THEORETICAL FRAMEWORK OF THE STUDY

RATIO ANALYSIS
Ratio Analysis is one of the most powerful tools of Financial Analysis. It is
used as a device to analyze and interpret the financial health of the enterprise. Ratios
are considered as one of the useful aids available to the Management in assessing the
position and drawing conclusions regarding efficiency and financial status of a
Business Concern.
MEANING OF RATIO

A ratio is defined as “the indicated quotient of two mathematical expressions” and as

the “relationship between two or more things.”

An accounting figure conveys meaning when it is related to some other relevant

information. For example, a Rs.3000 crores Net Profit may look impressive, but the firm’s
performance can said to be good or bad only when the net profit figure is related to the firm’s
investment. The relationship between two accounting figures, expressed mathematically is
known as ratio.

According to Myers, “Ratio analysis of financial statements is a study of relationship

among various financial factors in a business as disclosed by a single set of statements and a
study of trend of these factors as shown in a series of statements."

Ratio Analysis helps in summarizing large quantities of financial data and to

make qualitative judgment about the financial performance.
Ratio analysis is one of the techniques of financial analysis to evaluate the
financial condition and performance of a business concern. Simply, ratio means the
comparison of one figure to other relevant figure or figures
STANDARDS OF COMPARISON
The Ratio Analysis involves comparison for useful interpretation of the
Financial Statement. A single Ration in itself can not indicate favorable or
unfavorable condition. It should be compared with some standard. Standards of
comparison are of four types. They are
1. Trend Analysis: When ratios over a period of time are compared it is known
as the Time Series or Trend Analysis.

34
2. Cross-Sectional Analysis: when ratios of one firm are compared with some
selected firms in the same industry at the same point in time, it is called as
Cross Sectional Analysis.
3. Industry Analysis: The ratios are compared with average ratios of the
industry to which the firm belongs; this sort of analysis is known as the
Industry Analysis.
4. Pro Forma Analysis: The comparison of current or past ratios with future
ratios which are developed from the projected or pro forma financial
statements is called as Pro Forma Analysis.
Significance of ratio analysis
Now the day analysis of financial statements has become of general interest
various parties are interested in the financial statements of a business due to various
reasons. By analyzing the financial statements each party can as retain whether his
interest is safe or not. The significance of the financial statements analysis for
different parties is as follow
Significance to management
The management can measure the effectiveness of the own polices and
decisions, determine the advisability of adopting new policies, procedures and
document to owners, the result of their managerial efforts.
Significance to investors
With the help of financial analysis investors and share holders of the business
can know about the earning capacity and the safety to their investments in the
business.
Significance for creditors
Financial analysis tells them whether companies have sufficient assets and
funds to pay off its creditors.
Significance for government
Government can judge, the basis of analysis of financial statements, which
industry is progressing on the desired lines and which industry need the financial help.
Significance to financial institution
With the help of financial statement analysis financial institution can know the
profit earning capacity of the business and its long term solvency.
Significance to employees Analysis of financial statements helps the employees in
determining the true profit of the business enterprise.

35
Advantages and Uses of Ratio Analysis
There are various groups of people who are interested in analysis of financial
position of a company. They use the ratio analysis to work out a particular financial
characteristic of the company in which they are interested. Ratio analysis helps the
various groups in the following manner: -
1. To work out the profitability: Accounting ratio help to measure the
profitability of the business by calculating the various profitability ratios. It
helps the management to know about the earning capacity of the business
concern. In this way profitability ratios show the actual performance of the
business.
2. To work out the solvency: With the help of solvency ratios, solvency of the
company can be measured. These ratios show the relationship between the
liabilities and assets. In case external liabilities are more than that of the assets
of the company, it shows the unsound position of the business. In this case the
business has to make it possible to repay its loans.
3. Helpful in analysis of financial statement: Ratio analysis help the outsiders
just like creditors, shareholders, debenture-holders, bankers to know about the
profitability and ability of the company to pay them interest and dividend etc.
4. Helpful in comparative analysis of the performance: With the help of ratio
analysis a company may have comparative study of its performance to the
previous years. In this way company comes to know about its weak point and
be able to improve them.
5. To simplify the accounting information: Accounting ratios are very useful
as they briefly summarize the result of detailed and complicated computations.
6. To work out the operating efficiency: Ratio analysis helps to workout the
operating efficiency of the company with the help of various turnover ratios.
All turnover ratios are worked out to evaluate the performance of the business
in utilizing the resources.
7. To workout short-term financial position: Ratio analysis helps to work out
the short-term financial position of the company with the help of liquidity
ratios. In case short-term financial position is not healthy efforts are made to
improve it.
8. Helpful for forecasting purposes: Accounting ratios indicate the trend of the
business. The trend is useful for estimating future. With the help of previous

36
 years’ ratios, estimates for future can be made. In this way these ratios provide
the basis for preparing budgets and also determine future line of action.
Limitations of Ratio Analysis
In spite of many advantages, there are certain limitations of the ratio analysis
techniques and they should be kept in mind while using them in interpreting financial
statements. The following are the main limitations of accounting ratios:
1. Limited Comparability: Different firms apply different accounting policies.
Therefore the ratio of one firm cannot always be compared with the ratio of
other firm. Some firms may value the closing stock on LIFO basis while some
other firms may value on FIFO basis. Similarly there may be difference in
providing depreciation of fixed assets or certain of provision for doubtful
debts etc.
2. False Results: Accounting ratios are based on data drawn from accounting
records. In case that data is correct, then only the ratios will be correct. For
example, valuation of stock is based on very high price, the profits of the
concern will be inflated and it will indicate a wrong financial position. The
data therefore must be absolutely correct.
3. Effect of Price Level Changes: Price level changes often make the
comparison of figures difficult over a period of time. Changes in price affect
the cost of production, sales and also the value of assets. Therefore, it is
necessary to make proper adjustment for price-level changes before any
comparison.
4. Qualitative factors are ignored: Ratio analysis is a technique of quantitative
analysis and thus, ignores qualitative factors, which may be important in
decision making. For example, average collection period may be equal to
standard credit period, but some debtors may be in the list of doubtful debts,
which is not disclosed by ratio analysis.
5. Effect of window-dressing: In order to cover up their bad financial position
some companies resort to window dressing. They may record the accounting
data according to the convenience to show the financial position of the
company in a better way.
6. Costly Technique: Ratio analysis is a costly technique and can be used by big
business houses. Small business units are not able to afford it.

