PROJECT REPORT

1
A STUDY ON RATIO ANALYSIS

2
Chapter – 1

INTRODUCTION

3
 Introduction

Financial Management is the specific area of finance dealing

with the financial decision corporations make, and the tools and analysis
used to make the decisions. The discipline as a whole may be divided
between long-term and short-term decisions and techniques. Both share the
same goal of enhancing firm value by ensuring that return on capital exceeds
cost of capital, without taking excessive financial risks.

Capital investment decisions comprise the long-term choices

about which projects receive investment, whether to finance that investment
with equity or debt, and when or whether to pay dividends to shareholders.
Short-term corporate finance decisions are called working capital
management and deal with balance of current assets and current liabilities by
managing cash, inventories, and short-term borrowings and lending (e.g., the
credit terms extended to customers).

Corporate finance is closely related to managerial finance,

which is slightly broader in scope, describing the financial techniques
available to all forms of business enterprise, corporate or not.

4
Role of Financial Managers:

The role of a financial manager can be discussed under the

following heads:

1. Nature of work

2. Working conditions

3. Employment

4. Training, Other qualifications and Advancement

5. Job outlook

6. Earnings

7. Related occupations

Let us discuss each of these in a detailed manner.

1. Nature of work

Almost every firm, government agency and organization has

one or more financial managers who oversee the preparation of financial
reports, direct investment activities, and implement cash management
strategies. As computers are increasingly used to record and organize data,
many financial managers are spending more time developing strategies and
implementing the long-term goals of their organization.

5
 The duties of financial managers vary with their specific titles,
which include controller, treasurer or finance officer, credit manager, cash
manager, and risk and insurance manager. Controllers direct the preparation
of financial reports that summarize and forecast the organization’s financial
position, such as income statements, balance sheets, and analyses of future
earnings or expenses. Regulatory authorities also in charge of preparing
special reports require controllers. Often, controllers oversee the accounting,
audit, and budget departments. Treasurers and finance officers direct the
organization’s financial goals, objectives, and budgets. They oversee the
investment of funds and manage associated risks, supervise cash
management activities, execute capital-raising strategies to support a firm’s
expansion, and deal with mergers and acquisitions. Credit managers oversee
the firm’s issuance of credit. They establish credit-rating criteria, determine
credit ceilings, and monitor the collections of past-due accounts. Managers
specializing in international finance develop financial and accounting
systems for the banking transactions of multinational organizations.

Cash managers monitor and control the flow of cash receipts

and disbursements to meet the business and investment needs of the firm.
For example, cash flow projections are needed to determine whether loans
must be obtained to meet cash requirements or whether surplus cash should
be invested in interest-bearing instruments. Risk and insurance managers
oversee programs to minimize risks and losses that might arise from
financial transactions and business operations undertaken by the institution.
They also manage the organization’s insurance budget.

Financial institutions, such as commercial banks, savings and

loan associations, credit unions, and mortgage and finance companies,

6
employ additional financial managers who oversee various functions, such
as lending, trusts, mortgages, and investments, or programs, including sales,
operations, or electronic financial services. These managers may be required
to solicit business, authorize loans, and direct the investment of funds,
always adhering to State laws and regulations.

Branch managers of financial institutions administer and

manage all of the functions of a branch office, which may include hiring
personnel, approving loans and lines of credit, establishing a rapport with
the community to attract business, and assisting customers with account
problems. Financial managers who work for financial institutions must keep
abreast of the rapidly growing array of financial services and products.

In addition to the general duties described above, all financial

managers perform tasks unique to their organization or industry. For
example, government financial managers must be experts on the government
appropriations and budgeting processes, whereas healthcare financial
managers must be knowledgeable about issues surrounding healthcare
financing. Moreover, financial managers must be aware of special tax laws
and regulations that affect their industry.

Financial managers play an increasingly important role in

mergers and consolidations and in global expansion and related financing.
These areas require extensive, specialized knowledge on the part of the
financial manager to reduce risks and maximize profit. Financial managers
increasingly are hired on a temporary basis to advise senior managers on
these and other matters. In fact, some small firms contract out all accounting
and financial functions to companies that provide these services.

7
 The role of the financial manager, particularly in business, is
changing in response to technological advances that have significantly
reduced the amount of time it takes to produce financial reports. Financial
managers now perform more data analysis and use it to offer senior
managers ideas on how to maximize profits. They often work on teams,
acting as business advisors to top management. Financial managers need to
keep abreast of the latest computer technology in order to increase the
efficiency of their firm’s financial operations.

2. Working conditions

Financial managers work in comfortable offices, often close to

top managers and to departments that develop the financial data these
managers need. They typically have direct access to state-of-the-art
computer systems and information services. Financial managers commonly
work long hours, often up to 50 or 60 per week. They generally are required
to attend meetings of financial and economic associations and may travel to
visit subsidiary firms or to meet customers.

3. Employment

While the vast majority is employed in private industry, nearly

1 in 10 works for the different branches of government. In addition, although
they can be found in every industry, approximately 1 out of 4 are employed
by insurance and finance establishments, such as banks, savings institutions,
finance companies, credit unions, and securities dealers.

8
4. Training, Other qualifications and Advancement

A bachelor’s degree in finance, accounting, economics, or

business administration is the minimum academic preparation for financial
managers. However, many employers now seek graduates with a master’s
degree, preferably in business administration, economics, finance, or risk
management. These academic programs develop analytical skills and
provide knowledge of the latest financial analysis methods and technology.

Experience may be more important than formal education for

some financial manager positions—notably, branch managers in banks.
Banks typically fill branch manager positions by promoting experienced
loan officers and other professionals who excel at their jobs. Other financial
managers may enter the profession through formal management training
programs offered by the company.

Continuing education is vital for financial managers, who must

cope with the growing complexity of global trade, changes in State laws and
regulations, and the proliferation of new and complex financial instruments.
Firms often provide opportunities for workers to broaden their knowledge
and skills by encouraging employees to take graduate courses at colleges
and universities or attend conferences related to their specialty. Financial
management, banking, and credit union associations, often in cooperation
with colleges and universities, sponsor numerous national and local training
programs. Persons enrolled prepare extensively at home and then attend
sessions on subjects such as accounting management, budget management,
corporate cash management, financial analysis, international banking, and
information systems. Many firms pay all or part of the costs for employees

9
who successfully complete courses. Although experience, ability, and
leadership are emphasized for promotion, this type of special study may
accelerate advancement.

