A

SUMMER PROJECT REPORT ON

RATIO ANALYSIS

A REPORT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENT
OF

THE MBA PROGRAM

AT FACULTY OF MANAGEMENT STUDIES,

MRIU,FARIDABAD

SUBMITTED TO SUBMIT BY:

Ms. SHILPA ARORA SUNNY MITTAL
ROLL NO – 055
MBA (III SEM)

1
 DECLARATION

I SUNNY MITTAL hereby declare that the project entitled – “RATIO ANALYSIS submitted to
MANAV RACHNA INTERNATIONAL UNIVERSITY in partial fulfillment of the
requirements of the MBA program is an original and bonafied work done by me .

SUNNY MITTAL
Roll no.055

2
 ACKNOWLEDGMENTS

I would like to express my gratitude to all those who gave me the possibility to complete this
interim report. First of all I thank to Mr. PANKAJ KUMAR (Head Accounts ) for his
cooperation during this period. He was always there to provide me the judicious judgment,
logical thinking, procedure and in nut shell everything. His inspiration and precious guidance did
play a key role to complete my work at ease and well within time. I wish my deepest gratitude
for his support throughout.
I would also like to thank Mr. GOVIND BANSAL who helped me at every stage of the
program.

I am deeply indebted to my faculty guide Ms. SHILPA ARORA whose help, stimulating
suggestions and encouragements helped me in all the times of research and for writing the
interim report.

I express my profound sense of respect and deepest gratitude to each and everyone. I thank all
my well-wishers who helped me directly or indirectly in carrying out this work.

SUNNY MITTAL
Roll No. : 055

3
 TABLE OF CONTENTS

S. NO. TOPIC PAGE

NO.
1 Introduction 6
2 Objective and scope of study 7
3 Research Methodology 9
 Problem statement
 Research design
 Data collection
4 Industry Profile 11
5 Company Profile 14
6 Work done during the internship 22
7 Importance of ratio 24
8 Method of Analysis 25
9 Ratios 26
10 Parties interested in analysis of financial 34
statement
11 Advantages of ratio 35
12 Limitations of ratios 36
13 Conclusion 37
14 Recommendations and suggestions 38
15 Bibliography 39

4
 EXECUTIVE SUMMARY

This summer project report is prepared at ‘IMPERIAL AUTO INDUSTRIES LTD. on “RATIO
ANALYSIS” as a part of curriculum of the MBA program.

I have selected this topic to measures the financial position of the company and firm profit ability
as well as its credit policy with the help of ratio analysis. Ratio analysis is a widely used of
financial analysis. It is defined as the systematic use of ratio to interpret the financial statements
so that strengths and weakness of a firm as well as its historical performance and current
financial condition can be determined.

Ratio analysis is useful in determining the solvency of a business and the amount of reliance it
has on its creditors. Specific ratios included in this group are current ratio, which measures
financial strength by dividing a company's assets by its and, which takes the essence of the
current ratio but excludes. By focusing on of a business, a quick ratio can measure its strength
even in a worst-case scenario whereby all of its funding was suddenly removed.

5
 INTRODUCTION

A tool used by individuals to conduct a quantitative analysis of information in a company's

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

Ratio analysis is a method of analyzing data to determine the overall financial strength of a
business. Financial analysts take the information off the balance sheets and income statements of
a business and calculate ratios that can then be used to make assessments of the operating ability
and future prospects of that business.

These ratios are useful only when compared to other ratios, such as the comparable ratios of
similar businesses or the historical trend of a single business over several business cycles. There
are various ratios that measure a company's efficiency, short-term strength, and solvency.

The type of ratio analysis that is most effective depends upon who needs the information. Credit
analysts are concerned with risk evaluation, and they therefore will concentrate of ratios that
Measure whether a company can pay its financial obligations and how much debt is involved in
capital structure.

On the opposite end of the spectrum, analysts looking at a business in terms of an investment
opportunity will employ ratios that determine if a company is efficient and how great is its
potential profitability.

For example, knowing that a company has a particular as determined by a corresponding ratio is
meaningless by itself. Financial analysts know it's more important to determine how that ratio
looks in terms of other similar companies, or even how that ratio looks compared to prior
profitability levels of that same company. In addition, these ratios must be studied over a proper
time period, allowing for major changes within the company to be taken into consideration.

6
 Objectives of the research
Analysis of financial statements is an attempt to assess the efficiency and performance of an
enterprise. For that there are some objectives which are described as under.