37
7. Misleading Results: In the absence of absolute data, the result may be
misleading. For example, the gross profit of two firms is 25%. Whereas the
profit earned by one is just Rs. 5,000 and sales are Rs. 20,000 and profit
earned by the other one is Rs. 10,00,000 and sales are Rs. 40,00,000. Even the
profitability of the two firms is same but the magnitude of their business is
quite different.
8. Absence of standard university accepted terminology: There are no
standard ratios, which are universally accepted for comparison purposes. As
such, the significance of ratio analysis technique is reduced.
TYPES OF RATIOS
Ratios are grouped in to various classes according to the financial activity or
function they evaluate. There are four important categories. They are

 Liquidity Ratios

 Turnover Ratios or Activity Ratios

 Profitability Ratios

Liquidity Ratios measure the firm’s ability to meet current obligations;

Leverage Ratios measure the proportions of debt and equity in financing the firm’s
assets; Turnover Ratios reflect the firm’s efficiency in utilizing its assets, and
Profitability Ratios measure the overall performance and efficiency of the firm.
The various ratios are calculated below using the financial statements of
BSNL for the past five year’s i.e.2005-06 to 2009-2010.

1. LIQUIDITY RATIOS
Liquidity Ratios measure the ability of the firm to meet its current obligations.
Liquidity Ratios establish relationship between cash and other current assets to
current obligations and provide a quick measure of liquidity position to the
management of the firm. Thus a firm should ensure that it does not suffer from lack
of liquidity and also at the same time see that it does not have excess liquidity.

38
A. CURRENT RATIO

The Current Ratio is a measure of the firm’s short term solvency. It indicates
the availability of current assets in rupees for every one rupee of current liability. A
ratio of greater than one means that the firm has more current assets than current
liabilities of the firm.
Current Assets include cash and those assets which can be converted into cash
within a year, such as marketable securities, debtors and inventories. Prepaid expenses
are also included in current assets as they represent the payments that will not be
made by the firm in the future.
Current Liabilities include creditors, bills payable, accrued expenses, short
term bank loan, income tax liability and long term debt maturing in the current year.
The Current Ratio is calculated by dividing the current assets by current
liabilities:
Current Assets

Current Ratio = --------------------------

Current Liabilities

B. QUICK RATIO

Quick Ratio establishes the relationship between quick or liquid assets and
liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon
without a loss of value.

Cash is the most liquid asset. Other assets which are considered to be
relatively liquid and included in the quick assets are debtors and bills receivable and
marketable securities (temporary quoted investments). Inventories are considered to be less
liquid.

Current Assets – Inventories

Quick Ratio = -----------------------------------------

Current Liabilities

39
C. CASH RATIO OR ABSOLUTE LIQUID RATIO

Cash is the most liquid asset. When the relationship between cash and
current liabilities is calculated it is called Cash Ratio or Absolute Liquid Ratio.

In the computation of Cash Ratio Marketable Securities, Trade Investments

are included.

Cash + Marketable Securities

Cash Ratio = ------------------------------------------

Current Liabilities

D. NET WORKING CAPITAL RATIO

The difference between Current Assets and Current Liabilities excluding

short term bank borrowings is called Net Working Capital or Net Current Assets. Net
Working Capital is used as measure of firm’s liquidity capability. The Net Working Capital
Ratio measures the firm’s potential reservoir of funds. It is related to the Net Assets or
Capital Employed.

Net Working Capital (NWC)

Net Working Capital Ratio = --------------------------------------

Net Assets (NA)

(OR)

Net Current Assets

= -------------------------------------------------

(Net Fixed Assets + Net Current Assets

40
II. TURNOVER RATIOS

Turnover Ratios are employed to evaluate the efficiency with which the firm
manages and utilizes its assets. These ratios are called Turnover Ratios because they indicate
the speed with which assets are being converted or turned over into sales. These ratios are
also called as Activity Ratios. Thus Activity Ratios involve a relationship between sales and
assets. A proper balance between sales and assets generally reflects that assets are managed
well.

Net Assets Turnover Ratio indicates the relationship between Income from
Services and the Net Assets and how best the Net Assets are utilized by the company to
generate revenue.

Income from Services

Net Assets Turnover = -------------------------------

Net Assets

Net Assets include Net Fixed Assets and Net Current Assets. Since Net Assets equal
Capital Employed, Net Assets Turnover Ratio is also called as Capital Employed Turnover
Ratio.

B. TOTAL ASSETS TURNOVER RATIO

The Total Assets Turnover Ratio shows the company’s ability in generating
sales from all financial resources committed to total assets. Total Assets include Net Fixed
Assets and Current Assets.

Income from Services

Total Assets Turnover = --------------------------------

Total Assets

41
 C. FIXED ASSETS TURNOVER RATIO

This ratio shows the firm’s ability in utilizing the Fixed Assets of the
Company. The ability of the company in generating income from the fixed assets can be
known by calculating this ratio.

