EXECUTIVE SUMMARY

For every organization or an enterprise to run, finance department plays a pivotal

role. One of the major roles of the finance department is to identify appropriate

financial information prior to communicating this information to managers and

decision-makers, in order that they make informed judgments and decisions.

Finance department also prepares financial documents and final accounts for

managers to use and for reporting purposes (AGM etc). Finance department

ensures that there are adequate funds available to acquire the resources needed to

help the organization achieve its objectives. It also ensures costs are controlled and

also to ensure that there is adequate cash inflow. It also establishes and controls the

profitability levels.

In this report, I have taken Arihant Retail Private Limited’s (ARPL’s) balance

sheet and profit & loss account for doing Ratio Analysis. The primary objective of

this study is to ascertain the financial position of the company. 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.

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CHAPTER 1

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1.1. INTRODUCTIONAny management will be interested in knowing the financial strength of the

firm to make their best of the company to take suitable corrective actions.

Hence financial analysis an essential function of the firm. Financial analysis is

a process of identifying the financial strength and weakness of the company by

properly establishing the relationship between item of balance sheet and the

profit & loss account.

Ratios are useful to know the financial performance in the past and assess

the present financial strengths. This is the process of identifying the financial

strength and weakness of the company by properly establishing relationship

between item of balance sheet and profit and loss account.

“According to Webster a ratio is defined as the relationship between two on

more things” expressed mathematically is known as financial ratio.

Ratio may be expressed in any of the three. In time percentage and

proportion. There is a growing body of evidence that ratio can be directly

helpful as a basis for making predications. There are two main ways to analyze

the ratio. In trend analysis the performance of the firm at single point of time

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relevance either of other firms. In industry on some other generally accepted

industry standard is studied.

In comparative analysis the performance or a company at a single point of

time relative either of other firm in the industry on some other generally

accepted industry standard industry standard is studied.

In our present study we compare the ratios for the past four years. As an

effective analytical tool, ratios are useful not only to management but also for

the investor, creditors, and stock dealers etc., to comprehend the financial

aspects of the company in different dimensions as glance. Ratio analysis helps

to study and diagnose the financial problems and suggest corrective actions.

There is a growing body or evidence that ratio can be directly helpful as a basis

for making predictions especially rations are useful for the predication of

business.

Ratio analysis indicates quantitative relationships, which can be used to

make qualities, judgment. To evaluate the financial conditions of a firm the

financial analysis need contain yardsticks. On the basis of ratio analysis the

management can assess the profit performance of the firm. The helps to assess

the soundness of the investment in an enterprise with the help or the ratio

analysis. Thus it is evident that the ratio analysis is a tool of financial

management with the multidimensional users.

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1.2. . IMPORTANCE OF THE STUDY

The study has great significance and provides benefits to various

parties whom directly or indirectly interact with the Arihant Retail Pvt

.Ltd.

It is beneficial to management of ARPL by providing crystal clear

picture regarding important aspects like liquidity, leverage, activity

and profitability.

The study is also beneficial to employees and offers motivation by

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

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.

1.3. SCOPE OF THE STUDY

Scope of the project is very wide for the reason that there is scope for improvement

of the profitability of the company. Scope is also to ascertain the sources of fund

on effective application of funds in business. The financial soundness of the

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company with references to various factors namely short – term and long term

based on the profitability liquidity found.

1.4. OBJECTIVES OF THE STUDY

The following are the objectives of the study:

To ascertain the financial position of the Arihant Retail Pvt. Ltd.

To find out the profitability of ARPL.

To analyze the capital structure of the ARPL with the help of ratios

To offer appropriate suggestions for the better performance of the

organization.

To ascertain the drawbacks of the ARPL

To compare the performance of different divisions

Ratio Analysis helps in taking Investment decision

Helps in planning and forecasting the financial statements.

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1.5. METHODOLOGY

The information is collected through the secondary sources during the project. That

information was utilized for calculating performance evaluation and based on that,

interpretations were made.

Types of research:

The researcher has applied analytical research for this study.

Sources of Data:

As secondary data is used the main sources of the data is company’s annual

report for the period from 2007 - 2009, it is Collected from the company textbooks

and the data are also collected from the estimated statement prepared by the firm.

Tools of Analysis:

Ratio analysis

Comparative Financial Statements

Trend Percentage analysis

Sources of secondary data:

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

company provided statements

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ii. Referring standard text and referred books collected some of the information

regarding theoretical aspects.

iii. Method:- to assess the performance of the company method of observation

of the work in finance department in followed.

1.6. LIMITATIONS

o The study provides an insight into the financial, personnel, marketing

and other aspects of Arihant Retail Pvt. Ltd. Every study will be

bound with certain limitations.

o The below mentioned are the constraints under which the study is

carried out.

o 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.

o Time is an important limitation. The whole study was conducted in a

period of 90 days, which is not sufficient to carry out proper

interpretation and analysis.

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CHAPTER 2

2.1. INDUSTRY PROFILE

2.1.1. Indian Textile Industry

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The textile industry is the largest industry of modern India. It accounts for over 20

percent of industrial production and is closely linked with the agricultural and rural

economy. It is the single largest employer in the industrial sector employing about

38 million people. If employment in allied sectors like ginning, agriculture,

pressing, cotton trade, jute, etc. are added then the total employment is estimated at

93 million. The net foreign exchange earnings in this sector are one of the highest

and, together with carpet and handicrafts, account for over 37 percent of total

export earnings at over US $ 10 billion. Textiles,1 alone, account for about 25

percent of India’s total forex earnings.

India’s textile industry since its beginning continues to be predominantly cotton

based with about 65 percent of fabric consumption in the country being accounted

for by cotton. The industry is highly localised in Ahmedabad and Bombay in the

western part of the country though other centres exist including Kanpur, Calcutta,

Indore, Coimbatore, and Sholapur.

The structure of the textile industry is extremely complex with the modern,

sophisticated and highly mechanised mill sector on the one hand and the

handspinning and handweaving (handloom) sector on the other. Between the two

falls the small-scale powerloom sector. The latter two are together known as the

decentralized sector. Over the years, the government has granted a whole range of

concessions to the non-mill sector as a result of which the share of the

decentralized sector has increased considerably in the total production. Of the two

sub-sectors of the decentralized sector, the power loom sector has shown the faster

rate of growth. In the production of fabrics the decentralized sector accounts for

roughly 94 percent while the mill sector has a share of only 6 percent.

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Being an agro-based industry the production of raw material varies from year to

year depending on weather and rainfall conditions. Accordingly the price

fluctuates too.

India's trade in textiles and its share in world trade can be categorized as follows:

India’s Trade in Textiles

(1998)

Type India's Share in

World Trade

Yarn 22%

Fabrics 3.2%

Apparel 2%

Made-ups 9%

Over-all 2.8%

2.1.2. Global Scenario

The textile and clothing trade is governed by the Multi-Fibre Agreement (MFA)

which came into force on January 1, 1974 replacing short-term and long-term

arrangements of the 1960’s which protected US textile producers from booming

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Compound Annual Growth Rate (CAGR) of different segments

Type CAGR (1993-98)

Yarn 31.79%

Fabric 9.04%

Made-ups 15.18%

Japanese textiles exports. Later, it was extended to other developing countries

like India, Korea, Hong Kong, etc. which had acquired a comparative advantage

in textiles. Currently, India has bilateral arrangements under MFA with USA,

Canada, Australia, countries of the European Commission, etc. Under MFA,

foreign trade is subject to relatively high tariffs and export quotas restricting

India’s penetration into these markets. India was interested in the early phasing

out of these quotas in the Uruguay Round of Negotiations but this did not

happen due to the reluctance of the developed countries like the US and EC to

open up their textile markets to Third World imports because of high labour

costs. With the removal of quotas, exports of textiles have now to cope with

new challenges in the form of growing non-tariff / non-trade barriers such as

growing regionalisation of trade between blocks of nations, child labour, anti-

dumping duties, etc.

Nevertheless, it must be realised that the picture is not all rosy. It is now being

admitted universally and even officially that the year 2005 AD is likely to

present more of a challenge than opportunity. If the industry does not pay

attention to the very vital needs of modernisation, quality control, technology

upgradation, etc. it is likely to be left behind. Already, its comparative

advantage of cheap labour is being nullified by the use of outmoded machinery.