1. EARNING CAPACITY OR PROFITABILITY

The overall objective of a business is to earn a satisfactory return on the funds invested in it.
Financial analysis helps in ascertaining whether adequate profits are being earned on the capital
invested in the business or not. It also helps in knowing the capacity to pay the interest and
dividend.

2. COMPARATIVE POSITION IN RELATION TO OTHER FIRMS

The purpose of financial statements analysis is to help the management to make a comparative
study of the profitability of various firms engaged in similar business. Such comparison also
helps the management to study the position of their firm in respect of sales expenses, profitability
and using [Link].

3. EFFICIENCY OF MANAGEMENT
The purpose of financial statement analysis is to know that the financial policies adopted by the
management are efficient or not. Analysis also helps the management in preparing budgets by

forecasting next year‘s profit on the basis of past earnings. It also helps the management to find
out shortcomings of the business so that remedial measures can be taken to remove these
shortcomings.

4. FINANCIAL STRENGTH
The purpose of financial analysis is to assess the financial potential of business. Analysis also
helps in taking decisions;
(a) Whether funds required for the purchase of new machinery and equipments are provided
from internal resources of business or not.
(b) How much funds have been raised from external sources.

5. SOLVENCY OF THE FIRM

The different tools of analysis tell us whether the firm has suffucient funds to meet its short-term
and long-term liabilities or not.

7
 SCOPE OF THE STUDY

 The study can be used by the researchers for the further analysis and
recommendations.

 The company executives can utilize the project report for the purpose of taking
financial decisions.

 The training students can use the report to undergo the various aspects of financial
management.

 The banks can utilize it as a manual for determining the financial position of the
company and its management.

8
 RESEARCH METHODOLOGY

Problem Statement:
How to measure the financial position of the company with the help of ratio analysis?

Research Design:
A research design is the specification of method and procedure for accruing the information
needed. It is overall operational pattern of frame work of project that stipulates what information
is to be collected for source by that procedures

Descriptive Research design is appropriate for this study.

Descriptive study is used to study the situation. This study helps to describe the situation. A
detail descriptive about present and past situation can be found out by the descriptive study. In
this involves the analysis of the situation using the secondary data

9
 Data Collection:
This research study is based on secondary data, means data that are already available i.e. the data
which have been already collected and analyzed by someone else.

Secondary data are used for the study of Ratio analysis of this company. To collect the data I
have refer – Company annual report, annual magazine, last year balance sheet, and cash flow
statements

10
 INDUSTRY PROFILE

Automotive industry in India

The automotive industry in India is one of the largest in the world and one of the fastest
growing globally.
India's passenger car and commercial vehicle manufacturing industry is the sixth largest in the
world, with an annual production of more than 4.7 million units in 2010.
The majority of India's car manufacturing industry is based around three clusters in the south,
west and north.

THE SOUTHERN CLUSTER CONSISTS OF :

CHENNAI AND BANGLORE

THE WESTERN HUB COSISTS OF :

MUMBAI AND PUNE

NORTHERN CLUSTER CONSISTS OF :

NATIONAL CAPITAL REGION

Exports

Automobile Exports registered a growth of 22.30 percent during the current financial year.

ACMA

The Automotive Component Manufacturers Association

of India (ACMA) is the nodal agency for the Indian
Auto Component Industry.
It's active involvement in trade promotion, technology up-gradation, quality enhancement and
collection and dissemination of information has made it a vital catalyst for this industry's
development. It's other activities include participation in

11
international trade fairs, sending trade delegations overseas and bringing out publications on
various subjects related to the automotive industry.
ACMA is represented on a number of panels, committees and councils of the Government of
India through which it helps in the formulation of policies pertaining to the Indian automotive
industry.

For exchange of information and especially for co-operation in trade matters, ACMA has signed
Memoranda of Understanding with its counterparts in USA, Canada, UK, France, Italy, Spain,
Japan, South Korea, Malaysia, Uzbekistan, Pakistan, Australia, Egypt, Iran, Tunisia, South
Africa. Thailand & Scandinavia.

SIAM

Society of Indian Automobile Manufacturers (SIAM) is

the apex Industry body representing 38 leading vehicle
and vehicular engine manufacturers in India.

SIAM is an important channel of communication for the Automobile Industry with the
Government, National and International organisations

The Society works closely with all the concerned stake holders and actively participates in
formulation of rules, regulations and policies related to the Automobile Industry.

