Orignal Ing Vysya Research Report

7/29/2019 Orignal Ing Vysya Research Report

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CONTENTS

1. Bank Profile

Banking Sector

Introduction Of Bank

Vision & Mission

Introduction to Ratio Analysis

Meaning

Objective of Ratio Analysis

Products

Plant Locations

Bank Associates

Ratings

Awards s

Organization chart

2. Theory of Ratio Analysis

Ratio Analysis

Meaning

Term of Ratio Analysis

Forms of Ratio

Steps in Ratio Analysis

Types of Comparisons

Pre-Requisites to Ratio Analysis

Classification of Ratios

Importance of Ratio Analysis

Advantages of Ratio Analysis

Limitations of Ratio Analysis

Purpose of Ratio Analysis

Role of Ratio Analysis

3. Objective and scope of the study.

4. Research methodology.

5. Analysis of the collected data

6. Observation & Summery

7. Conclusion and recommendations

8. Questionnair


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9. Bibliograph

BANKING

PROFILE


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ING VYSYA

BANK


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COOPERATIVE SECTOR

Concept of Cooperation:

The philosophy of co-operation endeavors to empower isolated individuals who are

individually weak, to come together in a democratic manner on the basis of equality to

achieve the desired common economic interests.

The Co-operative Planning committee defined co-operation "as a form of

organization in which persons voluntarily associate together on a basis of equality for the

promotion of their economic interests".

Voluntary association of individuals is the important aspect of any co-operative

Endeavour. The concept of co-operation emphasizes on the collective action of

individuals to achieve common goals which may not have been possible for one isolated

individual.The principles of co-operation define the basic characteristics of any co-

operative organization. These principles form the common thread that runs through all

the co-operative societies which marginal variations.

History of co-operatives:

India has a rich history of co-operative movement. The co-operative movement has gone

up from strength and today India has a strong movement catering to various sectors. By

the union of forces, material advancement is secured and by united action self-reliance is

fostered, and it is from the interaction of these influences that it is hoped to attain the

effective realization of the higher and more prosperous standards of life which has been

characterized as ' better business, better farming, and better living".

Principles of Cooperation:

Voluntary and open membership

Democratic management

Economic participation

Autonomous and independent

Achievement of well defined objectives

Education and training to members

Cooperation among cooperatives
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INTRODUCTION

Banking system of a nation is the shadow of nations economy. A healthy and profitable

banking system is just like the backbone of nations economy. It is necessary for a nation

to achieve growth and remain stable in this global world and global economy. The Indian

banking system, with one of the largest banking networks in the world, has witnessed a

series of reforms over the past few years like the deregulation of interest rates, dilution of

the government stake in public sector banks (PSBs) and the increased participation of

private sector banks.

1.1 HISTORY OF INDIAN BANKING SYSTEM

Banking in India originated in the last decades of the 18th century. The first banks wereThe General Bank of India, which started in 1786, and the Bank of Hindustan, both of

which are now defunct The oldest bank in existence in India is the State Bank of India, a

government-owned bank that traces its origins back to June 1806 and that is the largest

commercial bank in the country. Allahabad Bank, established in 1865 and still

functioning today, is the oldest Joint Stock bank in India. Central

banking is the responsibility of the Reserve Bank of India, which in 1935 formally took

over these responsibilities from the then Imperial Bank of India, relegating it to

commercial banking functions. After India's independence in 1947, the Reserve Bank

was nationalized and given broader powers. In 1969 the government nationalized the 14

largest commercial banks; the government nationalized the six next largest in 1980.