With the dismantling of the MFA, it becomes imperative for the textile industry to

take on competitors like China, Pakistan, etc., which enjoy lower labour costs. In

fact the seriousness of the situation becomes even more apparent when it is realised

that the non-quota exports have not really risen dramatically over the past few

years. The continued dominance of yarn in exports of cotton, synthetics, and

blends, is another cause for worry while exports of fabrics is not growing. The

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lack of value added products in textile exports do not augur well for India in a non-

MFA world.

Textile exports alone earn almost 25 percent of foreign exchange for India yet its

share in global trade is dismal, having declined from 10.9 percent in 1955 to 3.23

percent in 1996. More significantly, the share of China in world trade in textiles,

in 1994, was 13.24 percent, up from 4.36 percent in 1980. Hong Kong, too,

improved its share from 7.06 percent to 12.65 percent over the same period.

Growth rate, in US$ terms, of exports of textiles, including apparel, was over 17

percent between 1993-94 to 1995-96. It declined to 10.5 percent in 1996-97 and to

5 percent in 1997-98. Another disconcerting aspect that reflects the declining

international competitiveness of Indian textile industry is the surge in imports in

the last two years. Imports grew by 12 percent in dollar terms in 1997-98, against

an average of 5.8 percent for all imports into India. Imports from China went up

by 50 percent while those from Hong Kong jumped by 23 percent.

Global factors influencing textile industry

The history of the textile and clothing industry has been replete with the use of

various bilateral quotas, protectionist policies, discriminatory tariffs, etc. by the

developed world against the developing countries. The result was a highly

distorted structure, which imposed hidden costs on the export sectors of the Third

World. Despite the fact that GATT was established way back in 1947, the textile

industry, till 1994, remained largely out of its liberalisation agreements. In fact,

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trade in this sector, until the Uruguay Round, evolved in the opposite direction.

Consequently, since 1974 global trade in the textiles and clothing sector had been

governed by the Multi-fibre agreement, which was the sequel to an increasingly

pervasive quota regime that began with the Short-term arrangement on cotton

products in 1962 and followed by the Long-Term arrangement. After the

successful conclusion of the Uruguay Round in 1994, the MFA was replaced by

the Agreement on Textiles and Clothing (ATC), which had the same MFA

framework in the context of an agreed, ten year phasing out of all quotas by the

year 2005. The section that follows takes a brief look at the history of these

protectionist regimes as also a more detailed look at the MFA and the ATC.

2.1.3. Structure of India’s Textile Industry

Close to 14% of the industrial output and 30% of the export market share is

contributed directly by the Indian textile industry. Indian textile industry is also the

largest industry when it comes to employment that generates jobs not just within

but also in various support industries like agriculture. As per a recent survey the

textile industry is going to contribute 12 million new jobs in India by 2010 itself. 

Indian textile industry is as old as the word textile itself. This industry holds a

significant position in India by providing the most basic need of Indians. Starting

from the procurement of raw materials to the final production stage of the actual

textile, the Indian textile industry works on an independent basis.

Indian textile industry concludes of various segments like:

1. Woolen Textile

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2. Cotton Textiles

3. Silk Textiles

4. Readymade Garments

5. Jute And Coir

6. Hand-Crafted Textile Like Carpets

7. Man Made Textiles

Indian textile industry in a very short span had made a distinct position globally,

alluring the globe towards the ‘World of Indian textiles’. This has happened mainly

because: 

8. High availability of raw materials

9. Highly skilled economical labor, an added advantage

10.Largest producer of cotton yarn contributing 25% towards worlds cotton

11.Availability of all kinds of fibers like silk, cotton, wool and even high

quality synthetic fibers

12.Flexibility of the readymade garment industry in terms of sizes, fabric

variety, quantity, quality and cost

It’s not just the present that is shinning like a bright start but also the future, as the

textile export market of India is expected to reach a high of $50 billion by 2010.

This will eventually make a profit by 300%. In order to attain this target Indian

textile industry has already started improving their design skills, including a

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combination of various fibers. Indian textile industry is all set to meet international

standards and is planning to invest $5 billion in machineries very soon. 

Most of the international brands like Marks & Spencer, JC penny, Gap have started

procuring most of their fabrics from India. In fact, Walmart, who had procured

textile worth $ 200 million last year, intends to procure $ 3 billion worth of textile .

The golden phase of the Indian textile industry has just begun where the world is

chasing it from all nooks and corners.

2.1.4. INDIAN TEXTILE INDUSTRY – SWOT ANALYSIS

Strength

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» India has rich resources of raw materials of textile industry. It is one of the

largest producers of cotton in the world and is also rich in resources of fibres like

polyester, silk, viscose etc. 

» India is rich in highly trained manpower. The country has a huge advantage due

to lower wage rates. Because of low labor rates the manufacturing cost in textile

automatically comes down to very reasonable rates. 

» India is highly competitive in spinning sector and has presence in almost all

processes of the value chain. 

» Indian garment industry is very diverse in size, manufacturing facility, type of

apparel produced, quantity and quality of output, cost, and requirement for fabric

etc. It comprises suppliers of ready-made garments for both, domestic or exports

markets. 

Weakness 

» Knitted garments manufacturing has remained as an extremely fragmented

industry. Global players would prefer to source their entire requirement from two

or three vendors and the Indian garment units find it difficult to meet the capacity

requirements.

» Industry still plagued with some historical regulations such as knitted garments

still remaining as a SSI domain.

» Labour force giving low productivity as compared to other competing countries.

» Technology obsolescence despite measures such as TUFS.

» Low bargaining power in a customer-ruled market.

» India seriously lacks in trade pact memberships, which leads to restricted access

to the other major markets. 

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» Indian labour laws are relatively unfavorable to the trades and there is an urgent

need for labour reforms in India. 

Opportunity

» Low per-capita domestic consumption of textile indicating significant potential

growth

» Domestic market extremely sensitive to fashion fads and this has resulted in the

development of a responsive garment industry.\

» India's global share is just 3% while China controls about 15%. In post-2005,

China is expected to capture 43% of global textile trade.

» Companies need to concentrate on new product developments.

» Increased use of CAD to develop designing capabilities and for developing

greater options.

Threats  

» Competition in post-2005 is not just in exports, but is also likely within the

country due to cheaper imports of goods of higher quality at lower costs.

» Standards such as SA-8000 or WARP have resulted in increased pressure on

companies for improvement of their working practices.

» Alternative competitive advantages would continue to be a barrier

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2.2. COMPANY PROFILE

PROFILE REPORT

CONSTITUTION PRIVATE LIMITED COMPANY

DATE OF ESTABLISHMENT 21.05.1996

LINE OF ACTIVITY TRADING IN TEXTILES, GARMENTS, AND

ALLIED PRODUCTS.

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2.2.1. BACKGROUND OF THE COMPANY

M/s. Arihant Retail Pvt. Ltd is a Private Limited Company established in 1996.

The company was established on 21.05.1996 in the name of Manasee Textiles Pvt.

Ltd and the name was changed on 12.08.2002 as Surana Fashions Pvt. Ltd and

again the name was changed on 05.01.2007 as Arihant Retail (P) Ltd. The

company is a trading concern engaged in textiles/ready made garments.

Arihant Retail Pvt. Ltd (Formerly known as Surana Fashions Pvt. Ltd) was

incorporated in 1996 and is mainly engaged in retailing of garments, textiles,

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ready-mades, furnishing and upholstery. The business is carried on under the brand

name ‘Arihant’, which today has become the household name in the garment

business. ‘Arihant- the Family Clothing Shop’ is the punch line which has become

the catchword with the families of Chennai.

The logo of Arihant is a well-recognized trademark. The Company also has a

concept store by name “HOTMALE” meant exclusively for men. Also heavy

promos in outdoor media by way of hoardings, wall paintings, newspaper ads,

attractive schemes and offers etc. are undertaken to carry the message to people at

large.

There are presently 3 showrooms of Arihant and 2 showroom of Hotmale apart

from a franchise showroom with Basics & Genesis (Hasbro Clothing Pvt.ltd)

which is one of the popular brands in South India.

The 1st Arihant Showroom located at 92, G.A. Road, Wanarpet is a very big

showroom owned by the promoters with about 17,000 sq.ft. of floor space spread

in 3 floors. This showroom caters to the readymade needs of the customer and

deals exclusively in readymade products for people of all age.

The 2nd Arihant Showroom located at 73, G.A. Road, Wanarpet is a very big

showroom owned by the company with about 17,500 sq. ft. of floor space spread

over 4 floors. This showroom caters to the Textiles needs of the customer and deals

exclusively in readymade products for people of all age. Both the showrooms at

G.A Road are adjacent to each other and enjoy the advantage of market leader in

the area.