In some cases, financial managers also may broaden their skills

and exhibit their competency by attaining professional certification. There
are many different associations that offer professional certification
programs. For example, the Association for Investment Management and
Research confers the Chartered Financial Analyst designation on investment
professionals who have a bachelor’s degree, pass three sequential
examinations, and meet work experience requirements. The Association for
Financial Professionals (AFP) confers the Certified Cash Manager credential
to those who pass a computer-based exam and have a minimum of 2 years of
relevant experience. The Institute of Management Accountants offers a
Certified in Financial Management designation to members with a BA and
at least 2 years of work experience who pass the institute’s four-part
examination and fulfill continuing education requirements. Also, financial
managers who specialize in accounting may earn the Certified Public
Accountant (CPA) or Certified Management Accountant (CMA)
designations.

Candidates for financial management positions need a broad

range of skills. Interpersonal skills are important because these jobs involve
managing people and working as part of a team to solve problems. Financial
managers must have excellent communication skills to explain complex
financial data. Because financial managers work extensively with various
departments in their firm, a broad overview of the business is essential.

1
 Financial managers should be creative thinkers and problem-
solvers, applying their analytical skills to business. They must be
comfortable with the latest computer technology. As financial operations
increasingly are affected by the global economy, financial managers must
have knowledge of international finance. Proficiency in a foreign language
also may be important.

Because financial management is critical for efficient business

operations, well-trained, experienced financial managers who display a
strong grasp of the operations of various departments within their
organization are prime candidates for promotion to top management
positions. Some financial managers transfer to closely related positions in
other industries. Those with extensive experience and access to sufficient
capital may start their own consulting firms.

5. Job outlook

Some companies may hire financial managers on a temporary

basis, to see the organization through a short-term crisis or to offer
suggestions for boosting profits. Other companies may contract out all
accounting and financial operations. Even in these cases, however, financial
managers may be needed to oversee the contracts.

Computer technology has reduced the time and staff required to

produce financial reports. As a result, forecasting earnings, profits, and
costs, and generating ideas and creative ways to increase profitability will
become a major role of corporate financial managers over the next decade.

1
Financial managers who are familiar with computer software that can assist
them in this role will be needed.

6. Earnings

The Association for Financial Professionals’ 16th annual

compensation survey showed that financial officers’ average total
compensation in 2006, including bonuses and deferred compensation, was
$261,800. Selected financial manager positions had average total
compensation as follows:

US$

Vice president of finance 367,000

Treasurer 301,200

Assistant vice president-finance 282,600

Controller/comptroller 268,600

Director 227,200

Assistant treasurer 223,800

Assistant controller/comptroller 231,000

Manager 167,000
Cash manager 129,400

Large organizations often pay more than small ones, and salary
levels also can depend on the type of industry and location. Many financial

1
managers in both public and private industry receive additional
compensation in the form of bonuses, which also vary substantially by size
of firm. Deferred compensation in the form of stock options is becoming
more common, especially for senior level executives.

7. Related occupations

Financial managers combine formal education with experience

in one or more areas of finance, such as asset management, lending, credit
operations, securities investment, or insurance risk and loss control. Workers
in other occupations requiring similar training and skills include accountants
and auditors; budget analysts; financial analysts and personal financial
advisors; insurance underwriters; loan counselors and officers; securities,
commodities, and financial services sales agents; and real estate brokers and
sales agents.

NEED FOR THE STUDY

1. The study has great significance and provides benefits to

various parties whom directly or indirectly interact with the company.

2. It is beneficial to management of the company by providing

crystal clear picture regarding important aspects like liquidity,
leverage, activity and profitability.

3. The study is also beneficial to employees and offers motivation

by showing how actively they are contributing for company’s growth.

1
4. The investors who are interested in investing in the company’s
shares will also get benefited by going through the study and can
easily take a decision whether to invest or not to invest in the
company’s shares.

1
 OBJECTIVES

The major objectives of the resent study are to know about

financial strengths and weakness of LANCO through FINANCIAL RATIO
ANALYSIS.

The main objectives of resent study aimed as:

To evaluate the performance of the company by using ratios as

a yardstick to measure the efficiency of the company. To understand the
liquidity, profitability and efficiency positions of the company during the
study period. To evaluate and analyze various facts of the financial
performance of the company. To make comparisons between the ratios
during different periods.

OBJECTIVES

 To study the present financial system at Genting Lanco.

 To determine the Profitability, Liquidity Ratios.

 To analyze the capital structure of the company with the help of

Leverage ratio.

1
 To offer appropriate suggestions for the better performance of the
organization

METHODOLOGY

The information is collected through secondary sources during

the project. That information was utilized for calculating performance
evaluation and based on that, interpretations were made.

Sources of secondary data:

1. Most of the calculations are made on the financial statements of

the company provided statements.

2. Referring standard texts and referred books collected some of

the information regarding theoretical aspects.

3. Method- to assess the performance of he company method of

observation of the work in finance department in followed.

1
 LIMITATIONS

1. The study provides an insight into the financial, personnel,

marketing and other aspects of LANCO. Every study will be bound
with certain limitations.

2. The below mentioned are the constraints under which the study
is carried out.

3. One of the factors of the study was lack of availability of ample

information. Most of the information has been kept confidential and
as such as not assed as art of policy of company.

Time is an important limitation. The whole study was

conducted in a period of 60 days, which is not sufficient to carry out proper
interpretation and analysis.

1
Chapter – 2

RATIO ANALYSIS

1
 RATIO ANALYSIS

FINANCIAL ANALYSIS

Financial analysis is the process of identifying the financial

strengths and weaknesses of the firm and establishing relationship between
the items of the balance sheet and profit & loss account.

Financial ratio analysis is the calculation and comparison of

ratios, which are derived from the information in a company’s financial
statements. The level and historical trends of these ratios can be used to
make inferences about a company’s financial condition, its operations and
attractiveness as an investment. The information in the statements is used by

 Trade creditors, to identify the firm’s ability to meet their claims i.e.
liquidity position of the company.

 Investors, to know about the present and future profitability of the

company and its financial structure.