In 1948, the Reserve Bank of India, India's central banking authority, was

nationalized, and it became an institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve

Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an

existing bank could be opened without a license from the RBI, and no two banks

could have common directors


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1.2 LIBERIZATION OF INDIAN BANKING SYSTEM

In the early 1990s, the then government embarked on a policy of liberalization, licensing

a small number of private banks. These came to be known as New Generation tech-savvy

banks, and included Global Trust Bank (the first of such new generation banks to be set

up), which later amalgamated

with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and

HDFC Bank. This move, along with the rapid growth in the economy of India,


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revitalized the banking sector in India, which has seen rapid growth with strong

contribution from all the three sectors of banks, namely, government banks, private

banks and foreign banks. The next stage for the Indian banking has been setup with the

proposed relaxation in the norms for Foreign Direct Investment, where all Foreign

Investors in banks may be given voting rights which could exceed the present cap of

10%, at present it has gone up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time,

were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4%) of

functioning. The new wave ushered in a modern outlook and tech-savvy methods of

working for traditional banks. All this led to the retail boom in India. People not just

demanded more from their banks but also received more.

Currently (2009), banking in India is generally fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the private

sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks

are considered to have clean, strong and transparent balance sheets relative to other

banks in comparable economies in its region. The Reserve Bank of India is an

autonomous body, with minimal pressure from the government. The stated policy of the

Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-

and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong. One may also

expect M&As, takeovers, and asset sales. Currently, India has 88 scheduled commercial

banks (SCBs) - 27 public sector banks (that is with the Government of India holding a

stake), 31 private banks (these do not have government stake; they may be publicly listed

and traded on stock exchanges) and 38 foreign banks. They have a combined network of

over 53,000 branches and 17,000 ATMs. The public sector banks hold over 75 percent of

total assets of the banking industry, with the private and foreign banks holding 18.2%

and 6.5% respectively.

1.3 The Origin of ING Group

ING group originated in 1990 from the merger between Nationale Nederlanden thelargest Dutch Insurance Company and NMB Post Bank Group. Combining roots and


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ambitions, the newly formed company called Internationale Nederlanden Group.

Market circles soon abbreviated the name to I-N-G. The company followed suit by

changing the statutory name to ING Group. ING is a global financial services company

providing banking, investments, life insurance and retirement services and operates in

more than 50 countries.

PROFILE

ING is a global financial institution of Dutch origin offering banking, investments, life

insurance and retirement services. ING serve more than 85 million private, corporate and

institutional customers in Europe, North and Latin America, Asia and Australia. They

draw on their experience and expertise, their commitment to excellent service and their

global scale to meet the needs of a broad customer base, comprising individuals,families, small businesses, large corporations, institutions and governments

STRATEGY

INGs overall mission is to help customers manage their financial future. Capitalizing on

changing customer preferences and building on our solid business capabilities, INGs

strategic focus is on banking, investments, life insurance and retirement services. They

provide retail customers with the products they need during their lives to grow savings,

manage investments and prepare for retirement with confidence. With wide range of

products, innovative distribution models and strong footprints in both mature and

developing markets, ING has the long-run economic, technological and demographic

trends on their side. ING aligns its business strategy around a universal customer ideal:

saving and investing for the future should be easier. While steering the business through

turbulent times, ING will execute efforts across all its business lines to strengthen

customer confidence and meet their needs, preserve a strong capital position, furthermitigate risks and bring its costs in line with revenue expectations.

COPERATE RESPOSIBILITY

ING wants to pursue profit on the basis of sound business ethics and respect for its

stakeholders. Corporate responsibility is therefore a fundamental part of INGs strategy:

ethical, social and environmental factors play an integral role in business decisions


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1.4 FINANCIAL RESULTS

FY 2012 FY2011 FY2010 FY2009 FY2008

Income (in EUR milion)