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The 3rd Arihant Showroom is located right in the heart of today’s retail market i.e.

T.nagar, which has toady become the hub for all FMCG goods ranging from

textiles, household items to gold jewellery. Ranganathan Street, where the

showroom is located, is the busiest street in world today. Approx 1 lakh customers

throng the place every day and they hustle and bustle of this area is un-paralled

T.Nagar’s retail market has evolved as a most successful and a unique retail model

in the World today. The T.Nagar showroom, which has renovated, offers wide

range of garments at the most affordable rates. It is one of the fastest growing shop

in the area. A floor space of 700 sq. ft. expanded in two floors offers a whole new

shopping experience to the customers.

The 1st Showroom of Hotmale located at 94 M.C Road, Chennai 600 02, started

on 2nd October 2006 is an exclusive showroom for Gents only. The showroom is

around 2500 sq. ft. spread over 2 floors and caters the need of mainly the young

generation.

The 2nd Showroom of Hotmale located at Anna Nagar in the Shanty Colony with

an area of around 2000 sq. ft. is an exclusive showroom for Gents only. The

showroom caters the need of mainly the young generation. The store is an

operation since May 2007 and is having a very good response from the market.

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FRANCHISE SHOWROOM WITH BASICS & GENESIS:

Apart from this the company has also started a new showroom at 68 G.A road, Old

Washermanpet, Chennai 600 021 measuring about 1000 sq. ft. as a franchise of

Basics & Genesis (a well known brand for Gents clothing in South India).

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2.2.2. Details of the Promoter

Sri Hastimal Surana, the Chairman of the group, who is also the chief architect

of the success story of the Surana Family. He is leading businessman and has been

in Textile Wholesale business for the past 35 years. In fact, he is among the first

businessmen to have started the textile business in the area of Old Washermenpet.

He has a very vast and rich experience of promoting and managing business. He is

the patriarch under whose overall supervision all the activities of the Group are

run. His credentials and business acumen command an excellent respect from all

quarters of the society. Being in business for the past 4 decades, he has the intricate

knowledge and nitty gritty of the business. Needless to say, he is the Father Figure

behind all the group activities and the group owes all its prosperity to his selfless

and unrelenting efforts.

Sri Hastimal Surana requires no introduction to the business and banking

community of Chennai. As the Chairman, he spearheads the well diversified

business interests of this Group. This Group has come a long way from being

primarily engaged in wholesale textile business to now having interests in

Education, Garments Retailing, Financing, Infrastructure Projects etc.

Mr.Vishal Surana, the first son of Sri. Hastimal Surana is the other key persons

behind the management of this company. Vishal Surana is about 33 years old and

he has done his M.B.A. from S.P Jain Institute of Management, Mumbai. He is the

key person behind the flagship brand of the Hastimal Group- Arihant. He has been

into the garments business for the past 13 years. He is in-charge of the business

under Arihant Retail Pvt. Ltd which has 6 show rooms in Chennai spread over

50000 Sq ft, the garment divisions of the HVS Group. He has travelled extensively

across the globe spanning the countries of Malaysia, Kenya, Singapore, Dubai,

China and other countries.

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Also, he has undertaken business visits to source the supplies from all the textile

hubs across the country. He is a member of various trades and other associations

and an active participant of all their activities. Being a dynamic young man

himself, he has the right eye to evaluate the tastes of the new generation. No

wonder, the growth curve of Arihant as a brand has been vertical throughout under

his leadership. His HR practices are admired by one and all and so are his

compensation packages.

2.2.3. General Details

The company has a well defined hierarchy where in the Board comprises of

Chairman (Shri Hastimal Surana), Executive Director (Shri Vishal Surana) along

with four General Manager namely Md.Sulaiman, Raj Chordia, Md.Ali and Rajesh

Agarwal. Below the General Manager there are several Managers, Assistant

General Manager and Supervisor. So the company has a well laid hierarchy which

helps in the management of the company in a professional manner.

The key person apart from the Chairman and executive Director has a well defined

portfolio as detailed below.

1. Rajesh Agarwal: GM (Finance & Accounts). Aged about 34 years, he is a

Chartered Accountant by profession. He is in this industry for more than 7 years

which helps in having a thorough knowledge of the industry. Being professional,

his experience to various functions in the field of finance and accounts is an

advantage for the company. His academic background, leadership skills, ability to

work in team and analytical skill guides the company to manage its finances in a

professional manner.

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2. Md. Sulaiman: GM (Purchase- Textiles). Aged about 45 years and is

associated with the group for more than 20 years. He is a master in purchase of

textiles material and kids section. He handles the entire operation of purchase with

regard to textiles. He travels across India for the selections of clothing material. He

has great taste when it comes to clothing and is the prominent figure in Arihant

when it comes to procurement of material.

3. Raj Chordia: He is GM (purchase- Readymade). Ages about 35 years, he is a

young and dynamic person looking after the readymade section of the company

especially focusing on Gents section. He is very trendy in selection and he has

helped in bringing the new culture and trend in the company of having exclusive

gents store apart from the family stores. He keeps himself ahead of time and is far

sighted when it comes to fashion for young generations. He takes care of

procurement of Gents section which the company caters in all its 4 locations as of

now.

4. Md. Ali; GM (Admin & HR). Aged about 38 years, Mr.Ali is a sensational

personality when it comes to managing the HR. he is a master in administration

and has the natural capability to manage human resource. He is instrumental in

making Arihant a six stores company from one store company.

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2.2.4. VISION AND MISSION OF THE COMPANY

Surana Group is poised to join the big league in retail clothing business. The

promoters have drawn out a very ambitious growth plans for the near future and

have envisioned a chain of retail stores under brand name Arihant. They have

embarked upon plans to set-up more showrooms by next fiscal. The outlay for

these 2 projects is pegged at Rs. 10 Crores.

The future roadmap in terms of growth is chartered to achieve atleast three-fold

ramp-up of the shopping space and more than 2 fold jump in the Turnover of the

Businesses. The economies of scale would in turn boost up our bottom-line. As a

value- addition to the existing business, the Group has identified one of the most

potential sectors i.e. to source quality fabrics and textile materials from abroad

which, of late, are enjoying unprecedented demand in the domestic market. Several

new promotional schemes coupled with unmatched customer service are being

introduced to augment the sales.

It has been the conviction of the Group that customer satisfaction alone would

yield lasting and ever-improving results. The Showrooms have been renovated and

their stylish and aesthetic looks will definitely add to the existing brand value. The

garment business of these showrooms is expected to post a quantum leap and we

are confident of achieving the projections. The areas identified for expansion plans

are critically located and fall among the most progressive localities today. Hence,

the Group intends to take the plunge well ahead of its competitors and thus derive

that First Move Advantages.

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2.2.5. EXPANSION PROGRAMME OF THE COMPANY

1. New Store at Dr.Allagappa Road, Puruswallkam: The Company wants to come

up with a new store at Dr. Allagappa Road. Puruswallkam and measuring

16000Sq.ft. with parking area of 3000 Sq.ft. comprised in ground plus 2 floors.

Once again this shall be owned by promoters, thereby increasing their property

base in Chennai. This shall help the promoters to make their presence felt in the

developed market of Chennai.

2. Wind Mill from Suzlon: The Company plans to set up a wind mill from Suzlon

having installed capacity of 600 MW. The wind mill will be able to generate 15

Lacs unit of Electricity per year. At present the company is paying electricity for

about 70 lacs per year. The current cost of electricity is Rs. 5.8 per Unit.

Once the wind mill is set up the same can be transmitted to the store through

TNEB at a nominal cost of 7.5% of total generated electricity. So by paying a cost

of (7.5% of 70 lacs i.e. 5.4 lacs approx) the company will be able to meet its

electricity requirement. Apart from this the interest cost on wind mill will be

around 35 lacs per year. So the total EB cost will be around 40 lacs thereby the

total savings in Electricity will be 30 lacs approx per year.

Further the company will be eligible to claim benefit under sec 80IA

wherein the company will be eligible to claim Depreciation @ 80% in the first year

which will help to bring the tax liability of the company by 18% as per current

Income Tax Norm.