 Management, in every aspect of the financial analysis. It is the

responsibility of the management to maintain sound financial
condition in the company.

1
RATIO ANALYSIS

The term “Ratio” refers to the numerical and quantitative

relationship between two items or variables. This relationship can be
exposed as

 Percentages

 Fractions

 Proportion of numbers

Ratio analysis is defined as the systematic use of the 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. Ratio reflects a quantitative relationship helps to form a
quantitative judgment.

STEPS IN RATIO ANALYSIS

 The first task of the financial analysis is to select the information

relevant to the decision under consideration from the statements and
calculates appropriate ratios.

 To compare the calculated ratios with the ratios of the same firm
relating to the pas6t or with the industry ratios. It facilitates in
assessing success or failure of the firm.

2
  Third step is to interpretation, drawing of inferences and report
writing conclusions are drawn after comparison in the shape of report
or recommended courses of action.

BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between

variables. They enable analyst to draw conclusions regarding financial
operations. They use of ratios as a tool of financial analysis involves the
comparison with related facts. This is the basis of ratio analysis. The basis of
ratio analysis is of four types.

 Past ratios, calculated from past financial statements of the firm.

 Competitor’s ratio, of the some most progressive and successful

competitor firm at the same point of time.

 Industry ratio, the industry ratios to which the firm belongs to

 Projected ratios, ratios of the future developed from the projected or

pro forma financial statements

NATURE OF RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of

financial statements. It is the process of establishing and interpreting various
ratios for helping in making certain decisions. It is only a means of

2
understanding of financial strengths and weaknesses of a firm. There are a
number of ratios which can be calculated from the information given in the
financial statements, but the analyst has to select the appropriate data and
calculate only a few appropriate ratios. The following are the four steps
involved in the ratio analysis.

 Selection of relevant data from the financial statements depending

upon the objective of the analysis.

 Calculation of appropriate ratios from the above data.

 Comparison of the calculated ratios with the ratios of the same firm in
the past, or the ratios developed from projected financial statements or
the ratios of some other firms or the comparison with ratios of the
industry to which the firm belongs.

INTERPRETATION OF THE RATIOS

The interpretation of ratios is an important factor. The inherent

limitations of ratio analysis should be kept in mind while interpreting them.
The impact of factors such as price level changes, change in accounting
policies, window dressing etc., should also be kept in mind when attempting
to interpret ratios. The interpretation of ratios can be made in the following
ways.

 Single absolute ratio

 Group of ratios

2
  Historical comparison

 Projected ratios

 Inter-firm comparison

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS

The calculation of ratios may not be a difficult task but their use
is not easy. Following guidelines or factors may be kept in mind while
interpreting various ratios are

 Accuracy of financial statements

 Objective or purpose of analysis

 Selection of ratios

 Use of standards

 Caliber of the analysis

IMPORTANCE OF RATIO ANALYSIS

 Aid to measure general efficiency

 Aid to measure financial solvency

 Aid in forecasting and planning

2
  Facilitate decision making

 Aid in corrective action

 Aid in intra-firm comparison

 Act as a good communication

 Evaluation of efficiency

 Effective tool

LIMITATIONS OF RATIO ANALYSIS

 Differences in definitions

 Limitations of accounting records

 Lack of proper standards

 No allowances for price level changes

 Changes in accounting procedures

 Quantitative factors are ignored

 Limited use of single ratio

 Background is over looked

 Limited use

2
  Personal bias

CLASSIFICATIONS OF RATIOS

The use of ratio analysis is not confined to financial manager

only. There are different parties interested in the ratio analysis for knowing
the financial position of a firm for different purposes. Various accounting
ratios can be classified as follows:

1. Traditional Classification

2. Functional Classification

3. Significance ratios

1. Traditional Classification

It includes the following.

 Balance sheet (or) position statement ratio: They deal with the
relationship between two balance sheet items, e.g. the ratio of current
assets to current liabilities etc., both the items must, however, pertain
to the same balance sheet.

 Profit & loss account (or) revenue statement ratios: These ratios deal
with the relationship between two profit & loss account items, e.g. the
ratio of gross profit to sales etc.,

 Composite (or) inter statement ratios: These ratios exhibit the relation
between a profit & loss account or income statement item and a

2
 balance sheet items, e.g. stock turnover ratio, or the ratio of total
assets to sales.

2. Functional Classification

These include liquidity ratios, long term solvency and leverage

ratios, activity ratios and profitability ratios.

3. Significance ratios

Some ratios are important than others and the firm may classify
them as primary and secondary ratios. The primary ratio is one, which is of
the prime importance to a concern. The other ratios that support the primary
ratio are called secondary ratios.

IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS

ARE

1. Liquidity ratio

2. Leverage ratio

3. Activity ratio

4. Profitability ratio

1. LIQUIDITY RATIOS

2
 Liquidity refers to the ability of a concern to meet its current
obligations as & when there becomes due. The short term obligations of a
firm can be met only when there are sufficient liquid assets. The short term
obligations are met by realizing amounts from current, floating (or)
circulating assets The current assets should either be calculated liquid (or)
near liquidity. They should be convertible into cash for paying obligations of
short term nature. The sufficiency (or) insufficiency of current assets should
be assessed by comparing them with short-term current liabilities. If current
assets can pay off current liabilities, then liquidity position will be
satisfactory.

To measure the liquidity of a firm the following ratios can be

calculated

 Current ratio

 Quick (or) Acid-test (or) Liquid ratio

 Absolute liquid ratio (or) Cash position ratio

(a) CURRENT RATIO:

Current ratio may be defined as the relationship between

current assets and current liabilities. This ratio also known as Working
capital ratio is a measure of general liquidity and is most widely used to
make the analysis of a short-term financial position (or) liquidity of a firm.

Current assets

2
Current ratio =
Current liabilities

Components of current ratio

CURRENT ASSETS CURRENT LIABILITIES

Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Bills receivable Bills payable
Inventories Short-term advances
Work-in-progress Sundry creditors
Marketable securities Dividend payable
Short-term investments Income-tax payable
Sundry debtors
Prepaid expenses

(b) QUICK RATIO

Quick ratio is a test of liquidity than the current ratio. The term
liquidity refers to the ability of a firm to pay its short-term obligations as &
when they become due. Quick ratio may be defined as the relationship
between quick or liquid assets and current liabilities. An asset is said to be
liquid if it is converted into cash with in a short period without loss of value.