Insurance operations 54,851 62,208 59,642 57,403 55,614

Banking operations 11,731 14,602 14,195 13,848 12,678

Total Income1 66,291 76,587 73,621 71,120 68,171

Operating Expenses

Insurance operations 5,422 5,515 5,275 5,195 4,746

Banking operations 10,303 9,967 9,087 8,844 8,795

Total operating expenses 15,725 15,481 14,362 14,039 13,541

Addition to loan loss provisionBanking operations

1,280 125 103 88 465

Insurance result before tax -1,635 6,533 4,935 3,978 4,322

Banking result before tax 148 4,510 5,005 4,916 3,418

Total result before tax -1,487 11,043 9,940 8,894 7,740

Taxation -721 1,534 1,907 1,379 1,709

Minority interests -38 267 341 305 276

Net result -729 9,241 7,692 7,210 5,755

Figures per ordinary share

(EUR)

Net result -0.36 4.32 3.57 3.32 2.71

Earnings 2) -0.56 4.32 3.57 3.32 2.71

Dividend 0.74 1.48 1.32 1.18 1.07

Shareholders equity 8.55 17.73 17.78 16.96 12.95

Balance Sheet (in EUR billion)

Total assets 1,332 1.312 1,226 1,159 964

Total equity 29 40 41 38 28

Shareholders equity 17 37 38 37 28

Capital Ratios (%)

ING Group debt/equity ratio 13.8% 9.5% 9.0% 9.4% 10.2%


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Insurance capital coverage ratio 256% 244% 274% 255% 204%

Insurance debt/equity ratio 8.5% 13.6% 14.2% 13.4% 14.3%

Bank Tier-1 ratio 9.32% 7.39% 7.63% 7.32% 6.92%

Market capitalisation (in EUR

billion)

15 60 74 65 49

Shares (in millions):

Outstanding 2,063 2,226 2,205 2,205 2,205

Preference shares outstanding - 16 63 87 87

Key Performance Indicators

- Net return on equity (ROE) -2.1% 24.2% 23.5% 26.6% 25.4%

- Net result growth -108% 20% 7% 25% n.a.

Insurance

- Value of new life business 1,023 1,113 807 805 632

- Internal rate of return 13.9% 14.3% 13.3% 13.2% 12.1%

- Combined ratio (non-life) 97% 97% 91% 95% 94%

Banking

- Cost/income ratio 87.8% 68.3% 64.0% 63.9% 69.4%

- RAROC after tax 1.2% 19.9% 19.7% 22.6% 14.5%

Assets under management (in

EUR billion)

551 643 600 547 492

ING VYSYA BANK Ltd.


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ING Vysya Bank Ltd., is an entity formed with the coming together of erstwhile, Vysya

Bank Ltd, a premier bank in the Indian Private Sector and a global financial powerhouse,

ING of Dutch origin, during Oct 2002.

The origin of the erstwhile Vysya Bank was pretty humble. It was in the year 1930 that a

team of visionaries came together to form a bank that would extend a helping hand to

those who weren't privileged enough to enjoy banking services.

ING and ING Vysya Life Insurance are headquartered at Bangalore, while the corporate

office of ING Investment Management is situated at Mumbai. The synergies arising out

of the three distinct but complimentary businesses are bound to be an asset to the group

in the changing market dynamics of the future. The first such signs are already visible on

the horizon with combined products being successfully launched by the different entities

of the group in conjunction with each other

It's been a long journey since then and the Bank has grown in size and stature to

encompass every area of present-day banking activity and has carved a distinct identity

of being India's Premier Private Sector Bank.

In 1980, the Bank completed fifty years of service to the nation and post 1985; the Bank

made rapid strides to reach the coveted position of being the number one private sector

bank. In 1990, the bank completed its Diamond Jubilee year. At the Diamond Jubilee

Celebrations, the then Finance Minister Prof. Madhu Dandavate, had termed the

performance of the bank stupendous. The 75th anniversary, the Platinum Jubilee of the

bank was celebrated during 2005.