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3. New Store at Madippakkam: The Company wants to come up with a new store

at Madippakkam measuring 16000 Sq.ft of sales area with parking area of 4000

Sq.ft comprised in ground plus 3 floors. This shall be a rented property wherein the

monthly rent shall be 4 lacs. The cost for furniture and interior along with AC and

generator is estimated to be 4.70 crores and bank term loan is estimated at 75% of

the project cost i.e. 3.5 Crores.

4. Franchise Store of Koutons: The Company plans to enter into franchise

business with Koutons Ltd who has their head office in Delhi and has 1450 stores

across. The company has 7 stores in Chennai which are run by Koutons on their

own. The Company has approached to give the same to on a franchise basis where

in the same is beneficial to both the companies.

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2,2.6. SWOT ANALYSIS OF THE COMPANY

STRENGTHS:

The strengths of the company are as below:

Biggest store in North Chennai.

Located in clothing market

Customer Service: Provides exceptional customer service which has made

them loyal to get attached to Arihant

Huge variety in Clothing

Separate sections for each variety like pattu section, churidar section, gents

readymade section, gents textiles section, kids section and so on.

More than 90% of the retail space is owned by the promoters with very little

premises.

In depth knowledge of the textile business by the promoters.

Catering to the middle income group which is the majority in Indian Public

and hence a good future.

The knowledge of upcoming market and the taste to keep the goods

accordingly.

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WEAKNESS:

Lack of car parking facilities.

Relatively young brand.

Absence in high segment people.

Lack of visibility of the brand.

OPPORTUNITIES:

Expansion of men’s (branded section)

Proposed exclusive biggest men’s store in Chennai at Dr.Allagappa road,

Puruswallkam. Chennai

Business promotion through advertisement media. At present the company

doesn’t spend much on advertisement, once they do that it will definitely

help to improve sales.

THREATS:

Coming up of new big stores in North Chennai like Big Bazaar, Veeras

Collection. However this will increase the market size and potential of North

Chennai as a whole. The company being in the market as an experienced

player will be in better position to capitalize on the same.

32

CHAPTER 3

33

3.1. DETAILS OF CONCEPT USED

THEORITICAL BACKGROUND

3.1.1. MEANING OF RATIO ANALYSIS: It is a powerful tool of financial analysis. A ratio is defined as the “indicated

quotient of two mathematical expressions” and as “the relationship between two or

more things”. In financial analysis, a ratio is used as a benchmark for evaluating

the financial position and performance of a firm. The absolute accounting figures

reported in the financial statements do not provide a meaningful understanding of

the performance and financial position of a firm. Ratio helps to summarize large

quantities of financial data and to make qualitative judgment about the firm’s

financial performance. The greater the ratio, the greater the firm’s liquidity and

vice versa.

3.1.2. ADVANTAGES OF RATIOS

Ratio analysis is an important and age-old technique of financial analysis. The

following are some of the advantages of ratio analysis

a) Simplifies financial statements: It simplifies the comprehension of financial

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

business

34

b) Facilitates inter-firm comparison: It provides data for inter-firm comparison.

Ratios highlight the factors associated with successful and unsuccessful firm. They

also reveal strong firms and weak firms, overvalued and undervalued firms.

Helps in planning: It helps in planning and forecasting. Ratios can assist

management, in its basic functions of forecasting. Planning, co-ordination, control

and communications.

c) Makes inter-firm comparison possible: Ratios analysis also makes possible

comparison of the performance of different divisions of the firm. The ratios are

helpful in deciding about their efficiency or otherwise in the past and likely

performance in the future.

d) Help in investment decisions: It helps in investment decisions in the case of

investors and lending decisions in the case of bankers etc.

3.1.3. LIMITATIONS OF RATIOS

Accounting Information

Different Accounting Policies: The choices of accounting policies may distort

inter company comparisons. Example IAS 16 allows valuation of assets to be

based on either revalued amount or at depreciated historical cost. The business may

opt not to revalue its asset because by doing so the depreciation charge is going to

be high and will result in lower profit.

Creative Accounting: The businesses apply creative accounting in trying to show

the better financial performance or position which can be misleading to the users of

financial accounting. Like the IAS 16 mentioned above, requires that if an asset is

revalued and there is a revaluation deficit, it has to be charged as an expense in

income statement, but if it results in revaluation surplus the surplus should be

credited to revaluation reserve. So in order to improve on its profitability level the

35

company may select in its revaluation programme to revalue only those assets

which will result in revaluation surplus leaving those with revaluation deficits still

at depreciated historical cost.

Information problems

Ratios are not definite measures: Ratios need to be interpreted carefully. They can

provide clues to the company’s performance or financial situation. But on their

own, they cannot show whether performance is good or bad. Ratios require some

quantitative information for an informed analysis to be made.

Outdated information in financial statements: The figures in a set of accounts are

likely to be at least several months out of date, and so might not give a proper

indication of the company’s current financial position.

Historical costs not useful in decision making: IASB Conceptual framework

recommends businesses to use historical cost of accounting. Where historical cost

convention is used, asset valuations in the balance sheet could be misleading.

Ratios based on this information will not be very useful for decision making.

Financial statements certain summarized information: Ratios are based on

financial statements which are summaries of the accounting records. Through the

summarization some important information may be left out which could have been

of relevance to the users of accounts. The ratios are based on the summarized year

end information which may not be a true reflection of the overall year’s results.

Interpretation of the Ratios: It is difficult to generalize about whether a particular

ratio is ‘good’ or ‘bad’. For example a high current ratio may indicate a strong

36

liquidity position, which is good or excessive cash which is bad. Similarly Non

current assets turnover ratio may denote either a firm that uses its assets efficiently

or one that is under capitalized and cannot afford to buy enough assets.

Comparison of performance over time

Price Changes: Inflation renders comparisons of results over time

misleading as financial figures will not be within the same levels of

purchasing power. Changes in results over time may show as if the

enterprise has improved its performance and position when in fact after

adjusting for inflationary changes it will show the different picture.

Technology changes: When comparing performance over time, there is

need to consider the changes in technology. The movement in

performance should be in line with the changes in technology. For ratios

to be more meaningful the enterprise should compare its results with

another of the same level of technology as this will be a good basis

measurement of efficiency.

Changes in Accounting Policies: Changes in accounting policy may

affect the comparison of results between different accounting years as

misleading. The problem with this situation is that the directors may be

able to manipulate the results through the changes in accounting policy.

This would be done to avoid the effects of an old accounting policy or

gain the effects of a new one. It is likely to be done in a sensitive period,

perhaps when the business’s profits are low.

37

Changes in Accounting Standards: Accounting standards offers

standard ways of recognizing, measuring and presenting financial

transactions. Any change in standards will affect the reporting of an

enterprise and its comparison of results over a number of years.

Impact of seasons on Trading: As stated above, the financial statements

are based on year end results which may not be true reflection of results

year round. Businesses which are affected by seasons can choose the best

time to produce financial statements so as to show better results. For

example, a tobacco growing company will be able to show good results if

accounts are produced in the selling season. This time the business will

have good inventory levels, receivables and bank balances will be at its

highest. While as in planting seasons the company will have a lot of

liabilities through the purchase of farm inputs, low cash balances and

even nil receivables.

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.

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.

38

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

Facilitate decision making

Aid in corrective action

Aid in intra-firm comparison

Act as a good communication

Evaluation of efficiency

Effective tool

39

3.1.4. CLASSIFICATION OF RATIOS

Different ratios are calculated from different financial figures which carry different

significance for different purposes. For example, for the creditors liquidity and

solvency ratios are more significant than the profitability ratios, which are of prime

importance for an investor. This means that ratios can be grouped on different

basis depending upon their significance. The classification is rather crude and

unsuitable to determine the profitability or financial position of the business. In

general, accounting ratios may be classified on the following basis leading to

overlap in many cases.

A. According to the Statement upon which they are based

Ratios can be classified in to three groups according to the statements from which

they are calculated.

a) Balance Sheet Ratios : They deal with relationship between two items

appearing in the balance sheet, e.g., current assets to current liability or

current ratio. These ratios are also known as financial position ratios since

they reflect the financial position of the business.

b) Operating Ratios or Profit and Loss Ratios : These ratios express the

relationship between two individual or group of items appearing in the

income or profit and loss statement. Since they reflect the operating

conditions of a business, they are also known as operating ratios, e.g., gross

profit to sales, cost of goods sold to sales, etc.

40

c) Combined Ratios : These ratios express the relationship between two items

each appearing in different statements, i.e.…. one appearing in balance sheet

while the other in income statement, e.g., return on investment (net profit to

capital employed: Assets turnover (sales) ratio, etc. Since both the

statements are involved in the calculation of each of these ratios, they are

also known as inter-statement ratios.

