
figures or two amounts. It indicates a quantitative relationship which is used for a
qualified judgment and decision making. The relationship between two accounting
figures is known as accounting ratio. These may be compared with the previous year
or base year ratios of the same firm. Ratios indicate the relationship between profits
and capital employed. Ratios may be expressed in 3 forms – (a) as quotient 1:1 or 2:1
etc.; (b) as a rate, i.e., inventory turnover as a number of times in year and (c) as a
percentage. Ratio analysis is useful to shareholders, creditors and executives of the
company.
1.2 Definition and Meaning
Think of ratio analysis as a financial health checkup. Just as a doctor looks at your
blood pressure and heart rate to see how your body is performing, an analyst looks at
the relationship between different numbers on a company's financial statements to see
how the business is "breathing."
What is Ratio Analysis?
In technical terms, ratio analysis is a quantitative method of gaining insight into a
company's liquidity, operational efficiency, and profitability by studying its financial
statements (like the Balance Sheet and Income Statement).
Instead of looking at a single number—like $1 million in profit—ratio analysis
compares that profit to other figures, such as total sales or assets. This provides
context, which is far more valuable than raw data.

Why Does It Matter?

 Performance Tracking: You can see if a company is getting better or worse
over time (Trend Analysis).
 Comparison: It allows you to compare a small startup to a giant corporation
by looking at percentages rather than total dollars (Inter-firm Comparison).
 Red Flag Detection: It helps spot potential bankruptcy or cash flow issues
before they become disasters.
 A Simple Example
 Imagine two lemonade stands:
 Stand A makes $100 profit but spent $1,000 to get it.
 Stand B makes $50 profit but only spent $100 to get it.
 If you only looked at the "profit" number, you'd think Stand A is winning. But
through ratio analysis (Profit / Expenses), you’d see Stand B has a 50%
margin while Stand A only has 10%. Stand B is much more efficient!

1.3 Types of Ratio Analysis

Types of Ratios
Ratios can be broadly classified into four groups:
1. Liquidity ratios;
2. Capital Structure / Leverage ratios;
3. Profitability ratios and
4. Activity ratios.

1. Liquidity Ratios:
Liquidity is a prerequisite for the very survival of a business unit. Liquidity represents
the ability of the business concern to meet short-term obligations when they fall due
for payment. Hence the maintenance of adequate liquidity in any business concern
cannot be over emphasized.
The liquidity ratio measures the ability of the business concern to meet its short-term
obligations and reflects the short-term solvency of the unit.
Important Liquidity Ratios:

2. Capital Structure/Leverage Ratios:

The second category of financial ratio is Leverage or Capital structure ratios. The
short-term Creditors would use leverage ratios for ascertaining the current financial
position of the business unit.
The long-term would use leverage or capital structure ratio to examine the long term
solvency of the business unit. The leverage ratio reflects the capacity of the business
unit. The leverage ratios reflect on the capacity of the business unit to assure long
term creditor as regards to periodic payment of interest during the period of the loan
as well as repayment of principal on maturity.
There are two aspects of the long term solvency of a unit as reflected in its policy to
repay the principal on maturity and pay interest at periodic intervals. These two
aspects are mutually dependent and interrelated and give rise to two types of leverage
ratios.
The first type of leverage ratios which are based on the relationship between
borrowed funds and owner’s capital and computed from the balance sheet include
many variations such as
(i) debt equity ratio,
(ii) proprietary ratio,
(iii) equity-asset ratio.
The second type of leverage ratio which are also referred to as “Coverage ratios”
computed from the Profit and Loss Account include many variations such as
(i) interest coverage ratio,
(ii) dividend coverage ratio and
otal fixed charges coverage ratio.
Important Leverage/Capital Structure Ratios:

3. Profitability Ratios:
The Profitability of any organization is very essential and serves as an incentive to
achieve efficiency. Thus the management of any business organizations strives to
measure the operating efficiency of that organization to ensure optimum profitability
on its investment. The profitability ratios are designed to measure the profitability of
any organization.
In other words these ratios indicate the units’ efficiency of operation. Profitability
ratios can be divided into two categories i.e. showing profitability either in relation to
sales or in relation to investments.
Important Profitability
4. Activity/Turnover/Efficiency Ratios:
The last category of ratios is the activity ratios. They are also known as the efficiency
or turnover ratios. Such ratios are concerned with measuring the efficiency in asset
management. The efficiency with which assets are managed / used is reflected in the
speed and rapidity with which they are converted into sales.
Thus the activity ratios are a test of relationship between sales / cost of goods sold and
assets.
Depending upon the type of asset, activity ratios may be (i) inventory / stock turnover,
(ii) receivable / debtor’s turnover and (iii) total assets turnover. The first of these
indicates the number of times inventory is replaced during the year, of how quickly
the goods are sold. It is a test of efficiency inventory management. The second
category of turnover ratio is indicative of the efficiency of receivables management as
it shows how quickly trade goods are sold. It reveals the efficiency in managing and
utilizing the total assets.
Important Activity / Turnover / Efficiency Ratios:

1.4 Advantages of Ratio Analysis

The special advantage of working out accounting ratios is that performance and
financial position can be properly judged.
Following are some important advantages of ratio analysis:
(i) Simplification of Financial Statements
(ii) Trend Identification (Forecasting)
(iii) Operational Efficiency Insights
(iv) Investment & Lending Decisions
The real power of ratio analysis lies in its ability to turn a mountain of confusing
financial data into a simple, actionable story. It’s like using a filter on a messy photo
to see the important details clearly.
Here are the primary advantages of using ratio analysis:
1. Simplification of Financial Statements
Financial statements can be dozens of pages long with thousands of numbers. Ratio
analysis boils this complexity down into a few key indicators. Instead of debating "Is
$5 million in debt a lot?", a ratio tells you immediately: "Their debt is 2x their
equity." ### 2. Standardized Comparison (The "Level Playing Field") This is perhaps
the biggest advantage. It allows you to compare a massive corporation like Walmart
to a smaller regional retailer.
 The Problem: Walmart has billions more in profit, so a raw dollar
comparison is useless.
 The Solution: By looking at Profit Margin (%) or Inventory Turnover, you
can see which company is actually run more efficiently, regardless of their
size.
2. Trend Identification (Forecasting)
Ratios act as an early warning system. By calculating ratios over 3–5 years, you can
spot patterns:
 Example: If a company’s Current Ratio (liquidity) has been dropping by
10% every year, you can predict a cash crunch before it actually happens.
3. Operational Efficiency Insights
It reveals how well management is using the company’s "tools" (assets).
 It answers: Are we sitting on too much unsold inventory? Are we taking too
long to collect cash from customers?
 This helps managers pinpoint exactly which department needs to improve.
4. Investment & Lending Decisions
For outsiders, ratios are the "DNA test" of a business:
 Investors use them to see if a stock is undervalued.
 Bankers use them to decide if a company is safe enough to give a loan to.

Summary Table: Who gains what?

Stakeholder Primary Advantage

Managers Identify operational weaknesses and set internal targets.

Investors Estimate future dividend payouts and stock growth.

Creditors/Banks Assess the "safety" of lending money (Solvency).

Competitors Benchmark their own performance against the industry leader.

1.5 Limitations of Ratio Analysis

While ratio analysis is a powerful diagnostic tool, it is not a crystal ball. Relying
solely on ratios without understanding their context can lead to a completely wrong
conclusion about a company’s health.
Think of it like looking at a person’s heart rate: a high heart rate could mean they are
an elite athlete exercising, or it could mean they are having a panic attack. Context is
everything.
Here are the primary limitations of ratio analysis:

1. Historical Data (The "Rearview Mirror" Problem)

Ratios are calculated using financial statements from the past (last quarter or last
year).
 The Risk: A company might have had great ratios six months ago, but a new
competitor or a change in technology could have rendered their business
model obsolete today. Ratios tell you where a company was, not necessarily
where it is going.
2. Differences in Accounting Policies
Not every company counts their beans the same way. This makes "Apples-to-Apples"
comparisons very difficult.
 Depreciation: One company might use "Straight-Line" depreciation, while
another uses "Accelerated." This makes their profit ratios look different even
if they own the exact same equipment.
 Inventory Valuation: Switching between FIFO (First-In, First-Out) and LIFO
(Last-In, First-Out) can drastically change the Current Ratio and Gross
Margin.
3. Price Level Changes (Inflation)
Ratios generally do not account for inflation.
 If a company bought land 20 years ago for $100,000, it stays on the books at
that "historical cost."
  A competitor buying the same land today for $1,000,000 will look much less
efficient on paper (lower Return on Assets), even though they might be just as
well-run.
4. Seasonal Distortions
Many businesses are seasonal. If you look at a retailer’s ratios in November, they will
have massive inventory and low cash. If you look in January, they will have low
inventory and high cash.
 The Mistake: Taking a "snapshot" at a single point in time can give a biased
view of the company’s average performance.
5. "Window Dressing"
Management knows that investors look at ratios. To make the company look better at
year-end, they might engage in "Window Dressing."
 Example: A company might delay paying its suppliers until January 1st just
so their Cash Ratio looks stronger on the December 31st Balance Sheet.

Summary of Limitations

Limitation Why it matters

No "universal" definition for some ratios; different analysts

Lack of Standards
calculate them differently.

Qualitative Ratios ignore the quality of management, employee morale, and

Factors brand loyalty.

One "good" ratio can hide several "bad" ones. You need the
Single Ratio Bias
whole picture.

Industrial A "good" ratio in Software is a "death sentence" in

Variations Manufacturing.

1.6 Care in uses of ratio analysis

Using ratio analysis effectively requires more than just plugging numbers into a
formula. Since ratios can be easily manipulated or misunderstood, you must exercise
care and professional skepticism when interpreting them.
Think of ratios as "clues" in a detective story—they point you in a direction, but they
aren't the whole truth.
1. Never Use a Ratio in Isolation
A single ratio is almost meaningless. If a company has a Current Ratio of 3.0 (which
usually means they are very liquid), you might think they are healthy. However, if
you look at their Inventory Turnover, you might find that the "assets" are actually
just piles of old, unsellable clothes in a warehouse.
 The Rule: Always look at a "bundle" of ratios (Liquidity + Profitability +
Efficiency) to get a 360-degree view.

2. Check for "Window Dressing"

Management is often incentivized to make the balance sheet look "pretty" right before
the reporting date (e.g., December 31st).
 What to watch for: A company might take out a short-term loan just to boost
their cash balance for the year-end report, then pay it back on January 2nd.
 The Care: Look at quarterly trends, not just the annual report, to see if the
numbers stay consistent.

3. Ensure "Apples-to-Apples" Comparisons

You cannot compare the ratios of a software company (like Microsoft) to a grocery
store (like Kroger).
 The software company will have massive profit margins but very few
physical assets.
 The grocery store will have razor-thin margins but huge inventory turnover.
 The Care: Only compare a company against its direct industry peers or its
own historical performance.

4. Adjust for Inflation and Accounting Changes

Ratios rely on "Book Value" (the price paid for something years ago).
 If a company changed its accounting method (e.g., from FIFO to LIFO) mid-
year, the ratios for this year will not be comparable to last year.
 The Care: Read the "Notes to the Financial Statements." This is where
companies disclose if they changed their accounting rules or if inflation has
made their old assets look undervalued.

5. Consider Qualitative Factors

Ratios ignore everything that can't be turned into a dollar sign. A company could have
perfect ratios today, but if:
 Their CEO just resigned.
 A major patent is expiring.
  There is a looming lawsuit.
...the ratios will not warn you.

Summary Checklist for Using Ratios

To use ratio analysis safely, ask yourself these three questions:

The Question Why it matters

Garbage in = Garbage out. Ensure the financial statements

Is the data reliable?
are audited.

Is the industry A "high" debt ratio might be normal for a utility company
standard met? but a disaster for tech.