Quick or liquid assets

Quick ratio =
Current liabilities

2
Components of quick or liquid ratio

QUICK ASSETS CURRENT LIABILITIES

Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Bills receivable Bills payable
Sundry debtors Short-term advances
Marketable securities Sundry creditors
Temporary investments Dividend payable
Income tax payable

(c) ABSOLUTE LIQUID RATIO

Although receivable, debtors and bills receivable are generally

more liquid than inventories, yet there may be doubts regarding their
realization into cash immediately or in time. Hence, absolute liquid ratio
should also be calculated together with current ratio and quick ratio so as to
exclude even receivables from the current assets and find out the absolute
liquid assets.

Absolute liquid assets

Absolute liquid ratio =
Current liabilities

Absolute liquid assets include cash in hand etc. The acceptable

forms for this ratio is 50% (or) 0.5:1 (or) 1:2 i.e., Rs.1 worth absolute liquid
assets are considered to pay Rs.2 worth current liabilities in time as all the

2
creditors are nor accepted to demand cash at the same time and then cash
may also be realized from debtors and inventories.

Components of Absolute Liquid Ratio

ABSOLUTE LIQUID ASSETS CURRENT LIABILITIES

Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Interest on Fixed Deposit Bills payable
Short-term advances
Sundry creditors
Dividend payable
Income tax payable

2. LEVERAGE RATIOS
The leverage or solvency ratio refers to the ability of a concern
to meet its long term obligations. Accordingly, long term solvency ratios
indicate firm’s ability to meet the fixed interest and costs and repayment
schedules associated with its long term borrowings.
The following ratio serves the purpose of determining the
solvency of the concern.

 Proprietory ratio

(a) PROPRIETORY RATIO

A variant to the debt-equity ratio is the proprietory ratio which

is also known as equity ratio. This ratio establishes relationship between
share holders funds to total assets of the firm.

3
 Shareholders funds
Proprietory ratio =
Total assets

SHARE HOLDERS FUND TOTAL ASSETS

Share Capital Fixed Assets
Reserves & Surplus Current Assets
Cash in hand & at bank
Bills receivable
Inventories
Marketable securities
Short-term investments
Sundry debtors
Prepaid Expenses

3
3. ACTIVITY RATIOS

Funds are invested in various assets in business to make sales

and earn profits. The efficiency with which assets are managed directly
effect the volume of sales. Activity ratios measure the efficiency (or)
effectiveness with which a firm manages its resources (or) assets. These
ratios are also called “Turn over ratios” because they indicate the speed with
which assets are converted or turned over into sales.

 Working capital turnover ratio

 Fixed assets turnover ratio

 Capital turnover ratio

 Current assets to fixed assets ratio

(a) WORKING CAPITAL TURNOVER RATIO

Working capital of a concern is directly related to sales.

Working capital = Current assets - Current liabilities

It indicates the velocity of the utilization of net working capital.

This indicates the no. of times the working capital is turned over in the
course of a year. A higher ratio indicates efficient utilization of working
capital and a lower ratio indicates inefficient utilization.

Working capital turnover ratio=cost of goods sold/working

capital.

3
Components of Working Capital

CURRENT ASSETS CURRENT LIABILITIES

Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Bills receivable Bills payable
Inventories Short-term advances
Work-in-progress Sundry creditors
Marketable securities Dividend payable
Short-term investments Income-tax payable
Sundry debtors
Prepaid expenses

(b) FIXED ASSETS TURNOVER RATIO

It is also known as sales to fixed assets ratio. This ratio

measures the efficiency and profit earning capacity of the firm. Higher the
ratio, greater is the intensive utilization of fixed assets. Lower ratio means
under-utilization of fixed assets.

Cost of Sales
Fixed assets turnover ratio =
Net fixed assets

Cost of Sales = Income from Services

Net Fixed Assets = Fixed Assets - Depreciation

3
 (c) CAPITAL TURNOVER RATIOS

Sometimes the efficiency and effectiveness of the operations

are judged by comparing the cost of sales or sales with amount of capital
invested in the business and not with assets held in the business, though in
both cases the same result is expected. Capital invested in the business may
be classified as long-term and short-term capital or as fixed capital and
working capital or Owned Capital and Loaned Capital. All Capital
Turnovers are calculated to study the uses of various types of capital.

Cost of goods sold

Capital turnover ratio =
Capital employed

Cost of Goods Sold = Income from Services

Capital Employed = Capital + Reserves & Surplus

3
 (d) CURRENT ASSETS TO FIXED ASSETS RATIO

This ratio differs from industry to industry. The increase in the

ratio means that trading is slack or mechanization has been used. A decline
in the ratio means that debtors and stocks are increased too much or fixed
assets are more intensively used. If current assets increase with the
corresponding increase in profit, it will show that the business is expanding.

Current Assets
Current Assets to Fixed Assets Ratio =
Fixed Assets

Component of Current Assets to Fixed Assets Ratio

CURRENT ASSETS FIXED ASSETS

Cash in hand Machinery
Cash at bank Buildings
Bills receivable Plant
Inventories Vehicles
Work-in-progress
Marketable securities
Short-term investments
Sundry debtors
Prepaid expenses

3
4. PROFITABILITY RATIOS

The primary objectives of business undertaking are to earn

profits. Because profit is the engine, that drives the business enterprise.

 Net profit ratio

 Return on total assets

 Reserves and surplus to capital ratio

 Earnings per share

 Operating profit ratio

 Price – earning ratio

 Return on investments

(a) NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit

(after tax) and sales and indicates the efficiency of the management in
manufacturing, selling administrative and other activities of the firm.

Net profit after tax

Net profit ratio=
Net sales

3
Net Profit after Tax = Net Profit (–) Depreciation (–) Interest (–) Income Tax

Net Sales = Income from Services

It also indicates the firm’s capacity to face adverse economic

conditions such as price competitors, low demand etc. Obviously higher the
ratio, the better is the profitability.

(b) RETURN ON TOTAL ASSETS

Profitability can be measured in terms of relationship between

net profit and assets. This ratio is also known as profit-to-assets ratio. It
measures the profitability of investments. The overall profitability can be
known.