The long journey of seventy-five years has had several milestones


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RATIO ANALYSIS

1930 Set up in Bangalore

1948 Scheduled Bank

1985 Largest Private Sector Bank

1987 The Vysya Bank Leasing Ltd. Commenced

1988 Pioneered the concept of Co branding of Credit Cards

1990 Promoted Vysya Bank Housing Finance Ltd.

1992 Deposits cross Rs.1000 crores

1993 Number of Branches crossed 300

1996Signs Strategic Alliance with BBL., Belgium. Two National Awards by Gem & Jewellery

Export Promotion Council for excellent performance in Export Promotion

1998

Cash Management Services, & commissioning of VSAT. Golden Peacock Award - for the

best HR Practices by Institute of Directors. Rated as Best Domestic Bank in India by

Global Finance (International Financial Journal - June 1998)

2000 RBI clears setting up of ING Vysya Life Insurance Company

2001 ING-Vysya commenced life insurance business.

2002

The Bank launched a range of products & services like the Vys Vyapar Plus, the range of

loan schemes for traders, ATM services, Smartserv, personal assistant service, Save &

Secure, an account that provides accident hospitalization and insurance cover, Sambandh,

the International Debit Card and the mi-b@nk net banking service.

2002 ING takes over the Management of the Bank from October 7th , 2002

2002 RBI clears the new name of the Bank as ING Vysya Bank Ltd, vide their letter of 17.12.02

2009Introduced customer friendly products like Orange Savings, Orange Current and Protected

Home Loans

2010 Introduced Protected Home Loans - a housing loan product

2011Introduced Slow - My Own Account for youth and Customer Service Line Phone

Banking Service

2012Bank has networked all the branches to facilitate AAA transactions i.e. Anywhere, Anytime

& Anyhow Banking


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Fundamental Analysis has a very broad scope. One aspect looks at the general

(qualitative) factors of a company. The other side considers tangible and measurable

factors (quantitative). This means crunching and analyzing numbers from the financial

statements. If used in conjunction with other methods, quantitative analysis can produceexcellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet, income

statement, and cash flow statement. It's comparing the number against previous years,

other companies, the industry, or even the economy in general. Ratios look at the

relationships between individual values and relate them to how a company has

performed in the past, and might perform in the future.

MEANING OF RATIO

A ratio is one figure express in terms of another figure. It is a mathematical yardstick that

measures the relationship two figures, which are related to each other and mutually

interdependent. Ratio is express by dividing one figure by the other related figure. Thus a

ratio is an expression relating one number to another. It is simply the quotient of two

numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute

figures as so many times. As accounting ratio is an expression relating two figures or

accounts or two sets of account heads or group contain in the financial statements.

MEANING OF RATIO ANALYSIS

Ratio analysis is the method or process by which the relationship of items or group of

items in the financial statement are computed, determined and presented.

Ratio analysis is an attempt to derive quantitative measure or guides concerning the

financial health and profitability of business enterprises. Ratio analysis can be used both

in trend and static analysis. There are several ratios at the disposal of an analyst but their

group of ratio he would prefer depends on the purpose and the objective of analysis.


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While a detailed explanation of ratio analysis is beyond the scope of this section, I will

focus on a technique, which is easy to use. It can provide you with a valuable investment

analysis tool. This technique is called cross-sectional analysis. Cross-sectional analysis

compares financial ratios of several companies from the same industry. Ratio analysis

can provide valuable information about a company's financial health. A financial ratio

measures a company's performance in a specific area. For example, you could use a ratio

of a company's debt to its equity to measure a company's leverage. By comparing the

leverage ratios of two companies, you can determine which company uses greater debt in

the conduct of its business. A company whose leverage ratio is higher than a competitor's

has more debt per equity. You can use this information to make a judgment as to which

company is a better investment risk. However, you must be careful not to place too much

importance on one ratio. You obtain a better indication of the direction in which a

company is moving when several ratios are taken as a group.