SIAM provides a window to the Indian Automobile industry and aims to enhance exchanges
and communication, expand economics, trade and technical cooperation between the Automotive
Industry and its international counterparts.

With its regular and continuous interaction with international bodies and organizations it aims to
facilitate up gradation of technical capabilities of the Indian Industry to match the best practice
worldwide.

SIAM also interacts with worldwide experts to assess the global trends and developments
shaping the Automotive Industry. It has been actively pursuing issues like Frontier Technologies
viz. Telematics: Promotion of Alternative Fuels

including Hydrogen Energy for automotive use through cell vehicles and Harmonisation of
Safety and Emission Standards etc.

Dissemination of information is an integral part of SIAM'S activities, which it does through

various publications, reports, seminars and conferences.

12
At present, India is the worlds
 Largest tractor and three-wheel vehicle producer.
 Second largest two-wheel vehicle producer.
 Fourth largest commercial vehicle producer.

 Eleventh largest passenger car producer.

The Industry's Challenge:

Even though the automotive industry is robust, car manufacturers are complaining that the
government's frequent change in policies is not encouraging the industry. Changing the policies
and guidelines frequently severely hurts the companies’ plans. It also affects investment
decisions in the country
 

Future Plans:
 
The Government has prepared a ten-year Automotive Mission Plan (AMP) to draw a future
plan of action and remove obstacles in the way of competition, such as that required
infrastructure be put in place well in time to alleviate its constraining impact on the growth.

13
IMPERIAL AUTO INDUSTRIES LTD.
FARIDABAD

COMPANY PROFILE

Opposite Railway Goods Shed,

14
 Faridabad ( Old )

Tel 0129-2412311, 2423791 E-mail: pankajiai@[Link]

ABOUT US

• Established in year 1969

• Largest integrated manufacturer of ‘FLUID TRANSMISSION PRODUCT” (FTP)

• Eight dedicated manufacturing / assembly plant

• Multi location manufacturing facility have diversified product portfolio

• Expected to cross group turnover of US $ 155 million (700 crores) by FY 2010-2011

• 3000 employees

• Strategic and technical alliances with major international players in the industry

• Global presence and scale

• Major supplier to most leading OEM ‘s worldwide

• Overseas warehousing capability and facility

• High level of quality and commitment to continuous improvement

15
 HISTORY/ KEY MILESTONE

IN 1969

• Incorporated as a partnership firm for manufacturing low pressure fuel hose assemblies
and in the year 1998 got converted into limited company
• Established Plant1.

IN 1970
• Initiated supplies to all the major automotive players – Mahindra &Mahindra , TATA
MOTORS, Kirloskar, Fiat and Ambassador
• Started manufacturing rubber hose in- house
IN 1980

• Initiated supplies to international players setting up of operations in India – Maruti ,DCM,

TOYOTA, SWARAJ MAZDA , NISSAN JCB etc
• Included Tubular assemblies in its portfolio of products

IN 1990

• Started supplies to most of new multinational entering the Indian automotive market
-New Holland , Ford, Fiat , JCB, General motors
• Stared manufacturing high pressure hose assemblies
• Established a dedicated rubber hose manufacturing unit and a 3rd
Plant to manufacture high pressure tubes

IN 2000
• Approved global supplier to international trucks , cummins , caterpillar, jcb, john
deere and other OEM manufacturers overseas
• Established 11nd plant for tubular assemblies , a dedicated unit for hydraulic
assemblies and added nylon extrusion in its portfolio

16
 Note: Our Panels have been won appreciations from under mentioned consultants

• EEL-Delhi,
• MECON - Delhi,
• M.N. Dastoor-Delhi,
• Howe India Ltd. - Delhi,
• Mechawar Beekay – Delhi

DIRECTORS

Shri. JAGIT Singh , Chairman cum Joint Managing Director Shri S.

B. Sardana, Managing Director

Shri [Link] Whole time director

Mr. Vinod Kampania Director

Dr. R.N. Malik Director

Mr. Tarun Lamba CEO

Mr. Madhav Sardana CEO

SISTER CONCERN

IAI INDUSTRIES LTD, GHAT NO. 243,

Nanekarwadi, Chakan, Pune

ACTIVITY: Manufacturing of Automobile Parts.