Income from Services

Fixed Assets Turnover Ratio = --------------------------------

Net Fixed Assets

D. NET CURRENT ASSETS TURNOVER RATIO

The Net Current Assets Turnover Ratio shows the firm’s efficiency in
utilizing the Net Current Assets and its ability in generating income from these net current
assets.

Income from Services

Net Current Assets Turnover Ratio = --------------------------------

Net Current Assets

III. Profitability Ratios

Profitability reflects the final result of business operations. There are two
types of profitability ratios: profit margins ratios and rate of return ratios. Profit margins
ratios show the relationship between profit and sales. The two popular profit margin ratios
are: gross profit margin ratio and net profit margin ratio. Rate of return ratios select the
relationship between profit and investment the important rate of return measures are: return
on total assets, earning power, and return on equity.

Generally, there are two types of profitability ratios.

 Profitability in relation to sales

 Profitability in relation to investment

42
 The profitability ratios are:

(i). Gross profit ratio

(ii). Net profit ratio

(iii). Return on equity ratio

(iv). Selling and distribution express ratio

(v). Return on capital employed ratio

(i) Gross Profit ratio:

It is calculated by dividing the gross profit by sales.

Gross profit
 Grass profit ratio:  100
Net sales
A firm should have reasonable gross margin to ensure adequate coverage for
operating expenses of the firm and sufficient return to the owner’s of business, which is
reflected in the net profit margin.

(ii) Net Profit ratio:

Net profit is obtained when operating expenses, interest and taxes are subtracted from
the gross profit. This ratio indicates the management’s efficiency in manufacturing,
administering and selling the products. This ratio is the overall measure of the firm’s ability to
turn each rupee into net profit.

Net profit
 Net Profit ratio= 100
sales

43
 This ratio provides a good opportunity to compare a company’s “return on sales” with
the performance of other companies. That’s why it is calculated after income tax because tax
and tax liabilities varying from company to company

(iii) Return on Equity ratio:

This ratio indicates how well the firm has used the resources of owners. And also
gives the shareholders and idea lf the return of the founds .as well as useful for inter-firm and
inters industry comparisons.

Profit after tax

 ROE = x100
Net worth
(iv) Selling and distribution expenses ratio:

The selling and distribution expenses are made after completion of production then
starts, at the time of production selling.

Selling & Distributi on Expenses

 Selling and distribution ration= 100
Net sales

(V) Return on capital Employed ratio:

The ratio is calculated by dividing the net profit with total capital employed in the
firm. Net profit means profit means profit after tax but with interest. Capital employed is
founded by subtracting intangible assets from investment.

 Return on capital employed ratio=

Net profit  interest

 100
Capital employed (or) return on investment

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3.2 COMMON SIZE BALANCE SHEET

Financial statements reveal the financial credibility of a company. A financial

statement, which expresses the different values in form of percentage, is called a Common
size financial statement. A common size financial statement helps in comparing two
companies, which differ in size. Two components of the common size financial statement are

 Balance sheet
 Income statement.
When both these components are clubbed together, a common size financial
statement is obtained.

A common-size balance sheet for a given period is constructed by dividing all items
by the total assets for that period. Thus, all items are reported as a percentage of total assets.
A common-size income statement for a given period is constructed by dividing all items by
net sales for that year. Thus, all items are reported as a percentage of net sales.

Common-size statements help analysts compare financial data across firms and time.
By presenting each item on a balance sheet as a percentage of total assets and each item on an
income statement as a percentage of total sales, these common-size statements allow analysts
to detect trends more easily. Common-size income statements enable analysts to evaluate
relationships between sales and specific revenues and expenses and to compare the
performance for one year with that for other years. For example, a firm’s income statement
may show gross profit increasing over the past three years, but it a common-size income
statement might show that gross profit has actually declined as a percentage of sales. In
addition, common-size statements allow analysts to compare firms that have different
amounts of total assets and sales.

Finally, common-size analysis provides a quick way to view certain financial ratios
such as gross profit margin, operating profit margin, and net profit margin.

Advantages of the common size financial statement

 One advantage of having the various amounts expressed in percentage, the percentage
assets of any company can be compared to another company or to other companies in
the industry.
 The size of the companies being compared is not important. The companies being
compared may be small or big. Hence, it is termed as common size. Since size of the
company does not matter, it removes any kind of bias, while comparing companies.
 Analyzing the operational activities of comparing companies can also be obtained.

45
 Changes in different values pertaining to company's performance can also be
ascertained during a particular period. For example, if one wishes to know how the
cost of goods sold over a span of time has changed, the common size financial
statement can be helpful.
 A common size financial statement is used for predicting future trends and analyzing
prevailing trends in the industry
COMPARATIVE FINANCIAL STATEMENTS

Comparative Financial Statements are designed as to provide time

perspective to the consideration of various elements of financial position embodied in such
statements. In these statements figures for two or more periods are placed side by side to
facilitate comparison.

Comparative financial statements present the accounting information of the

same business unit for two or more accounting periods. In another words comparative
financial statements help to study the financial and operating trends over a period of years.
Any statement can be prepared in a comparative form.

(1) Absolute figures (amount in Rs. As given in the final accounts)

(2) Absolute figures expressed in terms of percentages.
(3) Increase or decrease in absolute figures in terms of money values.
(4) Comparisons expressed in ratios.
(5) Percentage totals.
Both income statements and balance sheet can be prepared in the form of comparative
financial statements.