Since the balance sheet figures refer to one point of time, while the income

statement figures refer to events over a period of time, care must be taken while

calculating combined or inter-statement ratios.

B. Functional classification

The classification of ratios according to the purpose of its computation is known as

functional classification. On this basis ratios are categorized in the following

manner:

(a) Profitability Ratios: Profitability ratios given some yardstick to measure the

profit in relative terms with reference to sales, assets of capital employed. These

ratios highlight the end result of business activities. The main objective is to judge

the efficiency of the business.

(b) Turnover Ratios or Activity Ratios: These ratios are used to measure the

effectiveness of the use of capital/ assets in the business. These ratios are usually

calculated on the basis of sales or cost of goods sold and is expressed in integers

rather than as percentages.

41

(c) Financial Ratios or Solvency Ratios: These ratios are calculated to judge the

financial position of the organization from short term as well as long term solvency

point of view. Thus, it can be sub divided in to : (a) Short term Solvency Ratios

(Liquidity Ratios) and (b) Long term Solvency Rations (Capital Structure Ratios)

(d) Market Test Ratios: These are of course, some profitability ratios, having a

bearing on the market value of the shares.

C. Classification According to Importance

This classification has been recommended by the British Institute of

Management for inter firm comparisons. It is based on the fact that some ratios are

more relevant and important than other in the process of comparisons and decision

making. Therefore, ratios may be treated as primary or secondary.

a) Primary Ratio : Since profit is a primary consideration in all business

activities, the ratio of profit to capital employed is termed as “Primary

Ratio”. In business world this ratio is known as “Return on Investment”. It

is the ratio which reflects the validity or otherwise of the existence and

continuation of the business unit. In case if this ratio is not satisfactory over

long period, the business unit cannot justify its existence and hence, should

be closed down. Because of its importance for the very existence of the

business unit it is called “Primary Ratio”.

b) Secondary Ratios : These are ratios which help to analyze the factors

affecting “Primary Ratio”. These may be sub classified as under.

i) Supporting Ratios : These are ratios which reflect the profit earning

capacities of the business and thus support the “Primary ratio”.

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ii) Explanatory Ratios : These are ratios which analyze and explain the factors

responsible for the size of profit earned. Gross profit to sales, cost of goods

sold to sales, stock turnover, debtors turnover are some of the ratios which

can explain the size of the profits earned. Where these ratios are calculated

to highlight the effect of specific activity, they are termed as “Specific

Explanatory Ratios”

3.1.5. TYPES OF RATIOS

I. PROFITABILITY RATIOS

A measure of “Profitability” is the overall measure of efficiency. In general

terms efficiency of business is measured by the input output analysis. By

measuring the output as a proportion of the input, and comparing result of similar

other firms or periods the relative change in its profitability can be established.

The income (Output) as compared to the capital employed (input) indicates

profitability of a firm. Thus the chief profitability ratio is:

Once this is known, the analyst compares the same with the profitability ratio

of other firms or periods. Then, when he finds some contrast, he would like to have

details of the reasons. These questions are sought to be answered by working out

relevant ratios. The main profitability ratio and all the other sub ratios are

collectively known as “Profitability ratios”.

Profitability ratio can be determined on the basis of either investments or

sales. Profitability in relation to investments is measured by return on capital

employed, return on shareholder’s funds and return on assets. The profitability in

43

relation to sales is profit margin (gross and net) and expenses ratio or operating

ratio.

1) Return on Investment:

This ratio is also known as overall profitability ratio or return on capital

employed. The Income (output) as compared to the capital employed (input)

indicates the return on investment. It shows how much the company is earning on

its investment. This ratio is calculated as follows:

Return on Investment =

Operating profit means profit before interest and tax. In arriving at the profit,

interest on loans is treated as part of profit (but not the interest on bank overdraft or

other short term finance) because loans themselves are part of the input, i.e., the

capital employed and hence, the interests on loans should also be part of the output

and should not be excluded there from. All non business income or rather income

not related to normal operations of the company should be excluded. Thus profit

figure shall be IBIT, i.e., Income before Interest and Taxation (excluding non

business income).

The income figure is reckoned before taxation because the amount of tax has

no relevance to the operational efficiency. Both interest and taxation are

appropriations of profit and do not reflect operational efficiency. Moreover, to

compare the profitability of two different organizations having different sources of

finance and different tax burden, the profit before interest and taxation is the best

measure.

Capital employed comprises share capital and reserves and surplus, long term

loans minus non operating assets and fictitious assets it can also be represented as

44

net fixed assets plus working capital (i.e. Current assets minus Current liabilities).

Thus capital employed may comprise of:

Share capital + Reserve and Surplus + Long term Loans – Non operating Assets –

Fictitious Assets.

In using overall profitability ratio as the chief measure of profitability, the

following two notes of caution should be kept in mind. First, the figure of

operating profit shows the profit earned throughout a period. On the other hand the

figure capital employed refers to the values of assets as on a balance sheet date. As

the values of assets go on changing throughout a business period it may be

advisable to take the average assets throughout a period, so that the profits are

compared against average capital employed during a period.

Secondly, in making comparison between two different units on the basis

of the overall profitability ratio, the time of incorporation of the two units should

be taken care off. If a company incorporated in 1990 is capered with that

incorporated in 2000, the first company’s assets will be appearing at a much lower

figure than those of second company. Thus the former will show a lower capital

base and if profits of both the companies are the same, the former will show a

higher rate of return. This does not indicate higher efficiency. Only the capital

employed is lower because of the reason that it started 10 years earlier. Hence, in

such cases the present value of the fixed assets should be considered for calculating

the capital employed.

In the end, it may be stated that the limitations of the ratio should be kept in

mind while forming an opinion. The ‘profits’ and “Capital employed” figures are

the result of a number of approximations (examples, deprecation) and human

judgment (valuation of assets). The purpose of calculation of the ratio should be

45

kept in view and appropriate figures should be selected having regard to impact of

changing price levels. “Return on capital employed” is an instrument to be used

cautiously with clear understanding of its limitations.

2) Return on Shareholder’s Funds:

It is also referred to as return on net worth. In this case it is desired to work

out the profitability of the company from the shareholder’s point of view and it is

computed as follows:

Modifications of the “return on capital employed” can be made to adopt it to

various circumstances. Thus if it is required to work out the profitability from the

shareholder’s point of view, then the profit figure should be after interest and

taxation and the capital employed should be after deducting the long term loans.

This ratio would reflect the profitability for the shareholders. To extend the idea

further, the profitability from equity shareholders point of view can also be worked

out by taking the profits after preference divided and comparing against capital

employed after deducting both long term loans and preference share capital.

3) Return on Assets:

Here the profitability is measured in terms of the relationship between net

profits and assets. It shows whether the assets are being properly utilized or not. It

is calculated as.

46

This ratio is a measure of the profitability of the total funds or investment of the

organization.

II. . PROFIT RATIOS

(i) Gross Profit Ratio or Gross Margin:

Gross profit ratio expresses the relationship of gross profit to net sales or

turnover. Gross profit is the excess of the proceeds of goods sold and services

rendered during a period over their cost, before taking in to account administration,

selling and distribution and financing charges. Gross profit ratio is expressed as

follows:

This ratio is important to determine general profitability since it is expected that

the ratio will be quite high so as to cover not only the remaining costs but also to

allow proper returns to owners.

Any fluctuation in the gross profit ratio is the result of a change either in

‘sales’ or the ‘cost of goods sold’ or both. The rise or fall in the selling price may

be an external factor over which the management may have little control,

especially when prices are controlled. The management, however, must try to keep

the other end of the margin (i.e. cost) at least steady, if not reduce it. If the gross

profit ratio is lower than what it was previously, when the selling price has

remained steady, it can be reasonably concluded that there is an increase in the

manufacturing cost. Since manufacturing overheads include a fixed element as

47

well, a fall in the volume of sales will also lower the rate of gross profit and vice –

versa.

(ii) Net Profit Ratio:

One of the components of return on capital employed is the net profit ratio

(or the margin on sales) calculated as:

Net Profit Ratio =

It indicates the net margin earned in sales of Rs. 100. Net profit is arrived at

from gross profit after deducting administration, selling and distribution expenses;

non operating incomes, such as dividends received and non operating expenses are

ignored, since they do not affect efficiency of operations.