Net profit
Return on assets =
Total assets

Net Profit = Earnings before Interest and Tax

Total Assets = Fixed Assets + Current Assets

3
 (c) RESERVES AND SURPLUS TO CAPITAL RATIO

It reveals the policy pursued by the company with regard to

growth shares. A very high ratio indicates a conservative dividend policy
and increased ploughing back to profit. Higher the ratio better will be the
position.

Reserves& surplus
Reserves & surplus to capital =
Capital

(d) EARNINGS PER SHARE

Earnings per share is a small verification of return of equity and

is calculated by dividing the net profits earned by the company and those
profits after taxes and preference dividend by total no. of equity shares.

Net profit after tax

Earnings per share =
Number of Equity shares

The Earnings per share is a good measure of profitability when

compared with EPS of similar other components (or) companies, it gives a
view of the comparative earnings of a firm.

3
 (e) OPERATING PROFIT RATIO

Operating ratio establishes the relationship between cost of

goods sold and other operating expenses on the one hand and the sales on
the other.

Operating cost
Operation ratio =
Net sales

However 75 to 85% may be considered to be a good ratio in

case of a manufacturing under taking.

Operating profit ratio is calculated by dividing operating profit

by sales.

Operating profit = Net sales - Operating cost

Operating profit
Operating profit ratio =
Sales

3
 (f) PRICE - EARNING RATIO

Price earning ratio is the ratio between market price per equity
share and earnings per share. The ratio is calculated to make an estimate of
appreciation in the value of a share of a company and is widely used by
investors to decide whether (or) not to buy shares in a particular company.

Generally, higher the price-earning ratio, the better it is. If the

price earning ratio falls, the management should look into the causes that
have resulted into the fall of the ratio.

Market Price per Share

Price – Earning Ratio =
Earnings per Share

Capital + Reserves & Surplus

Market Price per Share =
Number of Equity Shares

Earnings before Interest and Tax

Earnings per Share =
Number of Equity Shares

4
 (g) RETURN ON INVESTMENTS

Return on share holder’s investment, popularly known as

Return on investments (or) return on share holders or proprietor’s funds is
the relationship between net profit (after interest and tax) and the
proprietor’s funds.

Net profit (after interest and

tax) Return on shareholder’s investment =
Shareholder’s funds

The ratio is generally calculated as percentages by multiplying

the above with 100.

4
Chapter – 6

DATA ANALYSIS

4
LIQUIDITY RATIO

1. CURRENT RATIO

(Amount in Rs.)

Current Ratio

Year Current Assets Current Liabilities Ratio

2003 58,574,151 7,903,952 7.41

2004 69,765,346 31,884,616 2.19
2005 72,021,081 16,065,621 4.48
2006 91,328,208 47,117,199 1.94
2007 115,642,068 30,266,661 3.82

Interpretation

As a rule, the current ratio with 2:1 (or) more is considered as

satisfactory position of the firm.

When compared with 2006, there is an increase in the provision

for tax, because the debtors are raised and for that the provision is created.
The current liabilities majorly included Lanco Group of company for
consultancy additional services.

The sundry debtors have increased due to the increase to

corporate taxes.

In the year 2006, the cash and bank balance is reduced because
that is used for payment of dividends. In the year 2007, the loans and
advances include majorly the advances to employees and deposits to

4
government. The loans and advances reduced because the employees set off
their claims. The other current assets include the interest attained from the
deposits. The deposits reduced due to the declaration of dividends. So the
other current assets decreased.

The huge increase in sundry debtors resulted an increase in the

ratio, which is above the benchmark level of 2:1 which shows the
comfortable position of the firm.

GRAPHICAL REPRESENTATION

CURRENT RATIO

8.00 7.41
7.00
6.00
5.00
Ratio 4.00 4.48
3.00 3.82
2.00
1.00 2.19 1.94 Ratio
0.00

2003 20042005 20062007

Years

4
2. QUICK RATIO

(Amount in Rs.)

Quick Ratio

Year Quick Assets Current Liabilities Ratio

2003 58,574,151 7,903,952 7.41

2004 52,470,336 31,884,616 1.65
2005 69,883,268 16,065,620 4.35
2006 89,433,596 47,117,199 1.9
2007 115,431,868 30,266,661 3.81

Interpretation

Quick assets are those assets which can be converted into cash
with in a short period of time, say to six months. So, here the sundry debtors
which are with the long period does not include in the quick assets.

Compare with 2006, the Quick ratio is increased because the

sundry debtors are increased due to the increase in the corporate tax and for
that the provision created is also increased. So, the ratio is also increased
with the 2006.

4
GRAPHICAL REPRESENTATION

QUICK RATIO

8.00 7.41
7.00
6.00
5.00
Ratio 4.00 4.35 3.81

Ratios
3.00 1.90
2.00 1.65
1.00
0.00

2003 20042005 20062007

Years

4
3. ABOSULTE LIQUIDITY RATIO

(Amount in Rs.)

Absolute Cash Ratio

Year Absolute Liquid Assets Current Liabilities Ratio

2003 31,004,027 7,903,952 3.92

2004 10,859,778 31,884,616 0.34
2005 39,466,542 16,065,620 2.46
2006 53,850,852 47,117,199 1.14
2007 35,649,070 30,266,661 1.18

Interpretation

The current assets which are ready in the form of cash are
considered as absolute liquid assets. Here, the cash and bank balance and the
interest on fixed assts are absolute liquid assets.

In the year 2006, the cash and bank balance is decreased due to
decrease in the deposits and the current liabilities are also reduced because
of the payment of dividend. That causes a slight increase in the current
year’s ratio.

4
GRAPHICAL REPRESENTATION

ABSOLUTE CASH RATIO

3.92
4
3.5
3 2.46
2.5
Ratios 2
1.14 1.18
1.5 Ratios
1 0.34
0.5
0
2003 2004 2005 2006 2007
Years

4
LEVERAGE RATIOS

4. PROPRIETORY RATIO

(Amount in Rs.)

Proprietory Ratio

Year Share Holders Funds Total Assets Ratio

2003 67,679,219 78,572,171 0.86

2004 53,301,834 88,438,107 0.6
2005 70,231,061 89,158,391 0.79
2006 56,473,652 106,385,201 0.53
2007 97,060,013 129,805,102 0.75

Interpretation

The proprietary ratio establishes the relationship between

shareholders funds to total assets. It determines the long-term solvency of
the firm. This ratio indicates the extent to which the assets of the company
can be lost without affecting the interest of the company.