Comparative Balance Sheet

Balance Sheet reflects the financial position of a business concern on a

particular date. It does not reveal the trends in the business over a period of year. To study
the trends of a business over a period says two or three years, a comparative balance sheet is
prepared. Comparative balance sheet as on two or more different dates can be used for
comparing assets and liabilities and finding out increase or decrease in those items. A
comparative study of balance will reveal the causes for changes in the financial position on
account of numerous business transactions that took place between two periods of time in the
business.

46
 The comparative balance sheet consists of two columns for the original data.
A third column is used to show increase or decrease in various items. A forth column
containing the percentages of increase or decrease may be added.

Methodology for analysis of Balance Sheet

1. In the first step change in absolute figures i.e. increase or decrease should be
calculated.
2. In the second step percentage change should be calculated by using the following
formula.
Change in amount

Percentage of change = ------------------------- * 100

Base year amount

3. After calculation of percentage of change, interpretation should be made

Guidelines for interpretation of balance sheet

The following guide lines help the analyst in interpretation of balance sheet.

1. The Short term financial position can be study by comparing the working capital of both
the years. If there is any increase in working capital we must understand that there is an
improvement in the current financial position of the business concern.
2. To study the liquidity position, changes in liquid assets such as cash in hand, cash at
bank, bills receivable, sundry debtors must be ascertained. If there is any increase in
liquid assets we must understand that there is an improvement in the liquidity position of
the concern and vice-versa.
3. A high increase in sundry debtors and bills receivable means an increase in risk in
collecting the amounts of due.
4. A high increase of closing stock may mean decrease in the demand.
5. The long term financial position of the business concern can be analyzed by the studying
the changes in fixed assets, long term liabilities and capital.
6. Fixed assets must be compared with long term loans and capital. If the increase in fixed
assets is more than the increase in long term finances then a part of fixed assets has been
financed from the working capital, which is not good.
7. If there is any increase in profit and loss account/ reserves balance, it means that there is
an increase in profitability of the concern. The decrease in profit and loss
account/reserves means payment of dividends, capitalization of profits by the issue of
bonus shares.

47
TREND ANALYSIS

Trend analysis as described here is related to a broader discipline called “time

series analysis.” Time-series analysis may involve more advanced analysis techniques such as

a. ARIMA, which aids in detecting seasonal patterns and fluctuations

b. Fourier, which reduces time-series information into underlying wave forms
c. Time-lagged correlation, when a time lag exists between the predictor and
dependent variables -- for example, between advertising and sales
These types of analysis may involve forecasting (via regression analysis), cyclic
adjustments, exponential or linear smoothing, and moving averages. For further information
on these techniques, refer to the resources, particularly books, listed at the end of the Data
Analysis section.

Trend analysis is valuable when one wants to use historical data to predict future
values or to calculate expected values for comparison to actual current values. Trend analysis
is also useful for identifying unexpected variances that may indicate strategic or operational
changes or entity weaknesses worthy of additional exploration and analysis.

ADVANTAGES

Trend analysis can

 reveal potentially fruitful areas of audit investigation

 detect significant variations over time
 be easily understood and communicated
 be readily accepted due to its widespread use

DISADVANTAGES

Trend analysis can:

 provide little insight into the root causes of variations

 fail to indicate what the entity’s normal or benchmark position is
 be undermined by frequent changes in financial reporting formats
 Be heavily influenced by the choice of the base fiscal period.

48
 DATA ANALYSIS AND INTERPRETATION

Data collection is the systematic recording of information; data analysis

involves working to uncover patterns and trends in data sets; data interpretation
involves explaining those patterns and trends.

Before the data can be tabulated meaningful categories must established and
coded .The answer thus collected are processed eliminating intermediate stirs. The
analysis is the application of resources to understand and interpret data that have been
collected. In this study a simple descriptive research is used, where in analysis
involves determining consistent patterns and summarizing the appropriate details.

There are three objectives of the data analysis

 Validity and reliability

 Testing there hypotheses of the investigation

The purpose of any study is to the decision by interpreting the information, so as

to draw conclusions relevant for decision. The purpose of this study is to help
decision by providing a historical record for managerial decisions.

Analysis of data is a process of inspecting, cleaning, transforming, and modeling

data with the goal of highlighting useful information, suggesting conclusions, and
supporting decision making.

Data analysis has multiple facets and approaches, encompassing diverse

techniques under a variety of names, in different business, science, and social science
domains.

Type of data

Data can be of several types

 Quantitative data (data is a number)

 Categorical data (data one of several categories)
 Qualitative data (data is a pass/fail or the presence of a characteristic)

49
Data analysis can offer the following benefits:

 Structuring the findings from survey research or other means of data

collection.
 Break a macro picture into a micro one
 Acquiring meaningful insights from the dataset
 Basing critical decisions from the findings
 Ruling out human bias through proper statistical treatment

Data Interpretation can be defined as "the application of statistical procedures to

analyze specific observed or assumed facts from a particular study". Data
interpretation is something that is pretty common in education circles. Data
interpretation is used as a means to understand a student's grasp of the subject.

It is very important to understand how to interpret data in order to do well in these

tests. It is especially important in case of students planning to study finance and
mathematics. An interpretation question will usually contain a chart or a graph. It will
also contain some data or even sets of data which the student has to analyze and come
to a conclusion. When you are solving an interpretation question you will have to
understand what the graph or chart means.

50
 DATA ANALYSIS AND INTERPRETATION

Data collection is the systematic recording of information; data analysis

involves working to uncover patterns and trends in data sets; data interpretation
involves explaining those patterns and trends.