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OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business organization-

A) Solvency-

1) Long term

2) Short term

3) Immediate

B) Stability

C) Profitability

D) Operational efficiency

E) Credit standing

F) Structural analysis

G) Effective utilization of resources

H) Leverage or external financing


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RATINGS

Ratings assigned by CRISIL:

Rating for Governance and Value Creation (GVC) Practices of Bank.

CRISIL has, assigned a GVC Level 2 rating to Bank. This rating indicates that the

capability of the Society with respect to wealth creation for all its stakeholders, while

adopting sound corporate governance practices, is high.

Rating for the Rs. 100 crore Commercial Paper Programme of Bank.

CRISIL has assigned a P1+ (pronounced P One Plus) rating to Banks Rs.100

Crore Commercial Paper Programme. This rating indicates that the degree of safety

with regard to timely payment of interest and principal on the instrument is Very

Strong.

Rating for the Rs. 400 crore Bonds Programme of IFFCO.

CRISIL has assigned the rating on Banks Long Term Borrowing Programme to

AA/Stable. The rating indicates high degree of safety with regard to timely payment

of interest and principal on the instrument.

Ratings assigned by FITCH

Rating for the Rs. 100 crore Commercial Paper Programme of Bank.

FITCH Ratings has assigned a National Short Term Rating of F1+ (Ind)to Bank s

Rs. 100 crore Commercial Paper Programme.

Rating for Long Term Borrowing Programme of Bank.

FITCH Ratings assigned National Long - Term Rating of AA+(ind) to the Long

Term Debt Programme of Bank. The outlook on the Long Term Rating is

Stable.


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AWARDS

Prestigious Economic Times, Acer and Intel Smart Workplace Award in the

Manufacturing and Industrial Segment.

Best Content Service as well as the Best Project Management in respect of

Bank Relation at the World Communications Award held at London.

Institute of Chartered Accountants of India (ICAI) Award for Excellence in

Financial Reporting for Banks Annual Report and Accounts for the year 2010-11.

Best Cooperative Society Award from Public Relations Society of India (PRSI) at

its Golden Jubilee Ceremony in Mauritius.

KALOL UNIT

National Energy Conservation Award-2008 (2nd Prize) from Ministry of

Power, Government of India.

National Safety Award2006 from DGFASLI and Union Ministry of Labour

and Employment.

Selected as a joint winner under category of Lowest Average Frequency Rate of

accident.

Suraksha Puraskar (Bronze Trophy and Certificate) from National Safety Council

for the year 2007.

Gujarat State Safety Award 2007 for lowest Disability Injury Index (DII) in the

category of Chemicals, Fertilisers and Distilleries for the fourth consecutive year.

PHULPUR UNIT

Water Efficient Unit award from Confederation of Indian Industry for

Excellence in Water Management.

First Prize for National Energy Conservation Award-2008 in Fertiliser Sector

instituted by Bureau of Energy Efficiency, Ministry of Power, Government of India.

First Prize for Best Production Performance in Nitrogenous Fertilisers Sector

from FAI.


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AONLA UNIT

Golden Peacock Environment Management Award+2008 during Convention

on Climate Change by World Environment Foundation.

National Award for Excellence in Energy Management-2008 from

Confederation of Indian Industry (CII) as Energy Efficient Unit.

National Award for Excellence in Energy Management-2008 from

Confederation of Indian Industry (CII) as Innovative Project.

Best Technical Innovation Award for Technical Innovation actually

implemented in the field of production technology in fertiliser industry from FAI,

New Delhi.

National Safety Award from DGFASLI and Union Ministry of Labour and

Employment. First prize for Accident Free year-2006 and Runner-up for Lowest

Average Accident Frequency Rate of consecutive three years 2004, 2005 and 2006.

KANDLA UNIT

Sun and NDTV Green IT Award under category of Technology for a Greener

Workplace (1st Prize).


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ORGANIZATION CHART

Managing Director

Dipt.

MD/

Fin.