Is the ratio improving or deteriorating over a 3-5 year

What is the trend?
period?
1.7 Objective of ratio analysis
The primary objective of ratio analysis is to turn raw financial data into actionable
intelligence. It bridges the gap between seeing a number (e.g., "$10 million in
revenue") and understanding what that number actually means for the future of the
business.
Here are the key objectives broken down by what they help you achieve:

1. To Measure Profitability
The ultimate goal of most businesses is to generate a return for owners. Ratio analysis
helps determine if the profit is "healthy" relative to the size of the company.
 Focus: Gross Profit Margin, Net Profit Margin, and Return on Equity (ROE).
 Objective: To see if the company is making enough money to justify the risks
it takes.
2. To Assess Liquidity (Short-Term Survival)
A company can be profitable but still go bankrupt if it runs out of cash to pay its
electric bill or its employees tomorrow.
 Focus: Current Ratio and Quick Ratio.
 Objective: To ensure the company has enough "liquid" assets to cover its
upcoming bills.
3. To Evaluate Solvency (Long-Term Stability)
While liquidity looks at the next 30 days, solvency looks at the next 10 years.
 Focus: Debt-to-Equity and Interest Coverage Ratio.
 Objective: To determine if the company’s capital structure is sustainable or if
it is drowning in too much debt.
4. To Gauge Operational Efficiency
This objective is about "sweating the assets." It looks at how hard the company’s
equipment, inventory, and cash are working.
 Focus: Inventory Turnover and Receivables Turnover.
 Objective: To spot "lazy" assets—like inventory sitting in a warehouse for too
long or customers who aren't paying their invoices on time.
5. To Facilitate Comparison (Benchmarking)
A major objective is to see how the company stacks up against the "Gold Standard" in
its industry.
 Intra-company: Comparing this year to last year (Trend Analysis).
  Inter-company: Comparing the company to its main rival (Cross-sectional
Analysis).

Summary of Objectives by Stakeholder

Stakeholder Their Main Objective

To decide whether to buy, hold, or sell the stock based on

Shareholders
Profitability.

To decide if the company is "safe" enough for a loan based on

Lenders (Banks)
Solvency.

Suppliers To see if they will get paid for their goods based on Liquidity.

To find which departments are underperforming based on

Management Efficiency.

1.8 Importance of Ratio anlysis

Think of Ratio Analysis as a medical check-up for a business. Instead of looking at a
single number (like total profit) and guessing how things are going, ratio analysis lets
you look "under the hood" to see how different parts of the engine are working
together.
It transforms raw data from financial statements into meaningful insights by
comparing one figure against another. Here is why it’s a cornerstone of financial
management:

1. Measuring Operational Efficiency

Ratios help determine how well a company is using its assets and resources. For
example, the Inventory Turnover Ratio tells you if stock is flying off the shelves or
sitting in a warehouse gathering dust.
 Insight: It helps management identify "bottlenecks" in production or sales.
2. Evaluating Solvency and Liquidity
This is the ultimate "stress test."
 Liquidity Ratios (like the Current Ratio) show if a company can pay its short-
term bills tomorrow.
 Solvency Ratios (like Debt-to-Equity) show if the company can survive in the
long run or if it’s drowning in loans.
3. Facilitating Comparison (Benchmarking)
Raw numbers are hard to compare between a giant corporation and a startup.
However, percentages and ratios level the playing field.
 Intra-company: Comparing this year’s performance against last year’s.
 Inter-company: Comparing your profit margins against your biggest
competitor.
4. Trend Analysis
Ratios allow you to spot patterns over time. A single year of low profit might be a
fluke, but a three-year downward trend in the Net Profit Margin is a flashing red
light for investors.
5. Decision Making for Stakeholders
Different people use ratios for different reasons:
 Investors: Look at Earnings Per Share (EPS) to see their potential return.
 Lenders: Check the Interest Coverage Ratio to see if the business can afford
to pay back a loan.
 Management: Use ratios to set future targets and budgets.

Key Ratios at a Glance

Category What it answers Example Ratio

Is the business making $Net\ Profit\ Margin = \frac{Net\ Profit}

Profitability
enough money? {Sales} \times 100$

Can we pay our $Current\ Ratio = \frac{Current\ Assets}

Liquidity
immediate bills? {Current\ Liabilities}$

Are we relying too much $Debt-to-Equity = \frac{Total\ Debt}

Leverage
on debt? {Shareholder\ Equity}$

How well are we using $Asset\ Turnover = \frac{Net\ Sales}

Efficiency
our stuff? {Average\ Total\ Assets}$

1.9 Introduction To Asian Paints

Asian Paints Ltd.