Before the data can be tabulated meaningful categories must established and
coded .The answer thus collected are processed eliminating intermediate stirs. The
analysis is the application of resources to understand and interpret data that have been
collected. In this study a simple descriptive research is used, where in analysis
involves determining consistent patterns and summarizing the appropriate details.

There are three objectives of the data analysis

 Validity and reliability

 Testing there hypotheses of the investigation

The purpose of any study is to the decision by interpreting the information, so as

to draw conclusions relevant for decision. The purpose of this study is to help
decision by providing a historical record for managerial decisions.

Analysis of data is a process of inspecting, cleaning, transforming, and modeling

data with the goal of highlighting useful information, suggesting conclusions, and
supporting decision making.

Data analysis has multiple facets and approaches, encompassing diverse

techniques under a variety of names, in different business, science, and social science
domains.

Type of data

Data can be of several types

 Quantitative data (data is a number)

 Categorical data (data one of several categories)
 Qualitative data (data is a pass/fail or the presence of a characteristic)

51
Data analysis can offer the following benefits:

 Structuring the findings from survey research or other means of data

collection.
 Break a macro picture into a micro one
 Acquiring meaningful insights from the dataset
 Basing critical decisions from the findings
 Ruling out human bias through proper statistical treatment

Data Interpretation can be defined as "the application of statistical procedures to

analyze specific observed or assumed facts from a particular study". Data
interpretation is something that is pretty common in education circles. Data
interpretation is used as a means to understand a student's grasp of the subject.

It is very important to understand how to interpret data in order to do well in these

tests. It is especially important in case of students planning to study finance and
mathematics. An interpretation question will usually contain a chart or a graph. It will
also contain some data or even sets of data which the student has to analyze and come
to a conclusion. When you are solving an interpretation question you will have to
understand what the graph or chart means.

52
 DATA ANALYSIS AND INTERPRETATION
LIQUIDITY RATIOS:

1. CURRENT RATIO:

Current Ratio=current assets/current liabilities

Ideal ratio=2:1

TABLE 1.1

( Rs. In crores)

YEAR CURRENT ASSETS CURRENT RATIO

LIABILITIES

2008 2899.90 731.96 2.56

2009 2005.80 786.36 1.82

2010 2239.10 1163.30 1.85

2011 1605.83 1543.80 1.49

2012 1691.88 1565.20 1.66

GRAPH:1.1

current ratio
3
2.5
2
1.5
current ratio
1
0.5
0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.1 and graph1.1 it is calculated that company is having
2889crores of current assets in the year 2008, during that period the current ratio is
2.56 which is most suggestible but in the year of 2011 the current ratio is dropped
down to 1.49% as in the danger alarming mode, in the year 2012 was slightly recover
to 1.66%. Overall the current ratio of the company is not in healthy mode.

53
 2. QUICK RATIO:

Quick ratio =quick assets/quick liabilities

Quick assets=current assets-stock&prepaid expenses

Quick liabilities=current liabilities-bank overdraft

TABLE 1.2

( Rs. In crores)

YEAR QUICK ASSETS QUICK LIABILITIES RATIO

2008 1204.3 731.96 2.81

2009 964.9 786.36 1.94

2010 1504 1163.30 2.13

2011 1108.4 1543.80 1.45

2012 1836.7 1565.20 1.91

GRAPH:1.2

QUICK RATIO
3

2.5

1.5
QUICK RATIO
1

0.5

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.2 and graph1.2 it is calculated that company is having
1204crores of quick assets in the year 2008, during that period the quick ratio is 2.81
which is most suggestible but in the year of 2011 the quick ratio is dropped down to
1.45% as in the danger alarming mode, in the year 2012 was slightly recover to
1.91%. Overall the quick ratio of the company is not in healthy mode.

54
3. ABSOLUTE LIQUID RATIO:

Absolute liquid ratio =absolute liquid assets/current liabilities

Absolute liquid assets =cash+ bank+ marketable securities(investments)

Ideal ratio = 0.50

TABLE1.3

( Rs. In crores)

YEAR ABSOLUTE LIQUID CURRENT RATIO

ASSETS LIABILITIES

2008 148.6 731.96 0.20

2009 67.9 786.36 0.09

2010 84.3 1163.30 0.07

2011 47.9 1543.80 0.03

2012 66.2 1565.20 0.04

GRAPH:1.3

ABSOLUTE LIQUID RATIO

0.25

0.2

0.15
ABSOLUTE LIQUID RATIO
0.1

0.05

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.3 and graph1.3 it is calculated that company is having
148crores of absolute liquid assets in the year 2008, during that period the absolute
liquid ratio is 0.20 which is most suggestible but in the year of 2011 the absolute
liquid ratio is dropped down to 0.03% as in the danger alarming mode, in the year
2012 was slightly recover to 0.04%. Overall the absolute liquid ratio of the company
is not in healthy mode.

55
ACTIVITY OR TURNOVER RATIOS:

1. Inventory turnover ratio:

Inventory turnover ratio = cost of goods sold/average inventory

Average inventory = (opening stock + closing stock)/2

TABLE1.4

(Rs. In corers)

YEAR COST OF GOODS AVERAGE INVENTORY RATIO

SOLD

2008 2545.7 487 5.23

2009 2845.7 640 4.45

2010 3322.4 735 4.52

2011 3380.9 897 3.77

2012 4066.3 1063 3.83

GRAPH:1.4

INVENTORY TURNOVVER RATIO

6

3 INVENTORY TURNOVVER
RATIO
2

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.4 and graph1.4 it is calculated that company is having
2545crores of cost of goods sold in the year 2008, during that period the Inventory
turnover ratio is 5.23 which is most suggestible but in the year of 2011 the Inventory
turnover ratio is dropped down to 3.77% as in the danger alarming mode, in the year
2012 was slightly recover to 3.83%. Overall the Inventory turnover ratio of the
company is not in healthy mode.