Dir.JV Dir.MSD/IT Dir.Marketing Dir

Corpo

rate

Relati

on

Dir. HRD Dir.Technical

Finance

Internal

audit

Bill or

Budget

Taxation

Joint

Ventu

res

IT

Managerial

Services

Department

North Zone

Central Zone

West Zone

East Zone

South Zone

Corporate

Relati

on

ED Cor.

Affair

s

Admin

Head

Legal Head

Vigilance

& Security

Kalol Unit

Phulpur Unit

Kandla Unit

Aonla Unit

Paradeep

Unit


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STRUCTURE OF RATIO ANALYSIS

Negative

Working

Ratio

Cash

Working

Ratio

Balance Sheet

Working

Ratio

Temporary

Working

Ratio

Permanent

Working

Ratio

Gross

Working

Ratio

Net Working

Ratio

Types of

Ratio

Analysis


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Sources of Ratio Analysis

Mainly there are two sources of working capital:

i. Permanent or Fixed Ratio Analysis

ii. Temporary or variables Ratio Analysis

In any concern, a part of the working capital investments are as investment

in fixed assets. This is so because there is always a minimum level of current assets,

which are copiously required by the enterprise to carry out its day-to-day business

operation and this minimum, cannot be expected to reduce at any time. This minimum

level of current assets need long term working capital, which is permanently blocked.

Similarly, some amount of working capital may be required to meet the seasonal

demands and some special exigencies such as rise in prices, strikes, etc. this gives

rise to short term working capital which is required for day to day transaction also.

The fixed proportion of working capital should be generally financed from the fixed

capital sources while the temporary or variable working capital equipment may be

met from the short term sources of capital.


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Long term Sources

Shares

Debentures

Public Deposits

Ploughing back of Profits

Loans from Financial institution

Short Term sources

Commercial Banks

Indigenous Banks

Trade Creditors

Installment Credit

Advances

Account receivable

Credit

Accrued Expenses

Differed Income

Commercial Paper


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Management of Ratio Analysis

Working capital, in general practice, refers to him excess of current assets over current

liabilities. Management of working capital therefore, is concerned with problems that

arise in attempting to mange him current assets, current liabilities, and interrelationship

that exists between them. In other word it refers to all aspects of administration of both

current assets and current liabilities.

The basic goal of working capital management is to manage the current assets and

current liabilities of a firm in such way that a satisfactory level of working capital is

maintained, i.e. neither inadequate nor excessive. This is so because both inadequate as

well as excessive working capital position is bad for the business. Inadequacy of working

capital, may lead the firm insolvency and excessive working capital implies idle funds,

which earn no profit for the business. Working capital management policies of the firm

have a great effect on its profitability, liquidity and structural health of the organization.

In this context, working capital management is three-dimensional nature:


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Profitability,

Risk

& Liquidity

Dimension I

Dimension III Dimension II

Composition &

Level of current

assets

Composition & level

Of current Liabilities

1) Dimension I is concerned with the formulation of the policy with regard to

profitability, risk and liquidity.

2) Dimension II is concerned with the decision about his composition and level of

current assets.

3) Dimension III is concerned with the decision about his composition and level of

current liabilities.

This dimension aspect of his working capital has been more clearly and

precisely

THEORY OF RATIO ANALYSIS


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Fundamental Analysis has a very broad scope. One aspect looks at the general

(qualitative) factors of a company. The other side considers tangible and measurable

factors (quantitative). This means crunching and analyzing numbers from the financial

statements. If used in conjunction with other methods, quantitative analysis can produceexcellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet, income

statement, and cash flow statement. It's comparing the number against previous years,

other companies, the industry, or even the economy in general. Ratios look at the

relationships between individual values and relate them to how a company has

performed in the past, and might perform in the future.