There is no increase in the capital from the year2004. The share

holder’s funds include capital and reserves and surplus. The reserves and
surplus is increased due to the increase in balance in profit and loss account,
which is caused by the increase of income from services.

Total assets, includes fixed and current assets. The fixed assets
are reduced because of the depreciation and there are no major increments in
the fixed assets. The current assets are increased compared with the year

4
2006. Total assets are also increased than precious year, which resulted an
increase in the ratio than older.

GRAPHICAL REPRESENTATION

PROPRIETORY RATIO

0.90 0.86
0.79 0.75
0.80
0.70
0.60
0.60 0.53

0.50
Ratios
0.40 Ratios
0.30
0.20
0.10
0.00
20032004200520062007
Years

5
ACTIVITY RATIOS

5. WORKING CAPITAL TURNOVER RATIO

(Amount in Rs.)

Working Capital Turnover Ratio

Year Income From Services Working Capital Ratio

2003 36,309,834 50,670,199 0.72

2004 53,899,084 37,880,730 1.42
2005 72,728,759 55,355,460 1.31
2006 55,550,649 44,211,009 1.26
2007 96,654,902 85,375,407 1.13

Interpretation

Income from services is greatly increased due to the extra

invoice for Operations & Maintenance fee and the working capital is also
increased greater due to the increase in from services because the huge
increase in current assets.

The income from services is raised and the current assets are
also raised together resulted in the decrease of the ratio of 2007 compared
with 2006.

5
GRAPHICAL REPRESENTATION

WORKING CAPITAL TURNOVER RATIO

1.60 1.42 1.31

1.40 1.26
1.20 1.13
1.00
Ratio 0.80 0.72
0.60
0.40 Ratio
0.20
0.00

20032004200520062007
Years

5
6. FIXED ASSETS TURNOVER RATIO

(Amount in Rs.)

Fixed Assets Turnover Ratio

Year Income From Services Net Fixed Assets Ratio

2003 36,309,834 28,834,317 1.26

2004 53,899,084 29,568,279 1.82
2005 72,728,759 17,137,310 4.24
2006 55,550,649 15,056,993 3.69
2007 96,654,902 14,163,034 6.82

Interpretation

Fixed assets are used in the business for producing the goods to
be sold. This ratio shows the firm’s ability in generating sales from all
financial resources committed to total assets. The ratio indicates the account
of one rupee investment in fixed assets.

The income from services is greaterly increased in the current

year due to the increase in the Operations & Maintenance fee due to the
increase in extra invoice and the net fixed assets are reduced because of the
increased charge of depreciation. Finally, that effected a huge increase in the
ratio compared with the previous year’s ratio.

5
GRAPHICAL REPRSENTATION

FIXED ASSETS TURNOVER RATIO

6.82
7.00
6.00

5.00 4.24 3.69

4.00
Ratios
3.00 Ratios
2.00 1.82
1.26
1.00
0.00

20032004200520062007
Years

5
7. CAPITAL TURNOVER RATIO

(Amount in Rs.)

Capital Turnover Ratio

Year Income From Services Capital Employed Ratio

2003 36,309,834 37,175,892 0.98

2004 53,899,084 53,301,834 1.01
2005 72,728,759 70,231,061 1.04
2006 55,550,649 56,473,652 0.98
2007 96,654,902 97,060,013 1.00

Interpretation

This is another ratio to judge the efficiency and effectiveness

of the company like profitability ratio.

The income from services is greaterly increased compared

with the previous year and the total capital employed includes capital and
reserves & surplus. Due to huge increase in the net profit the capital
employed is also increased along with income from services. Both are
effected in the increment of the ratio of current year.

5
GRAPHICAL REPRESENTATION

CAPITAL TURNOVER RATIO

1.04
1.04
1.03
1.02 1.01
1.01
1.00 1.00
Ratios 0.99 0.98
0.98 0.98
0.97 Ratios
0.96
0.95
0.94

20032004 2005 2006 2007

Years

5
8. CURRENT ASSETS TO FIXED ASSETS RATIO

(Amount in Rs.)

Current Assets To Fixed Assets Ratio

Year Current Assets Fixed Assets Ratio

2003 58,524,151 19,998,020 2.93

2004 69,765,346 18,672,761 3.74
2005 72,021,081 17,137,310 4.20
2006 91,328,208 15,056,993 6.07
2007 115,642,068 14,163,034 8.17

Interpretation

Current assets are increased due to the increase in the sundry

debtors and the net fixed assets of the firm are decreased due to the charge
of depreciation and there is no major increment in the fixed assets.

The increment in current assets and the decrease in fixed assets

resulted an increase in the ratio compared with the previous year

5
GRAPHICAL REPRESENTATION

CURRENT ASSETS TO FIXED ASSETS RATIO

9.00 8.17
8.00
7.00
6.00 6.07

5.00 4.20
Ratios 4.00 3.74
2.93
3.00 Ratios
2.00
1.00
0.00

20032004 200520062007
Years

5
PROFITABILITY RATIOS

GENERAL PROFITABILITY RATIOS

9. NET PROFIT RATIO

(Amount in Rs.)
Net Profit Ratio

Year Net Profit After Tax Income from Services Ratio

2003 21,123,474 36,039,834 0.59

2004 16,125,942 53,899,084 0.30
2005 16,929,227 72,728,759 0.23
2006 18,259,580 55,550,649 0.33
2007 40,586,359 96,654,902 0.42

Interpretation

The net profit ratio is the overall measure of the firm’s ability to
turn each rupee of income from services in net profit. If the net margin is
inadequate the firm will fail to achieve return on shareholder’s funds. High
net profit ratio will help the firm service in the fall of income from services,
rise in cost of production or declining demand.

The net profit is increased because the income from services is

increased. The increment resulted a slight increase in 2007 ratio compared
with the year 2006.