TURN OVER

2001.2002 73 Crores

2002-2003 92 Crores

2003-2004 156 Crores

17
2004-2005 230 Crores

THE VISION :

IAI to become a globally recognized financially strong company. Sustaining undisputed

leadership in the Indian Market.

THE BUSINESS

The core of our business is dedicated to market (manufacturing of automobile parts). Our product
marketing / engineering and service net works is dedicated to provide the best solution as per the
customer’s need.

The faith of our customer is encouraged us for system integration as a result of which we
promoted our business globally.

THE STRENGTHS

Right from application engineering, till System Integration, we ensure the best!
We understand the importance of highest degree of the customer service hence our technical
support, service and inventory are always within your reach.

We are a Qs- 9000, ISO / TS 16949 approved company and going to implement OHSAS- 18001

18
 PRODUCTS

1. RUBBER HOSES AND ASSEMBLIES

1.1 Radiator and Heater hoses
1.2 Fuel and vacuum hoses
1.3 Silicon hoses
1.4 Co extruded hoses
1.5 Branch hoses

2. METAL TUBE ASSEMBLIES

2.1 Fuel injection tubes

2.2 CRDI tubes

2.3 Hydraulic tubes
2.4 EGR and bellows

CUSTMOERS

DOMESTIC CUSTMERS

19
 • BOSCH

• CATER PILLAR

• CUMMIN

• DELPHI TVS

• KILOSKAR

• SUZUKI POWERTRAIN

• TATA CUMMINS

AUTOMOTIVE

• ASHOK LEYLAND
• BAJAJ AUTO
• FIAT
• GENERAL MOTORS
• HYUNDAI
• HERO HONDA
• MAHINDRA&MAHINDRA
• MARUTI SUZUKI
• NISAN
• TOYOTA

OFF HIGHWAY AND FARM EQUIPMENT

• CATER PILLAR
• DEFENCE
• INDIAN RAILWAYS
• CLASS
• ESCORTS CONSTRUCTION EQUIPMENT
• JCB
• KOMATSU

EXPORT CUSTMERS
• CATER PILLAR- USA
• FIAT POWERTRAIN- BRAZIL

20
 • NAVISTAR- USA CANADA &MEXICO
• CUMMINS- USA,BRAZIL,MEXICO, U.K , JAPAN &CHINA

QUALITY SYSTEM

• Imperial auto group companies are TS 16949 &ISO 14001 certified .We are committed to
provide world class products and services with due concern for the environment and safety of
our workmen and products

21
[Link]

LEARNING DURING THE INTERNSHIP

22
• In Imperial auto industry all their accounting work is done on the TALLY and ERP

• I have done a project on calculation of depreciation

• I have to made a register of FIXED ASSETS

• I have calculated depreciation according to INCOME TAX ACT &COMPANIES ACT

• The main difference between above two is :

o In income tax act depreciation is charged according to days and it is calculated if
asset is use less than 180 days.
o But in companies act depreciation is charged according to no. of period in which
asset is being utilized

Data given to me is in form of: voucher no, location of customer, details and
specifications of the product sold, Amount of invoice

• Assets in the data are : building, plant & machinery , furniture& fixture , tube well ,
motor vehicles , van etc

• This register helps the chartered accountant in taking various decisions.

• From this register we can know much is opening balance of assets before depreciation
and how much is after charging depreciation.

• It clearly shows that how much are the assets in the beginning of the year and how much
are left at the end by charging depreciation.

• It shows that at which amount asset is being sold whether it is sold on purchase price or
less than price.

• Basically our department will prepare the vouchers of the customers.

• They will also give the payment to various customers and employees.

• They also make the payment to some foreign parties through cheques of Bank of Baroda,
HSBC.

• All the transactions of finance in purchase section, storage of material and selling of
finished goods are done by our department.

• All the payment of loans of various banks at various dates is managed by our department.

23
 • After preparing this fixed asset register I have to match the balances of these assets with
. the Balance sheet.

• The head of our finance department (Mr. Pankaj) issues daily 1 crore rupees to his junior
[Link] Bansal for the disbursement of cash to various dealers.

• Our department will also prepare the bills to be sent to various customers of the company.

• They also have maintained cash reserve amount after which they will not use the balance
cash. Cash reserve amount is rupees 5 lakhs after which they will stop giving payment to
the suppliers.

• All the payments are done after the lunch because they have to make an estimate of how
much payment to be done on a particular day.