If the expenses met out of the gross profit are disproportionately heavy, the

net profit ratio will go down. If gross profit ratio is 40%, but the net profit ratio is

15% it means the expenses ratio is 25%. Thus a complement of the net profit ratio

is:

Proceeding upwards from net profit, we can arrive at gross profit if administrative

and selling expenses are added back. Similarly, if we add administrative and

selling expenses ratio to the profit ratio we can get the gross profit ratio.

(iii) Operating Ratio

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The ratio of all operating expenses (i.e., materials used, labour, factory

overheads, office and selling expenses) to sales in the operating ratio.

A comparison of the operating ratio would indicate whether the cost content

is high or low in the figure of sales. If the annual comparison shows that the sale

has increased, the management would be naturally interested and concerned to

know as to which elements of the cost has gone up.

It is not necessary that the management should be concerned only when the

operating ratio goes up. If the operating ratio has fallen, though the unit selling

price has remained the same, still the position needs analysis as it may be the sum

total of efficiency in certain departments and inefficiency in others. A dynamic

management should be increased in making a fuller analysis.

It is therefore, necessary to break up the operating ratio into various cost

ratios. The major components of cost are: material, labour and overheads.

Therefore, it is worthwhile to classify the cost ratio as:

Material Cost Ratio =

Labor Cost Ratio =

Factory Overhead Cost Ratio =

Administration Expenses Ratio =

Selling and distribution Expenses Ratio =

49

Generally all these ratios are expressed in terms of percentage. They total up

to Operating Ratio. Thus, deduct from 100 will be equal to the Net Profit Ratio.

If possible, the total expenditure for effecting sales should be divided into

two categories, namely, fixed and variable and then ratios should be worked out.

The ratio of variable expenses to sales will be generally constant, that of fixed

expenses should fall if sales increase, and it will increase if sales fall.

III. TURNOVER RATIOS

The ratios used to measure the effectiveness of the employment of resources

are termed as activity ratios. Since these ratios relate to the use of assets for

generation of income through turnover they are also known as turnover ratios, as

we have seen already, the overall profitability of the business depends on two

factors. i.e. i) The rate of return on sale and ii) The rate of return on capital

employed i.e. the speed at which the capital employed in the business is related.

More efficient the operations of an undertaking, the quicker and more number of

times the rotation is. Thus the overall profitability ratio is calculated as – Net Profit

Ratio multiplied by Turnover Ratio. The net profit ratio has already been

discussed. Now the important turnover ratios as regards to capital employed and

assets are discussed below.

i) Capital Turnover (Sales to Capital Employed) Ratio :

This ratio shows the efficiency of capital employed in the business and is

calculated as follows:

50

Capital Turnover Ratio =

The higher the ratio the greater are the profits

ii) Total Assets Turnover Ratio :

This ratio is ascertained by dividing the net sales by the value of total assets

Thus, Total Assets Turnover Ratio=

A high ratio is an indicator of overtrading of total assets while a low ratio reveals

idle capacity. The total Assets Turnover Ratio can be segregated into:

a) Fixed Assets Turnover Ratio:

This ratio indicates the number of times fixed assets are being turned over in a

stated period. It is calculated as:

Fixed Assets Turnover Ratio =

This ratio is an indicator of the extent to which investment in fixed assets

contributes to generate sales. The fixed assets are to be taken net of depreciation.

The higher is the ratio better is the performance.

b) Working Capital Turnover Ratio:

This ratio shows the number of times working capital is turned over in a

stated period. This ratio is calculated as:

51

Working Capital Turnover Ratio =

It indicates to what extend the working capital funds have been employed in

the business towards sales.

iii) Stock Turnover Ratio (Inventory Turnover Ratio) :

This ratio is an indicator of the efficiency of the use of investment in stock. It is

calculated as:

Stock Turnover Ratio = or

Too large an inventory will decrease the ratio, control over inventories and

active sales promotion will increase the ratio. If desired this ratio may be split into

two ratios, one for raw materials and other for finished goods.

i) and

ii)

This analysis will throw a better light on the inventory position.

Average inventory is calculated on the basis of the average inventory at the

beginning and at the end of the accounting period.

iv) Debtors Turnover Ratio (Debtor’s Velocity):

These days some amount of sales always is locked up in the form of book debts.

Efficient credit control and prompt collection of amounts due will mean lower

investments in book debts. This ratio measures the net credit sales of a firm to the

52

recorded trade debtors thereby indicating the rates at which cash is generated by

turnover of receivable or debtors. This ratio is calculated as:

Debt Collection Period: This ratio indicates the extent to which the debts have been

collected in time. This ratio is in fact, interrelated with and dependent upon the

debtor’s turnover ratio. It is calculated by dividing the days in a year by the

debtor’s turnover. This ratio can be computed as follows:

Debtor’s collection period shows the quality of debtors since it measures the

speed with which money is collected from them. It is rather difficult to specify a

standard collection period for debtors upon the nature of the industry, seasonal

character of the business and credit policy of the firm etc.

v. Creditor’s Turnover Ratio (Creditor’s Velocity):

Like debtor’s turnover ratio, this ratio indicates the speed at which the payments

for credit purchase are made to creditors. This ratio is computed as follows:

Creditor’s Turnover Ratio =

The term ‘creditors’ include, trade creditors and bills payable. In case the

details regarding credit purchases, opening and closing balances of creditors are

not available, then instead of credit purchases, total purchases may be taken and in

place of average creditors, the balance available may be substituted.

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Debt Payment Period: This ratio gives the average credit period enjoyed

from the creditors. It can be computed as under:

I =

IV. FINANCIAL RATIOS

Financial statements of a firm are analyzed for ascertaining its profitability

as well as financial position. A firm is said to be financially sound provided if it is

capable of meeting its commitments both short term and long term debts.

Accordingly, the ratios to be computed for judging the financial position are also

known as solvency ratios and those are computed for short term solvency is known

as liquidity ratios.

i) Liquidity Ratio :

In a short period, a firm should be able to meet all its short term

obligations i.e. current liabilities and provisions. It is current assets that

yield funds in the short period. Current assets are those assets that not

only should yield sufficient funds to meet current liabilities as they fall

due but also to enable the firm to carry on its day to day activities. The

ratios to test the short term solvency or liquidity position of an enterprise

are mainly the following:

a) Current Ratio : - Current ratio also known as the working capital ratio, is

the most widely used ratio. It is the ratio of total current assets to current

liabilities and is calculated by dividing the current assets by current

liabilities.

54

Current Ratio =

It indicates the firm’s commitment to meet its short term obligations. It is a

measure of testing short term solvency or in other words, it is an index of

the short term financial stability of an enterprise because it shows the

margin available after paying of current liabilities.

Generally 2: 1 ratio is considered ideal for a concern. If the current assets

are two times of the current liabilities, there will be no adverse effect on

the business operations when the payment of liabilities is made. In fact a

ratio much higher than 2: 1 may be unsatisfactory from the angle of

profitability, though satisfactory from the point of view of short term

solvency. A high current ratio may be taken as adverse on account of the

following reasons:

i) The stock might be pilling up because of poor sales.

ii) The amount might be looked up in debtors due to slack collection

policy

iii) The cash or bank balances might be lying idle because of no proper

investment.

55

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) Liquid Ratio: This is also known as Quick Ratio or Acid Test Ratio.

This ratio is calculated by relating liquid or quick assets to current

liabilities. Liquid assets mean those assets which are immediately

converted in to cash without much loss. All current assets except

inventories and prepaid expenses are categorized as liquid assets. The ratio

can be computed as:

Liquid Ratio =

Where

Liquid assets = Current Assets – Closing Stock – Prepaid Expenses.

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Liquidity ratio may also be computed by substituting liquid liabilities in

place of current liabilities. Liquid liabilities mean those liabilities which are

payable with a short period. Bank overdraft and cash credit facilities, if they

become a permanent mode of financing they are excluded from current liabilities

to arrive at liquid liabilities. Thus,

Liquid Ratio =

This ratio is an indicator of the liquid position of an enterprise. Generally, a

liquid ratio of 1:1 is considered as ideal as the firm can easily meet all current

liabilities. The main difference in current ratio and liquid ratio is on account of

inventories and therefore a comparison of two ratios leads to important conclusion

regarding inventory holding up.