5
GRAPHICAL REPRESENTATION

NET PROFIT RATIO

0.59
0.60

0.500.42
0.40 0.33
0.30
Ratios 0.30 0.23
Ratios
0.20

0.10

0.00 20032004200520062007
Years

6
10. OPERATING PROFIT

(Amount in Rs.)
Operating Profit

Year Operating Profit Income From Services Ratio

2003 36,094,877 36,309,834 0.99

2004 27,576,814 53,899,084 0.51
2005 29,540,599 72,728,759 0.41
2006 31,586,718 55,550,649 0.57
2007 67,192,677 96,654,902 0.70

Interpretation

The operating profit ratio is used to measure the relationship

between net profits and sales of a firm. Depending on the concept, it will
decide.

The operating profit ratio is increased compared with the last

year. The earnings are increased due to the increase in the income from
services because of Operations & Maintenance fee. So, the ratio is increased
slightly compared with the previous year.

6
GRAPHICAL REPRESENTATION

OPERATING PROFIT RATIO

0.99

1.00
0.90
0.80 0.70
0.70
0.51 0.57
0.60
Ratios 0.50 0.41
0.40
Ratios
0.30
0.20
0.10
0.00

20032004200520062007
Years

6
11. RETURN ON TOTAL ASSETS RATIO

(Amount in Rs.)
Return on Total Assets Ratio

Year Net Profit After Tax Total Assets Ratio

2003 21,123,474 78,572,171 0.27

2004 16,125,942 88,438,107 0.18
2005 16,929,227 89,158,391 0.19
2006 18,259,580 106,385,201 0.17
2007 40,586,359 129,805,102 0.31

Interpretation

This is the ratio between net profit and total assets. The ratio
indicates the return on total assets in the form of profits.

The net profit is increased in the current year because of the

increment in the income from services due to the increase in Operations &
Maintenance fee. The fixed assets are reduced due to the charge of
depreciation and no major increments in fixed assets but the current assets
are increased because of sundry debtors and that effects an increase in the
ratio compared with the last year i.e. 2006.

6
GRAPHICAL REPRESENTATION

RETURN ON TOTAL ASSETS

0.35
0.31
0.30 0.27
0.25
0.20
0.180.19
0.17
Ratios
0.15 Ratios
0.10
0.05
0.00

20032004200520062007
Years

6
12. RESERVES & SURPLUS TO CAPITAL RATIO

(Amount in Rs.)
Reserves & Surplus To Capital Ratio

Year Reserves & Surplus Capital Ratio

2003 65,599,299 2,079,920 31.54

2004 34,582,554 18,719,280 1.85
2005 51,511,781 18,719,280 2.75
2006 37,754,372 18,719,280 2.02
2007 78,340,733 18,719,280 4.19

Interpretation

The ratio is used to reveal the policy pursued by the company a

very high ratio indicates a conservative dividend policy and vice-versa.
Higher the ratio better will be the position.

The reserves & surplus is decreased in the year 2006, due to the
payment of dividends and in the year 2007 the profit is increased. But the
capital is remaining constant from the year 2004. So the increase in the
reserves & surplus caused a greater increase in the current year’s ratio
compared with the older.

6
GRAPHICAL REPRESENTATION

RESERVES & SRUPLUS TO CAPITAL RATIO

35.00 31.54
30.00
25.00
20.00
15.00
10.00
Ratios 5.00
- Ratios

1.852.75 4.19
2.02

2003 2004 2005 2006 2007

Years

6
OVERALL PROFITABILITY RATIOS

13. EARNINGS PER SHARE

(Amount in Rs.)
Earnings Per Share

Year Net Profit After Tax No of Equity Shares Ratio

2003 21,123,474 207,992 101.56

2004 16,125,942 1,871,928 8.61
2005 16,929,227 1,871,928 9.04
2006 18,259,580 1,871,928 9.75
2007 40,586,359 1,871,928 21.68

Interpretation

Earnings per share ratio are used to find out the return that the
shareholder’s earn from their shares. After charging depreciation and after
payment of tax, the remaining amount will be distributed by all the
shareholders.

Net profit after tax is increased due to the huge increase in the
income from services. That is the amount which is available to the
shareholders to take. There are 1,871,928 shares of Rs.10/- each. The share
capital is constant from the year 2004. Due to the huge increase in net profit
the earnings per share is greaterly increased in 2007.

6
GRAPHICAL REPRESENTATION

EARNINGS PER SHARE

120.00
101.56
100.00

80.00
Ratios 60.00
Ratios
40.00 21.68
8.61 9.049.75
20.00

0.00
2003 2004 2005 2006 2007
Years

6
14. PRICE EARNINGS (P/E) RATIO

(Amount in Rs.)
Price Earning (P/E) Ratio

Year Market Price Per Share Earnings Per Share Ratio

2003 32.54 101.56 0.32

2004 28.47 8.61 3.30
2005 37.52 9.04 4.15
2006 30.17 9.75 3.09
2007 51.85 21.68 2.39

Interpretation

The ratio is calculated to make an estimate of application in the

value of share of a company.

The market price per share is increased due to the increase in

the reserves & surplus. The earnings per share are also increased greaterly
compared with the last year because of increase in the net profit. So, the
ratio is decreased compared with the previous year.

6
GRAPHICAL REPRESENTATION

P/E RATIO

4.50 4.15
4.00
3.30
3.50 3.09
3.00
2.39
2.50
Ratios
2.00 Ratios
1.50
1.000.32
0.50
0.00
20032004200520062007
Years

7
15. RETURN ON INVESTMENT

(Amount in Rs.)
Return on Investment

Year Net Profit After Tax Share Holders Fund Ratio

2003 21,123,474 67,679,219 0.31

2004 16,125,942 53,301,834 0.3
2005 16,929,227 70,231,061 0.24
2006 18,259,580 56,473,652 0.32
2007 40,586,359 97,060,013 0.42

Interpretation

This is the ratio between net profits and shareholders funds. The
ratio is generally calculated as percentage multiplying with 100.

The net profit is increased due to the increase in the income

from services ant the shareholders funds are increased because of reserve &
surplus. So, the ratio is increased in the current year.

7
GRAPHICAL REPRESENTATION

RETURN ON INVESTMENT RATIO

0.45 0.42
0.40
0.35 0.32
0.31 0.30
0.30
0.25
0.24
0.20
Ratios 0.15
0.10
0.05 RatioS
0.00

20032004200520062007
Years

7
Chapter – 7

FINDINGS, SUMARRY & CONCLUSION

7
FINDINGS OF THE STUDY

1. The current ratio has shown in

a fluctuating trend as 7.41, 2.19, 4.48, 1.98, and 3.82 during 2003 of
which indicates a continuous increase in both current assets and
current liabilities.