• The money of the company is not utilized properly because the raw material in the store
gets wasted because the available store is not sufficient to keep all the raw material due to
which some raw material gets dispersed and wasted.

• The new store house is under construction but it is taking long time than usual because
the company has lack of funds.

24
 IMPORTANCE

Ratio analysis is an important technique of financial analysis. It is a means for judging the
financial health of a business enterprise. It determines and interprets the liquidity, solvency,
profitability, etc. of a business enterprise.

It becomes simple to understand various figures in the financial statements through the use of
different ratios. Financial ratios simplify, sumarise, and systemise the accounting figures
presented in financial statements.

 with the help of ratio analysis, comparison of profitability and financial soundness can be
made between one industry and another. Similarly comparisons of current year figures can also
be made

With those of previous years with the help of ratio analysis and if some weak points are located,
remedial measures are taken to correct them.

 If accounting ratios are calculated for a number of years, they will reveal the trend of costs,
sales, profits and other important facts. Such trends are useful for planning.

 Financial ratios, based on a desired level of activities, can be set as standards for judging
actual performance of a business. For example, if owners of a business aim at earning profit @
25% on the capital which is the prevailing rate of return in the industry then this rate of 25%
becomes the standard. The rate of profit of each year is compared with this standard and the
actual performance of the business can be judged easily.

 Ratio analysis discloses the position of business with different viewpoint. It discloses the
position of business with liquidity viewpoint, solvency view point, profitability viewpoint, etc.
with the help of such a study, we can draw conclusion regarding the financial health of business
enterprise

25
 METHOD OF RATIO ANALYSIS:

OCurrent Ratio
O Quick Ratio
O Debtor turnover ratio
O Creditors turnover ratio
O operating ratio
O Return on total assets
O Fixed asset turnover ratio
O Return on capital employed
O Working capital turnover ratio
O Stock turnover ratio
O Gross profit margin ratio
O Net profit Ratio

26
 RATIOS CALCULATION

1 Return on capital Employed

Operating Profit Before Interest & taxes* 100

average capital Employed

Year 2011 Year 2010

Operating Profit
208838381 80902064.6

Average Capital Employed

Fixed Asset 912583598 860595457

Current Assets 2820488612 2414811807

3733072210 3275407264
Less.

Current Liabilities 1189293491 788735024

Provision 45000000 27500000
Capital employed 2498778719 2459172240

ROCE = 208838381 *100 80902064.6

2498778719 2459172240

ROCE 8.36% 3.29%

27
 Comment:-
There is a efficient utilization of capital Invested in the business, Because the ratio
Is Increased from 3.29%
to 8.36%

2 Return on Total Assets

Net profit after Tax & interest*100

Total assets

Net Profit After Tax 157966609 50155278.6

Total assets
Fixed assts 912583598 860595457
Investment 123400000 108400000
Current Assets 2820488612 2414811807

Total Assets 3856472210 3383807264

ROTA = 157966609 *100 50155278.6

3856472210 3383807264

ROTA 4.10% 1.48%

Comment:-
The funds are fully utilized in the business as the ratio is increased from
1.48% to 4.10%

3 Operating ratio

COGS + Operating
Expenses*100
Net Sales

COGS&OPERATING 3171409168 2156899830

28
 EXPENSES

3171409168 2156899830

Net Sales 4930979584 3557971736

Operating ratio 64.32% 60.62%

Comment:-
As our operating ratio is Increase from 60.62% to
64.32% so investor will not get fair return on their
investment.

4. Fixed Assets Turnover ratio

Net Sales
Fixed assets (net)

Net Sales = 4930979584 3557971736

Net Fixed Assets 912583598 860595457

3557971736
FATR = 4930979584
912583598 860595457

FATR = 5.40 4.13

Comment:-

The resources are completely utilized because the ratio has been increased
from 4.13% to 5.40%

29
5. Debtors Turnover ratio

Credit Sales
Average Accounts Receivable

Credit sales = 4930979584 3557971736

Debtors = 1269784580 1133950718

DTR = 4930979584 3557971736

1269784580 1133950718

DTR = 3.88 3.14

Comment:-
The company was able to
collect debt promptly
from its debtors because
the ratio is increasing
from 3.14 to 3.88

6. Creditors Turnover ratio

Credit Purchase
Average Account Payable
Credit Purchase =
Raw
Material*consumable
stores 3171409168 2156899830