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

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ii) Long Term Solvency Ratios

Long term sources and uses of funds forms the basic input for

computation of long term solvency ratios. The investors both present and

prospective i.e., shareholders and debenture holders are interested in

knowing the financial status of the company so that they can take

decision for long term investment of their funds. The following are the

main ratios in this category.

a) Debt Equity Ratio:

Debt equity ratio is the relation between borrowed funds and owners

capital in a firm. It is also known as external internal equity ratio. The

debt equity ratio is used to ascertain the soundness of long term financial

policies of the business. Debt means long term loans, i.e. debentures or

long term loans from financial institutions. Equity means shareholders

funds i.e., preference share capital, equity share capital, reserves and

surplus less loss and fictitious assets like preliminary expenses. It is

calculated in the following ways:

1. or

2.

The main purpose of this ratio is to determine the relative stakes of

outsiders and shareholders.

58

b) Proprietary Ratios :

This ratio is a variant of debt equity ratio which establishes the relationship

between shareholders funds and total assets. Shareholder’s funds means, share

capital both equity and preference and reserves and surplus less losses. This ratio is

worked out as follows:

Proprietary Ratio =

This ratio indicates the extent to which shareholder’s funds have been invested in

the assets.

c) Fixed Assets Ratio:

The ratio of fixed assets to long term funds is known as fixed assets ratio. It

focuses on the proportion of long term funds invested in fixed assets. The ratio is

expressed as follows:

Fixed Assets Ratio =

d) Debt Service Ratio:

This ratio is also known as fixed charges cover or interest cover. This ratio

measures the debt servicing capacity of a firm in so far as fixed interest on long

term loan is concerned. It is determined by dividing the net profit before interest

and taxes by the fixed charges on loan. Thus:

Debt Service Ratio =

59

This ratio is expressed as number of times to indicate the profit is number of

times the interest charges. It is also measure of profitability. Thus higher the ratio,

higher will be the profitability. The ideal ratio should be 6 to 7 time

iii) Capital Gearing Ratio :

The proportion between fixed interest or dividend bearing funds and non- fixed

interest or divided bearing funds in the total capital employed in the business is

termed as capital gearing ratio. Debentures, long term loans and preference share

capital belong to the category of fixed interest/ dividend bearing funds. Equity

share capital, reserves and surplus constitute non- fixed interest or dividend

bearing funds. This ratio is calculated as follows:

Capital Gearing Ratio =

In case the fixed income bearing funds are more than the equity shareholder’s

funds, the company is said to be highly geared. A low capital gearing implies that

equity funds are more than the amount of fixed interest bearing securities. This

ratio indicates the extra residual benefits accruing to equity shareholders. Whether

the concern is operating on trading on equity can be judged by this ratio.

IV. Market Test Ratios

These ratios are calculated generally in case of such companies whose shares and

stocks are traded in the stock exchanges. Shareholders, present and probable, are

interested not only in the profits of the company but also in the appreciation of the

value of their shares in the stock market. The value of shares in the stock market,

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besides other factors, also depends upon factors like dividends declared, earning

per share, the payout policy etc. of the companies.

i) Earnings Per Share:

EPS =

ii) Price Earning Ratio:

PER =

iii) Dividend Pay Out Ratio:

DPR=

iv) Dividend Yield Ratio:

DYR=

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CHAPTER 4

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4.1. RATIO ANALYSIS AND INTERPRETATION

4.1.1. PROFITABILITY RATIOS

1) Return on Investment

PARTICULARS 2007 2008 2009

Return on

Investment

203% 548.13% 160.02%

TABLE – 4.1.1.

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Interpretation:

Despite reaching a high of 548.13% return on capital employed in 2008, ARPL’s

return on Investment has gone down to mere 160.02% in 2009.This has happened

mainly because of approx 38% hike in the cost of sales which resulted in the fall of

Net profit for the company during the year 2009.

2) Return on Share holders fund:

PARTICULARS 2007 2008 2009

Return on share

holders Fund

6.81% 11.77%% 11.91%%

TABLE -4.1.2.

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Interpretation:

Return on Share holders fund shows how much profitable is the company from the

share holders point of view. ARPL’s return on Share holders fund has been

stagnant since 2008. In 2007 its return to its shareholder was only 6.81% which

has now increased to 11.91% in 2009,this shows that share holders are pretty

satisfied with the firms performance.

3) ROA:

PARTICULARS 2007 2008 2009

Return on Assets 1.46% 1.12%% 1.29%

TABLE- 4.1.3

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Interpretation:

This ratio is a measure of the profitability of the total funds or investment of the

organization. ARPL’s return on Asset ratio has always been more than 1, which

shows that its Assets have been used to the core to generate sufficient profits for

the company. Though its return on asset declined in the year 2008 because of lesser

profits and hike in expenses, ARPL has managed to improve its ROA in the year

2009.

4.1.2. PROFIT RATIOS

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1) Gross Profit:

PARTICULARS 2007 2008 2009

Gross Profit 2.48%% 4.8% 4.73%

TABLE – 4.2.1.

Interpretation:

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This ratio is important to determine general profitability since it is expected that

the ratio will be quite high so as to cover not only the remaining costs but also to

allow proper returns to owners. Despite of good sales in terms of figures in 2009,

gross profit of ARPL is lesser than that of 2008; this is mainly due to higher cost of

sales. The management needs to concentrate on reducing the cost of sales.

2) Net Profit:

PARTICULARS 2007 2008 2009

Net Profit 0.70% 1.03% 0.80%

TABLE - 4.2.2.

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Interpretation:

This ratio is very important for deriving net profitability of the company after

deducting all expenses. ARPL’s net profit has been fluctuating over the years.

During 2007 the profit ratio was 0.70% which increased to 1.03% in 2008 because

of good sales and lesser expenses when compared to 2007, but in the year 2009

everything was vice versa and net profit ratio of the firm came down due to

increase in overall expenditure.

3) Operating Profit:

a) Financial Expenses ratio:

PARTICULARS 2007 2008 2009

Financial Expense

Ratio

2.3% 5.59% 7.04%

TABLE – 4.2.3.

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Interpretation:

This ratio indicates the sales generated in proportionate to the money spent on

acquiring funds for the investment. ARPL’s financial expenses ratio has increased

drastically over the years, this is due to increase in the long term funds of the

company. ARPL borrowed huge funds for the purpose of investment which raised

its financial expenditure and it did not meet the expected returns.

b) Administration Expenses ratio:

PARTICULARS 2007 2008 2009

Administration

Expense Ratio

11.73% 11.37%% 9.15%

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TABLE – 4.2.4.

Interpretation:

This ratio indicates the quantum of sales generated in proportionate to the money

spent on administration. Administration expenses ratio of ARPL has come down

over the years, which is due to increase in sales in proportionate to expenses met in

administration, which is good for the company.

4.1.3. TURNOVER RATIOS

1) Capital Turnover Ratio:

PARTICULARS 2007 2008 2009

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Capital Turnover

Ratio

208.62% 108.31% 138.53%

TABLE – 4.3.1.

Interpretation:

This ratio shows the efficiency of capital employed in the business. ARPL’s capital

turnover went down drastically during the year 2008 because of over investment in

Fixed assets, which failed to register sales proportionate to investment. Anyhow

ARPL improved its capital turnover to good extent in the following year.

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2) Total Asset Turnover Ratio

PARTICULARS 2007 2008 2009

Total Asset

Turnover Ratio

208.11% 108.20% 138.47%

TABLE – 4.3.2.

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Interpretation:

This ratio indicates how efficiently the overall assets have been used to generate

sales. ARPL had a huge decline in Total asset turnover ratio in 2008 because of

heavy investment in fixed assets which did not generate expected sales. Anyhow

ARPL improved its total asset turnover ratio during the assessment year 2009

which is a good sign for the company.

3) Fixed asset Turnover ratio:

PARTICULARS 2007 2008 2009

Fixed Asset

Turnover Ratio

43.40 17.86 14.19

TABLE – 4.3.3.

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Interpretation:

This ratio indicates the number of times fixed assets are being turned over in

a stated period. ARPL,s fixed asset turnover ratio has come down sharply

from 43.40% in 2007 to 17.86% in 2008 and it has further declined to 14.19%

in 2009, this is mainly due to massive investment on fixed assets during the

year 2008 and 2009.The investment in fixed asset was bitter as it could not

generate sales proportionate to its investment.

PARTICULARS 2007 2008 2009

Working Capital

Turnover Ratio

2.85 1.98 3.08

4) Working Capital Turnover ratio:

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TABLE – 4.3.4.