56
2. DEBTORS TURNOVER RATIO:

Debtors turnover ratio = Net sales/debtors

TABLE1.5

(Rs. In corers)

YEAR NET SALES DEBTORS RATIO

2008 3783.26 1055.70 3.58

2009 3343.89 897.71 3.72

2010 3999.50 1419.70 2.8

2011 4395.60 1060.50 4.14

2012 5188.50 1770.50 2.93

GRAPH:1.5

Debtors turnover ratio

4.5

3.5

2.5

2 Debtors turnover ratio

1.5

0.5

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.5 and graph1.5 it is calculated that company is having
4395crores of net sales in the year 2011, during that period the Debtors turnover ratio
is 4.14 which is most suggestible but in the year of 2012 the Debtors turnover ratio is
dropped down to 2.93% as in the danger alarming mode. Overall the Debtors turnover
ratio of the company is not in healthy mode.

57
3. WORKING CAPITAL TURNOVER RATIO:

Working capital turnover ratio = working capital / net sales

TABLE1.6

( Rs. In crores)

YEAR WORKING CAPITAL NET SALES RATIO

2008 959.92 3783.26 0.25

2009 819.47 3343.89 0.24

2010 1075.8 3999.50 0.26

2011 462 4395.60 0.10

2012 1334.7 5188.50 0.25

GRAPH:1.6

Working capital turnover ratio

0.3

0.25

0.2

0.15 Working capital turnover

ratio
0.1

0.05

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.6 and graph1.6 it is calculated that company is having
1075crores of working capital in the year 2010, during that period the Working capital
turnover ratio is 0.25 which is most suggestible but in the year of 2011 the Working
capital turnover ratio is dropped down to 0.10% as in the danger alarming mode, in
the year 2012 was slightly recover to 0.25%. Overall Working capital turnover ratio
of the company is not in healthy mode.

58
PROFITABILITY RATIOS:

1. GROSS PROFIT RATIO:

Gross profit ratio = (gross profit / net sales)*100

Gross profit = sales – sales returns

TABLE 1.7
( Rs. In corers)

YEAR GROSS PROFIT NET SALES RATIO

2008 1327.35 3783.26 35.08

2009 582.7 3343.89 17.42

2010 758 3999.50 18.95

2011 1088.50 4395.60 24.76

2012 1219.50 5188.50 23.50

GRAPH:1.7

GROSS PROFIT RATIO

40
35
30
25
20
GROSS PROFIT RATIO
15
10
5
0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.7 and graph1.7 it is calculated that company is having
1327crores of gross profit in the year 2008, during that period the Gross profit ratio is
35.08which is most suggestible but in the year of 2009 the Gross profit ratio is
dropped down to 17.42% as in the danger alarming mode, in the year 2011 was
slightly recover to 18.95. Overall Gross profit ratio of the company is not in healthy
mode.

59
2. INTEREST COVERAGE RATIO:

Interest coverage ratio = EBIT / interest

TABLE1.8
(Rs. In corers)

YEAR EBIT INTEREST RATIO

2008 1561.30 51.96 30.04

2009 779.99 14.69 53.09

2010 970.20 27.4 33.40

2011 1342.50 16 83.90

2012 1336.50 9.9 135.65

GRAPH:1.8

INTEREST COVERAGE RATIO

160

140

120

100

80
INTEREST COVERAGE RATIO
60

40

20

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.8 and graph1.8 it is calculated that company is having
1561crores of EBIT in the year 2008, during that period the Interest coverage ratio is
35.08which is in the danger alarming mode but in the year of 2009 the Interest
coverage ratio is increased to 53.09%. In the year 2012 the Interest coverage ratio is
135% which is most suggestible. Overall Interest coverage ratio of the company is in
healthy mode.

60
3. NET PROFIT RATIO:

Net profit ratio = (net profit after tax / sales)*100

TABLE1.9
( Rs. In crores)

YEAR NET PROFIT AFTER NET SALES RATIO

TAX

2008 1176.86 3783.26 31.10

2009 475.22 3343.89 14.21

2010 560.9 3999.50 14.02

2011 846.1 4395.60 19.24

2012 893.4 5188.50 17.21

GRAPH:1.9

NET PROFIT RATIO

35

30

25

20

NET PROFIT RATIO

15

10

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.9 and graph1.9 it is calculated that company is having
1176crores of net profit after tax in the year 2008, during that period the Net profit
ratio is 31.10 which is most suggestible but in the year of 2010 the Net profit ratio is
dropped down to 14.02% as in the danger alarming mode, in the year 2011 was
slightly recover to 19.24%. Overall the Net profit ratio of the company is not in
healthy mode.

61
4. OPERATING EXPENSES RATIO:

Operating expenses ratio = (operating expenses/sales)*100

Operating expenses = sales-gross profit

TABLE1.10
( Rs. In crores)

YEAR Operating expenses Sales RATIO

2008 2455.91 3783.26 64.92

2009 2761.29 3343.89 82.58

2010 3241.5 3999.50 81.05

2011 3307.8 4395.60 75.25

2012 3969 5188.50 76.50

GRAPH:1.10

OPERATING EXPENSES RATIO

90
80
70
60
50
40 OPERATING EXPENSES RATIO

30
20
10
0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.10 and graph1.10 it is calculated that company is having
2761crores of operating expenses in the year 2009, during that period the Operating
expenses ratio is 82.58 which is most suggestible but in the year of 2011 the
Operating expenses ratio is dropped down to 75.25% as in the danger alarming mode,
in the year 2012 was slightly recover to 76.50%. Overall the Operating expenses ratio
of the company is not in healthy mode.