Total Purchase 3171409168 2156899830

Average Payable 1029657684 682552294

CTR = 3171409168 2156899830

1029657684 682552294

CTR = 3.08 3.16

30
 Comment:-

As ratio is decreasing
from 3.16 to 3.08,so its
signifies that creditors
are not being paid
promptly thus decreasing
the credit worthiness of
the company

7. Current ratio
Current Assets
Current Liabilities

Current Assets 2820488612 2414811807

Current Liabilities 1189293491 788735024

CR = 2820488612 2414811807
1189293491 788735024

CR = 2.37 3.06

Comment:-
This ratio is decreasing
from 3.06 to 2.37 so it is
not good for the business
and the firm ability is
decreasing to meet its
current obligations.

8. Quick Ratio/ Liquidity ratio

Quick Assets
Current Liabilities

Quick Assets :-
Debtors 1269784580 1133950718

31
 cash & bank 96641159.1 54149939.6
Other Current Assets 400452248 354477442

Total Quick Assets 1766877987 1542578100

Current Liabilities 1189293491 788735024

QR = 1766877987 1542578100
1189293491 788735024

QR = 1.49 1.96

Comment:-
The short term solvency
of the company is not
good. Because the quick
ratio is
Decreasing and the assets
are not easily converted
into cash.

32
 YEAR 2011 YEAR 2010

SALES/WORKING

9. WORKING CAPITAL TURNOVER RATIO : CAPITAL

NET WORKING CAPITAL = NET CURRENT
ASSET

NET CURRENT ASSET = CURRENT ASSETS - CURRENT

LIABILITIES

SALES 4930979584 3557971736

NET CURRENT ASSETS 1721600437 1648071681

2.86418351 2.15886953

COMMENT:
This ratio is
increasing
from 2.15 to
2.86 it means
that the
working
capital
changes very
fastly

COST OF GOODS SOLD/AVERAGE

INVENTORY
10 STOCK TURNOVER RATIO :
COST OF GOODS SOLD : 3171409168 2156899830
AVERAGE INVENTORY 749406002.5 582802338

4.231897206 3.70091142

Comment:
This ratio
is
increasing
From 3.70
to 4.23 it
means

33
that stock
are
readily
converted
into cash.

GROSS PROFIT MARGIN RATIO : GROSS PROFIT/ NET

11. SALES
GROSS PROFIT(sales- cost of 1759570416 1401071907
goods sold )
NET SALES 4930979584 3557971736

COMMENT: 0.39378388
0.356839931

This ratio is
decreasing
from 0.39 to
0.35 it means
that the profit
of the
company is
declining and
margin is very
less.

NET
PROFIT/NET
12. NET PROFIT MARGIN RATIO : SALES
208838381.3 80902064.6

34
 NET PROFIT
NET SALES 4930979584 3557971736

0.042352311 0.02273825

COMMENT: This ratio is increasing from 0.022 to 0.042 it means that net profit of the
company is increasing because of increasing sales so it is good for the company.

Parties interested in analysis of financial statements

Analysis of financial statement has become very significant due to widespread interest of various
parties in the financial result of a business unit. The various persons interested in the analysis of
financial statements are:-

Short- term creditors

They are interested in knowing whether the amounts owing to them will be paid as and when fall
due for payment or not.

Long –term creditors

They are interested in knowing whether the principal amount and interest thereon will be paid on
time or not.

Shareholders

They are interested in profitability, return and capital appreciation.

Management

The management is interested in the financial position and performance of the enterprise as a
whole and of its various divisions.

Trade unions: They are interested in financial statements for negotiating the wages or
salaries or bonus agreement with management

35
  ADVANTAGES
Ratio analysis is an important and age-old technique of financial analysis. The following are
some of the advantages of ratio analysis:

1. Simplifies financial statements: It simplifies the comprehension of financial statements.

Ratios tell the whole story of changes in the financial condition of the business.

2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios

highlight the factors associated with successful and unsuccessful firm. They also reveal strong
firms and weak firms, overvalued and undervalued firms.
3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its
basic functions of forecasting. Planning, co-ordination, control and communications.
4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of
the performance of different divisions of the firm. The ratios are helpful in deciding about their
efficiency or otherwise in the past and likely performance in the future.
5. Help in investment decisions: It helps in investment decisions in the case of investors and
lending decisions in the case of bankers etc.