Asian Paints Ltd is an Indian multinational paint company, headquartered
in Mumbai.[2] The company is engaged in the business of manufacturing, selling and
distribution of paints, coatings, products related to home décor, bath fittings and
providing related services.
Asian Paints is India's largest paints company by market share.[5][6] The company has
27 paint manufacturing facilities in 15 countries, servicing consumers in over 60
countries. Asian Paints is also present in the home improvement and décor space in
India.[7]
Ownership
The families of the four founders (Choksey, Choksi, Dani and Vakil) together held the
majority shares of the company. But disputes started over the global rights in 1990s
when the
company expanded beyond India. Champaklal Choksey died in July 1997 and his son
Atul took over. After failed collaboration talks with the British company Imperial
Chemical Industries, Choksey family's 13.7% shares were mutually bought by the
remaining three families and Unit Trust of India. As of 2008, the Choksi, Dani and
Vakil families hold a share of 47.81%.[9] Ashwin Dani, the non-executive director of
Asian Paints, died on 28 September 2023 at the age of 79.[27][28] As per the Forbes list
of India's 100 richest tycoons, dated 9 October 2024, Dani family is ranked 36th with
a net worth of $8.1 billion.[29]
History
The company was started in a garage in Gaiwadi, Girgaon, Mumbai by four friends
Champaklal Choksey, Chimanlal Choksi, Suryakant Dani and Arvind Vakil, in
February 1942.[2] During World War II and the Quit India Movement of 1942, a
temporary ban on paint imports left only foreign companies and Shalimar Paints in
the market. Asian Paints took up the market and reported an annual turnover
of ₹23 crore in 1952 but with only 2% PBT margin. By 1967, it became the leading
paints manufacturer in the country.[8][9]
Asian Paints established its first overseas subsidiary in 1978 in Fiji,[10] before
expanding into Nepal in 1983.[11] The company made its first international acquisition
in 1999, when it took over Sri Lanka's second largest paint company, Delmege
Forsyth & Co.[12] In 2000, it began operations in Oman through a joint venture with
the Al Hassan Group.[13]
n 2002, Asian Paints acquired a 60% stake in Egyptian paint manufacturer SCIB
Chemicals for ₹24.5 crore (US$5.04 million).[14] It also acquired a 50.1% stake in
the SGX-listed Berger International Singapore, which had operations in 11 countries
across Southeast Asia, West Asia, the Caribbean, China and Malta, for US$20.8
million.[15] Later that year, it entered the Bangladesh market by incorporating a joint
venture with Confidence Group.[16]
In 2003, it acquired Taubmans Paints, which functioned in Fiji and Samoa; this added
to Asian Paints' existing presence in the region under Apco Coatings brand in
Fiji, Solomon Islands, Vanuatu and Tonga.[17] In 2004, the company sold its stake in
the Malta subsidiary, which was its only venture in Europe.[18] By 2010, it ceased its
loss-making operations in Malaysia, Hong Kong, Thailand and China.[19]
In 2013, Asian Paints increased its stake in Berger International Singapore to 96.48%.
[20]
In 2014, it entered Indonesia through the Singapore subsidiary.[21] In India, the
company ventured into home improvement and décor with the acquisitions
of modular kitchen manufacturer Sleek International and bathroom fittings company
Ess Ess.[22]
In 2015, Asian Paints completed the acquisition of a 51% controlling stake
in Ethiopia-based Kadisco Paint for US$18.95 million.[23] In 2017, it acquired 100%
of Sri Lanka's Causeway Paints for ₹387 crore (US$59.43 million).[24]
In 2020, Asian Paints started its personalised interior design service called Beautiful
Homes, and launched experiential studios across India under the same name.[25]
In 2022, Asian Paints acquired a 49% stake in the Indian decorative lighting company
White Teak for ₹180 crore (US$22.9 million), before buying another 11% the
following year.[26]
Asian Paints Ltd.

Formerly Asian Oil and Paint Company Pvt.