62
5. RETURN ON ASSETS RATIO:

Return on assets ratio = (profit after tax /total assets) *100

TABLE1.11
( Rs. In crores)

YEAR Profit after tax Total assets Ratio

2008 1168.9 4703.26 24.84

2009 473.72 5274.09 8.98

2010 560.9 5899.40 9.50

2011 846.1 6477.80 13.60

2012 893.4 7465 11.96

GRAPH:1.11

RETURN ON ASSETS
30

25

20

15
RETURN ON ASSETS

10

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.11 and graph1.11 it is calculated that company is having
1168crores of profit after tax in the year 2008, during that period the Return on assets
ratio is 24.84 which is most suggestible but in the year of 2009 the Return on assets
ratio is dropped down to 8.98% as in the danger alarming mode, in the year 2011 was
slightly recover to 13.60%. Overall the Return on assets ratio of the company is not in
healthy mode.

63
6. RETURN ON EQUITY RATIO:

Return on equity ratio = (profit after tax /equity) *100

TABLE1.12
( Rs. In crores)

YEAR Profit after tax Equity Ratio

2008 1168.9 62.97 18.5

2009 473.72 63.06 7.55

2010 560.9 105.3 5.32

2011 846.1 190 4.45

2012 893.4 190.40 4.70

GRAPH:1.12

RETURN ON EQUITY
20
18
16
14
12
10
RETURN ON EQUITY
8
6
4
2
0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.12 and graph1.12 it is calculated that company is having
1168crores of profit after tax in the year 2008, during that period the Return on equity
ratio is 18.5 which is most suggestible but in the year of 2011 the Return on equity
ratio is dropped down to 4.45% as in the danger alarming mode, in the year 2012 was
slightly recover to 4.70%. Overall the Return on equity ratio of the company is not in
healthy mode.

64
SOLVENCY RATIOS:

1. Debt equity ratio:

Debt equity ratio =debt /total equity

TABLE 1.13
( Rs. In crores)

YEAR Debt Equity Ratio

2008 329.90 62.97 16.75

2009 462.31 63.06 14.23

2010 640.30 105.3 13.48

2011 563.20 190 5.58

2012 1444.80 190.40 9.29

GRAPH:1.13

DEBT EQUITY
18

16

14

12

10

8 DEBT EQUITY

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.13 and graph1.13 it is calculated that company is having
329crores of debt in the year 2008, during that period the Debt equity ratio is 16.75
which is most suggestible but in the year of 2011 the Debt equity ratio is dropped
down to 5.58% as in the danger alarming mode, in the year 2012 was slightly recover
to 9.29%. Overall the Debt equity ratio of the company is not in healthy mode.

65
2. DEBTOR ASSET RATIO:
Debtor assets ratio= (total debtors /total assets)

TABLE 1.14
( Rs. In crores)

YEAR Debtor Total assets Ratio

2008 1055.70 4703.26 0.22

2009 897.71 5274.09 0.30

2010 1419.70 5899.40 0.24

2011 1060.50 6477.80 0.16

2012 1770.50 7465 0.23

GRAPH:1.14

DEBTOR ASSET RATIO

0.35

0.3

0.25

0.2
DEBTOR ASSET RATIO
0.15

0.1

0.05

0
2008 2009 2010 2011 2012

INTERPRETATION:

From the above table1.14 and graph1.14 it is calculated that company is having
897crores of debtors in the year 2009, during that period the Debtor assets ratio is
0.30 which is most suggestible but in the year of 2011 the Debtor assets ratio is
dropped down to 0.16% as in the danger alarming mode, in the year 2012 was slightly
recover to 0.23%. Overall the Debtor assets ratio of the company is not in healthy
mode.

66
 FINDINGS
 The company current ratio is not satisfactory because it is not maintaining

required level of ratios.

 The company quick ratio is not satisfactory because it is not maintaining 1:1

ratio.

 The company absolute liquid ratio is very poor.

 The company debtors turnover ratio is not satisfactory.

 The company working capital ratio is very low due to low working capital and

high sales.

 The company gross profit ratio is decreasing during the study period due to

high manufacturing expenditures.

 The company is paying more interest on its debt due to this the company

interest coverage ratio is increasing.

 The company net profit ratio is decreasing high due to fixed expenses.

 The company operating expenses are increasing.

 The company return on assets is decreasing during the study period due to

increase in operating expenses.

 The compay is having very less equity ratio due to high assets.

 The company debt equity ratio is very low because it having very less debt in

organisation.

 The company debtor asset ratio is satisfactory.

67
 RECOMMENDATIONS
 The company needs to minimise the manufacturing expenses for maximizing
the gross profit.

 The company raise the debt capital for decreasing tax liability.

 The company needs to minimize the fixed expenses for maximizing the profit.

 The company needs to utilize the internal funds effectively.

 The company needs to maintain the sufficient current ratio.

 The company needs to maintain the adequate funds for meeting the quick
ratio.

 The company needs to minimize debtors collection period.

 The company needs to improve working capital ratio.

 The company need to increase the current assets for liquidity purpose.

 The company should minimize the manufacturing expenses.

 The company should increase the inventory turnoverratio.

68
 CONCLUSION
The economic life of any organisation depends on some important

financial aspects like profits, expenses, turnover etc. A careful analysis of these areas

is very much essential for the success and survival of these organisations. For this

purpose financial statement analysis with the help of the technique like ratios, funds

flow etc. Is to be carried out. This type of study is very much useful for analysis of

financial performance of the company and it gives useful suggestions for better

financial planning purpose. From analysis of the data the company is facing serious

problem with high manufacturing and financial expense and also company is not

maintaining sufficient ratio’s like current ratio, quick ratio, debtors ratio, working

capital turnover ratio, operating expenses ratio ext...for improving the financial

performance of the company,they need to increased current ratio, quick ratio and

minimize fixed expenses and other expenses.