2. The quick ratio is also in a

fluctuating trend through out the period 2003 – 07 resulting as 7.41,
1.65, 4.35, 1.9, and 3.81. The company’s present liquidity position is
satisfactory.

3. The absolute liquid ratio has

been decreased from 3.92 to 1.18, from 2003 – 07.

4. The proprietory ratio has shown

a fluctuating trend. The proprietory ratio is increased compared with
the last year. So, the long term solvency of the firm is increased.

5. The working capital increased

from 0.72 to 1.13 in the year 2003 – 07.

6. The fixed assets turnover ratio

is in increasing trend from the year 2003 – 07 (1.26, 1.82, 4.24, 3.69,
and 6.82). It indicates that the company is efficiently utilizing the
fixed assets.

7. The capital turnover ratio is

increased form 2003 – 05 (0.98, 1.01, and 1.04) and decreased in 2006
to 0.98. It increased in the current year as 1.00.

7
8. The current assets to fixed
assets ratio is increasing gradually from 2003 – 07 as 2.93, 3.74, 4.20,
6.07 and 8.17. It shows that the current assets are increased than fixed
assets.

9. The net profit ratio is in

fluctuation manner. It increased in the current year compared with the
previous year form 0.33 to 0.42.

10. The net profit is increased

greaterly in the current year. So the return on total assets ratio is
increased from 0.17 to 0.31.

11. The Reserves and Surplus to

Capital ratio is increased to 4.19 from 2.02. The capital is constant,
but the reserves and surplus is increased in the current year.

12. The earnings per share was

very high in the year 2003 i.e., 101.56. That is decreased in the
following years because number of equity shares are increased and the
net profit is decreased. In the current year the net profit is increased
due to the increase in operating and maintenance fee. So the earnings
per share is increased.

13. The operating profit ratio is in

fluctuating manner as 0.99, 0.51, 0.41, 0.57 and 0.69 from 2003 – 07
respectively.

7
14. Price Earnings ratio is reduced
when compared with the last year. It is reduced from 3.09 to 2.39,
because the earnings per share is increased.

15. The return on investment is

increased from 0.32 to 0.42 compared with the previous year. Both
the profit and shareholders funds increase cause an increase in the
ratio.

7
SUMMARY

1) After the analysis of Financial Statements, the company status is

better, because the Net working capital of the company is doubled
from the last year’s position.

2) The company profits are huge in the current year; it is better to declare
the dividend to shareholders.

3) The company is utilising the fixed assets, which majorly help to the
growth of the organisation. The company should maintain that
perfectly.

4) The company fixed deposits are raised from the inception, it gives the
other income i.e., Interest on fixed deposits.

CONCLUSION

The company’s overall position is at a good position.

Particularly the current year’s position is well due to raise in the profit level
from the last year position. It is better for the organization to diversify the
funds to different sectors in the present market scenario.

7
BIBLIOGRAPHY

REFFERED BOOKS

 FINANCIAL MANAGEMENT - I. M. PANDEY

 MANAGEMENT ACCOUNTANCY - PILLAI & BAGAVATI

 MANAGEMENT ACCOUNTING – SHARMA & GUPTA

INTERNET SITE

 www.ercap.org

 www.wikipedia.com

 www.nwda.gov.in

7
 APPENDIX

Balance sheet as on 31st March 2019

(Amount in Rs.)
Particulars 2006 - 07 2005 - 06
SOURCES OF FUNDS :
1) SHAREHOLDERS' FUNDS
(a) Capital 18,719,280 18,719,280
(b) Reserves and Surplus 78,340,733 37,754,372
97,060,013 56,473,652
2) DEFFERED TAX LIABILITY 2,478,428 2,794,350
TOTAL 99,538,441 59,268,002
APPLICATION OF FUNDS :
1) FIXED ASSETS
(a) Gross Block 31,057,596 29,767,979
(b) Less: Depreciation 16,894,562 14,710,986
(c) Net Block 14,163,034 15,056,993
2) CURRENT ASSETS, LOANS AND ADVANCES
(a) Sundry Debtors 80,712,804 37,856,420
(b) Cash and Bank Balances 34,043,520 51,690,326
(c) Other Current Assets 152,228 857,753
(d) Loans and Advances 733,516 923,709
115,642,068 91,328,208
LESS : CURRENT LIABILITIES AND PROVISIONS
(a) Liabilities 21,596,916 38,591,265
(b) Provisions 8,669,745 8,525,934
30,266,661 47,117,199
NET CURRENT ASSETS 85,375,407 44,211,009
TOTAL 99,538,441 59,268,002

7
Profit and Loss Account for the period ended on 31st March 2020

(Amount in Rs.)
Particulars 2006 - 07 2005 – 06
I.INCOME
Income from Services 96,654,902 55,550,649
Other Income 2,398,220 2,285,896
TOTAL 99,053,122 57,836,545
II.EXPENDITURE
Administrative and Other Expenses 81,334,750 75,599,719
81,334,750 75,599,719
Less: Expenditure Reimbursable under Operations
and Maintenance Agreement 49,474,305 49,349,892
TOTAL 31,860,445 26,249,827
III. PROFIT BEFORE DEPRECIATION AND TAXATION 67,192,677 31,586,718
Provision for Depreciation 2,183,576 2,279,917
IV. PROFIT BEFORE TAXATION 65,009,101 29,306,801
Provision for Taxation
- Current 24,292,000 10,680,440
- Deferred (315,922) (67,359)
- Fringe Benefits 446,663 434,140
V. PROFIT AFTER TAXATION 40,586,359 18,259,580
Surplus brought forward from Previous Year 26,699,257 44,951,851
VI. PROFIT AVAIALABLE FOR APPROPRIATIONS 67,285,617 63,211,431
Transfer to General Reserve - 4,495,185
Interim Dividend Rs.15 per equity Share (2005- NIL) - 28,078,920
Provision for Dividend Distribution Tax - 3,938,069
VII. BALANCE CARRIED TO BALANCE SHEET 67,285,617 26,699,257