LIMITATIONS

36
The ratios analysis is one of the most powerful tools of financial management. Though ratios are
simple to calculate and easy to understand, they suffer from serious limitations.

1. Limitations of financial statements: Ratios are based only on the information which has
been recorded in the financial statements. Financial statements themselves are subject to several
limitations. Thus ratios derived, there from, are also subject to those limitations. For example,
non-financial changes though important for the business are not relevant by the financial
statements. Financial statements are affected to a very great extent by accounting conventions
and concepts. Personal judgment plays a great part in determining the figures for financial
statements.
2. Comparative study required: Ratios are useful in judging the efficiency of the business only
when they are compared with past results of the business. However, such a comparison only
provide glimpse of the past performance and forecasts for future may not prove correct since
several other factors like market conditions, management policies, etc. may affect the future
operations.
3. Problems of price level changes: A change in price level can affect the validity of ratios
calculated for different time periods. In such a case the ratio analysis may not clearly indicate the
trend in solvency and profitability of the company. The financial statements, therefore, be
adjusted keeping in view the price level changes if a meaningful comparison is to be made
through accounting ratios.
4. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no
well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders
interpretation of the ratios difficult.
5. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a
better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst
than help him in making any good decision.
6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to
interpret and different people may interpret the same ratio in different way.
7. Incomparable: Not only industries differ in their nature, but also the firms of the similar business
widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and
misleading

CONCLUSION
Ratios make the related information comparable. A single figure by itself has no meaning,
but when expressed in terms of a related figure, it yields significant interferences. Thus, ratios
are relative figures reflecting the relationship between related variables. Their use as tools of

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financial analysis involves their comparison as single ratios, like absolute figures, are not of
much use.

Ratio analysis has a major significance in analyzing the financial performance of a company
over a period of time. Decisions affecting product prices, per unit costs, volume or efficiency
have an impact on the profit margin or turnover ratios of a company.

Financial ratios are essentially concerned with the identification of significant accounting
data relationships, which give the decision-maker insights into the financial performance of a
company.

The analysis of financial statements is a process of evaluating the relationship between

component parts of financial statements to obtain a better understanding of the firm‘s position
and performance.

The first task of financial analyst is to select the information relevant to the decision under
consideration from the total information contained in the financial statements. The second step is
to arrange the information in a way to highlight significant relationships. The final step is
interpretation and drawing of inferences and conclusions. In brief, financial analysis is the
process of selection, relation and evaluation.

Ratio analysis in view of its several limitations should be considered only as a tool for
analysis rather than as an end in itself. The reliability and significance attached to ratios will
largely hinge upon the quality of data on which they are based. They are as good or as bad as the
data itself. Nevertheless, they are an important tool of financial analysis.

RECOMMENDATION AND SUGGESTION

 As the capital employed in the firm is efficiently utilized so the firm can further increase
the operating profit by efficiently utilizing the fixed assets which lead to enhancing the
goodwill of the company. The company should use same strategies as used presently by
the company.

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  Due to increase in return on total assets ratio, it shows that the company is properly
utilizing its assets .The Company can further increase the investment in assets which lead
to more revenue generation and further improvement.

 Due to increase in operating ratio I suggest the company to reduce the unnecessary
expenses incurred while producing product and also reduce the wastage which can lead to
decrease in operating cost, increase in net sale and a favourable operating ratio.

 As the fixed asset turnover ratio is increasing I recommend the company to regularly
invest in fixed asset which lead to efficiency in production and further increase in fixed
asset ratio.

 Due to increase in debtors turnover ratio the company can go for credit selling or the
company can extend their credit period which lead to building of good relationship with
the customers and a positive image in the society .

 As creditor turnover ratio is decreasing so I recommend the company to timely give the
payments to all its suppliers unless the supplier will not supply the raw material and the
company will be in a huge loss which can also lead to stoppage in production and
decrease in net profit.

 Due to decrease in current ratio I suggest the company to reduce the current obligations
and increase the current assets which can help in meeting current liabilities and try to
make the current ratio 2:1 which is ideal.

 As quick ratio is decreasing so the company should try to make good the short term
solvency which can lead to easily conversion of quick assets into cash for meeting current
obligations and try to make it 1:1 which is ideal .

BIBLIOGRAPHY

WEBSITES :
 [Link]

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Books Referred:

 Financial Management- Prasanna Chandra

 Accouting For Managers – [Link] &[Link]

Annual Reports of the company

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