69
 BIBLIOGRAPHY

1) Khan and jain, Financial Management, Tata McGraw-Hill Education, 5th edition,

2007.

2) Dr.R.K. Mittal ,Management Accounting and Financial Management,V.K(india)

Enterprises-2010.

3) Dr. Maheswari S.N, Management Accounting and Financial control, sultan chand

and sons, 1992.

WEBILIOGRAPHY
1. www.heterodrugs.com
2. www.wikipedia.org
3. Annual report of 2011-12 pharmaceutical industry

70
Balance Sheet of HETERO (in Rs. Cr).

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
Total Share Capital 84.6 84.4 84.2 84.09 83.96
Equity Share Capital 84.60 84.40 84.20 84.09 83.96
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 5,935.60 5,830.20 5,174.90 4,727.72 4,289.40
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Networth 6,020.20 5,914.60 5,259.10 4,811.81 4,373.36
Secured Loans 0.70 0.80 2.60 3.40 1.92
Unsecured Loans 1,444.10 562.40 637.70 458.91 327.98
Total Debt 1,444.80 563.20 640.30 462.31 329.90
Total Liabilities 7,465.00 6,477.80 5,899.40 5,274.12 4,703.26
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07
Application Of Funds
Gross Block 3,025.00 2,425.70 2,157.30 1,750.21 1,291.19
Less: Accum. Depreciation 1,334.00 1,110.10 946.5 762.8 609.15
Net Block 1,691.00 1,315.60 1,210.80 987.41 682.04
Capital Work in Progress 570.40 745.40 411.20 245.71 280.61
Investments 2,462.00 2,652.70 1,865.10 2,080.71 966.99
Inventories 1,063.20 897.4 735.1 640.93 487.58
Sundry Debtors 1,770.50 1,060.50 1,419.70 897.71 1,055.70
Cash and Bank Balance 66.2 47.9 84.3 67.19 148.6
Total Current Assets 2,899.90 2,005.80 2,239.10 1,605.83 1,691.88
Loans and Advances 1,663.80 1,321.40 1,331.20 1,272.02 1,028.56
Fixed Deposits 0 320.1 300.1 470.15 1,308.11
Total CA, Loans & 4,563.70 3,647.30 3,870.40 3,348.00 4,028.55
Advances
Deffered Credit 0 0 0 0 0
Current Liabilities 1,565.20 1,543.80 1,163.30 786.36 731.96
Provisions 256.9 339.4 294.8 601.38 522.97
Total CL & Provisions 1,822.10 1,883.20 1,458.10 1,387.74 1,254.93
Net Current Assets 2,741.60 1,764.10 2,412.30 1,960.26 2,773.62
Miscellaneous Expenses 0 0 0 0 0
Total Assets 7,465.00 6,477.80 5,899.40 5,274.09 4,703.26

71
Profit & Loss account of HETERO (in Rs. Cr).

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
Income
Sales Turnover 5,285.80 4,469.60 4,080.40 3,428.40 3,872.92
Excise Duty 97.30 74.00 80.90 84.51 89.66
Net Sales 5,188.50 4,395.60 3,999.50 3,343.89 3,783.26
Other Income 117.00 254.00 212.20 197.29 233.95
Stock Adjustments 79.00 117.30 64.10 93.87 23.23
Total Income 5,384.50 4,766.90 4,275.80 3,635.05 4,040.44
Expenditure
Raw Materials 1,749.50 1,599.40 1,534.00 1,347.33 1,144.82
Power & Fuel Cost 144.6 104.1 90 77.12 57.83
Employee Cost 702.70 516.40 412.50 366.28 299.04
Other Manufacturing 129.50 117.30 105.9 130.35 155.63
Expenses
Selling and Admin Expenses 1,256.70 1,036.60 1,117.90 896.54 777.06
Miscellaneous Expenses 65.00 50.60 45.30 37.44 44.76
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0
Total Expenses 4,048.00 3,424.40 3,305.60 2,855.06 2,479.14
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07
Operating Profit 1,219.50 1,088.50 758 582.7 1,327.35
PBDIT 1,336.50 1,342.50 970.20 779.99 1,561.30
Interest 9.9 16 27.4 14.69 51.96
PBDT 1,326.60 1,326.50 942.80 765.3 1,509.34
Depreciation 247.9 222.4 193.6 161.99 133.5
Other Written Off 26.80 19.30 19.70 20.71 18.16
Profit Before Tax 1,051.90 1,084.80 729.50 582.60 1,357.68
Extra-ordinary items -0.4 -0.1 -0.1 -0.06 -0.02
PBT (Post Extra-ord Items) 1,051.50 1,084.70 729.40 582.54 1,357.66
Tax 158.5 238.7 168.6 108.88 188.99
Reported Net Profit 893.4 846.1 560.9 475.22 1,176.86
Total Value Addition 2,298.50 1,825.00 1,771.60 1,507.73 1,334.32
Preference Dividend 0 0 0 0 0
Equity Dividend 190.4 190 105.3 63.06 62.97
Corporate Dividend Tax 115.2 31.6 17.8 10.72 10.7
Per share data (annualised)
Shares in issue (lakhs) 1,692.53 1,688.45 1,684.69 1,681.73 1,679.12
Earning Per Share (Rs) 52.78 50.11 33.29 28.26 70.09

72