Interpretation:

This ratio indicates to what extend the working capital funds have been

employed in the business towards sales. During the 2007 the working capital ratio

of ARPL was 2.85, which came down to 1.98 in 2008 due to increase in working

capital. Anyhow the ratio went up again to 3.08 in the year 2009 which is a good

sign for the company.

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5) Stock Turnover Ratio:

PARTICULARS 2007 2008 2009

Stock Turnover

Ratio

3.23 2.46 3.45

TABLE – 4.3.5.

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Interpretation:

This ratio is an indicator of the efficiency of the use of investment in stock.

ARPL’s stock turnover ratio portrays that its inventory is marginal which shows

that it has good sales because the higher ratio is indicator of lesser inventory. Other

than the assessment year 2008 the stock turnover ratio has always been more than

3, which portrays that the investment in stock has been fruitful.

4.1.4. FINANCIAL RATIOS

1) Liquidity Ratio

a) Current ratio:

PARTICULARS 2007 2008 2009

Current Ratio 5.3 4.49 5.09

TABLE – 4.4.1.

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Interpretation:

Current ratio indicates the firm’s commitment to meet its short term

obligations. Generally 2:1 ratio is considered to be good but in ARPL’s case it

is more than 5 which can be considered good in terms of solvency but very

bad in terms of profitability. It shows that ARPL might be having poor sales

leading to pile up of stocks or lying of idle cash or bank balance because of no

proper investment.

PARTICULARS 2007 2008 2009

Liquid Ratio 1.57 1.77 1.44

b) Liquid Ratio:

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TABLE – 4.4.2.

Interpretation:

This ratio is an indicator of the liquid position of an enterprise. ARPL is in a

condition to meet its current liabilities with ease, as it has more liquid assets that its

current liabilities. This shows how good ARPL is in allocating its long term and

short term fund. It has always maintained a good liquidity position to run its firm

smooth and steadily.

2) Long Term Solvency Ratio:

a) Debt equity Ratio:

PARTICULARS 2007 2008 2009

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Debt equity Ratio 0.12 0.62 0.27

TABLE – 4.4.3.

Interpretation:

Debt equity ratio is the relation between borrowed funds and owners capital in a

firm. In ARPL’s case the borrowed funds are higher than that of Owners fund.

ARPL borrowed funds to expand its retail empire which proved to be a good

decision. ARPL’s debt equity ratio increased from 0.12 in 2007 to 0.62 in 2008,

later in 2009 the debt equity ratio fell down to 0.27, as ARPL used its profit to

payout its lenders and increase their share in the company.

b) Proprietary Ratio

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PARTICULARS 2007 2008 2009

Proprietary Ratio 0.21 0.09 0.10

TABLE- 4.4.4.

Interpretation:

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This ratio indicates the extent to which shareholder’s funds have been invested in

the assets. ARPL’s proprietors share in total asset is very low, as it has used its

borrowed funds to acquire majority of its assets. Thus ARPL’s proprietary ratio is

only 0.10 during the assessment year 2009,which shows that the company is highly

dependent on its long term loans.

c) Fixed Asset Ratio:

PARTICULARS 2007 2008 2009

Fixed asset Ratio 0.33 0.48 0.47

TABLE – 4.4.5.

Interpretation:

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This ratio focuses on the proportion of long term funds invested in fixed assets.

ARPL has segregate its long term funds in to three parts namely Fixed asset,

investments and current asset. Out of which majority has been used for acquiring

fixed assets. When compared to 2007 ARPL has used more of its long term funds

for buying fixed assets which is good for the company’s operations.

4.1.5. MARKET TEST RATIO

1) EPS:

PARTICULARS 2007 2008 2009

EPS 1.86 3.66 3.88

TABLE – 4.5.1.

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Interpretation:

As ARPL is a private limited company, its shares are not listed in any of the stock

exchanges. But still the Earnings Per Share has been computed which portrays that

EPS of ARPL has been gradually increasing since 2007 from Rs 1.86 per share to

Rs 3.88 in 2009.

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CHAPTER 5

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5.1. SUMMARY AND FINDINGS

The following are the Findings from the financial statements of ARPL:

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’s Net profit has gone down to mere 0.80% in 2009 when

compared to 1.03% in 2008, this is due to increase in the cost of goods sold.

3) The company’s Return on Investment has declined heavily from 548.13% in

2008 to mere 160.02% in 2009. This is due to decrease in sales of the

company and over investment in fixed assets.

4) ARPL’s current ratio is more than 5 which can be considered good in terms

of solvency but very bad in terms of profitability. It shows that ARPL might

be having poor sales leading to pile up of stocks or lying of idle cash or bank

balance because of no proper investment.

5) ARPL’s proprietors share in total asset is very low, as it has used its

borrowed funds to acquire majority of its assets. Thus ARPL’s proprietary

ratio is only 0.10 during the assessment year 2009,which shows that the

company is highly dependent on its long term loans.

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6) ARPL’s borrowed funds are higher than that of Owners fund. ARPL

borrowed funds to expand its retail empire which proved to be a good

decision. ARPL’s debt equity ratio increased from 0.12 in 2007 to 0.62 in

2008, later in 2009 the debt equity ratio fell down to 0.27, as ARPL used its

profit to payout its lenders and increase their share in the company.

7) During the 2007 the working capital ratio of ARPL was 2.85, which came

down to 1.98 in 2008 due to increase in working capital. Anyhow the ratio

went up again to 3.08 in the year 2009 which is a good sign for the

company.

8) As ARPL is a private limited company, its shares are not listed in any of the

stock exchanges. But still the Earnings Per Share has been computed which

portrays that EPS of ARPL has been gradually increasing since 2007 from

Rs 1.86 per share to Rs 3.88 in 2009.

9) ARPL’s stock turnover ratio portrays that its inventory is marginal which

shows that it has good sales because the higher ratio is indicator of lesser

inventory. Other than the assessment year 2008 the stock turnover ratio has

always been more than 3, which portrays that the investment in stock has

been fruitful.

10) However the company’s overall financial position in the current year

is good when compared to previous years. The overall profitability and sales

volume of the firm has gone up heavily which shows that the firm has no

dead stocks in its warehouses. ARPL has good scope of expanding its

Textile Empire to many other cities in the upcoming years.

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5.2. SUGGESTIONS

From the overall analysis of Balance sheet and Profit and Loss statement, I found

that ARPL has to make some improvement in the following aspects

The overall profitability of ARPL has been affected due to increase in the

cost of sales. So ARPL needs to adopt cost cutting strategies to minimize

their costs and thus ending up raising its profitability.

The financial expense of ARPL has increased drastically over the years, as

the long term funds borrowed for the purpose of generating higher sales and

investments didn’t meet up as expected..Thus ARPL needs to diversify their

available funds in to sectors from which they can generate better returns and

make optimum use of the resources.

ARPL used its borrowed funds to buy more fixed assets, but the investment

turned out to be bitter for the company as it did not generate expected sales

proportionate to its investment. So ARPL should try to maximize the use of

its fixed assets to a greater extent.

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ARPL’s current ratio is more than 5 which can be considered good in terms

of solvency but very bad in terms of profitability. It shows that ARPL might

be having poor sales leading to pile up of stocks or lying of idle cash or bank

balance because of no proper investment. Thus ARPL should give more

importance to this aspect and try to generate higher sales to avoid pile up of

stocks and make proper use of idle cash balance.

5.3. CONCLUSION

The internship I have done is on “Overall analysis of Balance sheet and

Profit and Loss statement of a ARPL. In these 90 days tenure I gained lot of

knowledge on how to crack a balance sheet and profit and loss statement of a

company in order to forecast its future performance and rate its operations. It is

nothing but the projection of company’s financial position of a company in order to

map its future performance. In this period I have analyzed ARPL’s balance sheet

and profit and loss statement to prepare project report. It is totally based on our

logical and analytical skill.

In this projection I have learnt how to build the company’s portfolio, and

come out with strategies to remove the flaws in the funds allocation or mismatch of

long term and short term funds resulting in poor performance of the company. I

also learnt how to rate the financial position of a firm depending upon its cash

inflows and outflows and also how to rate the company’s credibility depending on

its liquidity position which portrays how solid is the company.

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

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is better for the organization to diversify the funds to different sectors in the

present market scenario

5.4. ANNEXURES

REFFERED BOOKS

REDDY T.S. AND MOORTHY - FINANCIAL MANAGEMENT

M.ZAHEER AHMED – MANAGEMENT ACCOUNTANCY

REDDY T.S. AND MOORTHY – MANAGEMENT ACCOUNTING

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