Ltd. (1945–1965)[1]
Asian Paints (India) Pvt. Ltd.
(1965–1973)[1]

Company type Public

Traded as  BSE: 50082

 NSE: ASIANPAINT
 BSE SENSEX constituent
 NSE NIFTY 50 constituent

ISIN INE021A01026

Industry Chemicals

Founded 1 February 1942; 84 years ago

Founders  Champaklal Choksey

 Chimanlal Choksi
 Suryakant Dani
 Arvind Vakil[2]

Headquarters Mumbai, Maharashtra

,
India

Area served Worldwide

Key people  Manish Choksi (Vice

Chairman)
 Amit Syngle (CEO)

Products  Chemicals
 Decorative paints
  Industrial finishing
products
 Coatings

Revenue ₹36,183 crore (US$4.3 billion)

(2024)

Operating ₹7,215 crore (US$850 million)

income (2024)

Net income ₹5,558 crore (US$660 million)

(2024)

Total assets ₹29,924 crore (US$3.5 billion)

(2024)

Total equity ₹19,424 crore (US$2.3 billion)

(2024)

Number of 9,482 permanent & 21,189

employees contractual (2024)[3]

Website [Link]

Footnotes / references
Financials as of 31 March 2024.[4]
1.10 Introduction To Indigo Paints

Indigo Paints Limited

Indigo Paints Limited is an Indian paint company that is headquartered

in Pune, Maharashtra, and has five manufacturing facilities that are located
at Jodhpur, Kochi and Pudukkottai.[4][5] The company is engaged in manufacturing,
selling and distribution of decorative paints, Emulsion, enamels, waterproofing &
chemical constructions, wood coatings, distemper, primers, putties and cement paints.
[6]

History
In 2000, Hemant Jalan founded Indigo Paints to manufacture cement paint; by 2021
the company scaled up to become the fifth largest player in terms of revenue
generation in the decorative paint industry.[7][8] In December 2019, Jalan stated that the
company had established a distribution network across 27 states and seven union
territories.[5][9][10] In 2018, Mahendra Singh Dhoni became the company’s brand
ambassador.[11] In 2014, Sequoia Capital first invested ₹55 crore in the firm and later
in 2016, an additional ₹95 crore in 2016.[5] In 2021, as a part of its IPO, the firm
raised ₹348 crore from 25 anchor investors including the Government of
Singapore, Fidelity, Goldman Sachs, Nomura, HSBC, Pacific Horizon Investment
Trust, SBI Mutual Fund, ICICI Prudential Mutual Fund and Axis Mutual Fund.[12] In
2022, company onboarded Mohanlal as a brand ambassador for promoting its
products in the state of Kerala. In 2023, Indigo Paints forayed into the waterproofing
and construction chemicals segments, with the acquisition of 51 percent stake[13] in
Apple Chemie India Private Ltd (ACIPL).
Initial public offering
On 20 January 2021, Indigo Paints launched its initial public offering (IPO) of about
1170 crores; the price band was fixed at ₹1,488-1,490 apiece.[10] The issue was
oversubscribed by 117 times.[10][14] On February, 2 2021, Indigo Paints Limited made
its debut on the NSE and the BSE at a price of ₹2,607.5 per share, a 75 percent
premium over its issue price of ₹1,490.[15][16][17] On the listing day, the stock price
more than doubled to hit the upper circuit at ₹3,129 per share.[1]
Indigo Paints Limited

Formerly Indigo Paints Private Limited

(2000–2020)

Company type Public

Traded as  BSE: 543258

 NSE: INDIGOPNTS

ISIN INE09VQ01012

Industry Chemicals

Founded 2000; 26 years ago

Founder Hemant Jalan

(Managing Director & Chairman)

Headquarters Pune, Maharashtra, India

Key people  Chetan Humane

(Chief Financial Officer)
[1]

 Suresh Babu
(Chief Operating Officer)
[1]

Products  Exterior and Interior

paints
 Enamel Paints
 Wood Coatings
 Putties
 Primers

Revenue ₹1,073 crore (US$130 million)

(2023)[2]

Number of 650[3] (2021)

employees

Website [Link]