MEANING OF RATIO

A ratio is one figure express in terms of another figure. It is a mathematical yardstick that

measures the relationship two figures, which are related to each other and mutually

interdependent. Ratio is express by dividing one figure by the other related figure. Thus a

ratio is an expression relating one number to another. It is simply the quotient of two

numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute

figures as so many times. As accounting ratio is an expression relating two figures or

accounts or two sets of account heads or group contain in the financial statements.

MEANING OF RATIO ANALYSIS

Ratio analysis is the method or process by which the relationship of items or group of

items in the financial statement are computed, determined and presented.

Ratio analysis is an attempt to derive quantitative measure or guides concerning the

financial health and profitability of business enterprises. Ratio analysis can be used both

in trend and static analysis. There are several ratios at the disposal of an analyst but their

group of ratio he would prefer depends on the purpose and the objective of analysis.


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While a detailed explanation of ratio analysis is beyond the scope of this section, I will

focus on a technique, which is easy to use. It can provide you with a valuable investment

analysis tool. This technique is called cross-sectional analysis. Cross-sectional analysis

compares financial ratios of several companies from the same industry. Ratio analysis

can provide valuable information about a company's financial health. A financial ratio

measures a company's performance in a specific area. For example, you could use a ratio

of a company's debt to its equity to measure a company's leverage. By comparing the

leverage ratios of two companies, you can determine which company uses greater debt in

the conduct of its business. A company whose leverage ratio is higher than a competitor's

has more debt per equity. You can use this information to make a judgment as to which

company is a better investment risk. However, you must be careful not to place too much

importance on one ratio. You obtain a better indication of the direction in which a

company is moving when several ratios are taken as a group.


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TERM OF RATIOS

Ratio is work out to analyze the following aspects of business organization-

A) Solvency-

4) Long term

5) Short term

6) Immediate

B) Stability

C) Profitability

D) Operational efficiency

E) Credit standing

F) Structural analysis

G) Effective utilization of resources

H) Leverage or external financing


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FORMS OF RATIO

Since a ratio is a mathematical relationship between two or more variables/accounting

figures, such relationship can be expressed in different ways as follows:

A] As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 & the preference

share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital

is 20,00,000: 5,00,000 or simply 4:1.

B] As a rate of times:

In the above case the equity share capital may also be described as 4 times that of

preference share capital. Similarly, the cash sales of a firm are Rs. 12,00,000 & credit

sales are Rs. 30,00,000. So the ratio of credit sales to cash sales can be described as 2.5

[30,00,000/12,00,000] or simply by saying that the credit sales are 2.5 times that of cash

sales.

C] As a percentage:

In such a case, one item may be expressed as a percentage of some other items. For

example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs.

10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]


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STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows:

1] Calculation of ratio

2] Comparing the ratio with some predetermined standards.

The standard ratio may be the past ratio of the same firm or industrys average ratio or a

projected ratio or the ratio of the most successful firm in the industry. In interpreting the

ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless the

calculated ratio is compared with some predetermined standard. The importance of a

correct standard is oblivious as the conclusion is going to be based on the standard itself.


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TYPES OF COMPARISONS

The ratio can be compared in three different ways

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare them with the

ratio or ratios of some other selected firm in the same industry at the same point of time.

So it involves the comparison of two or more firms financial ratio at the same point of

time. The cross section analysis helps the analyst to find out as to how a particular firm

has performed in relation to its competitors. The firms performance may be compared

with the performance of the leader in the industry in order to uncover the major

operational inefficiencies. The cross section analysis is easy to be undertaken as most of

the data required for this may be available in financial statement of the firm.

2] Time series analysis:

The analysis is called Time series analysis when the performance of a firm is evaluated

over a period of time. By comparing the present performance of a firm with the

performance of the same firm over the last few years, an assessment can be made about

the trend in progress of the firm, about the direction of progress of the firm. Time series

analysis helps to the firm to assess whether the firm is approaching the long-term goals

or not. The Time series analysis looks for (1) important trends in financial performance

(2) shift in trend over the years (3) significant deviation if any from the other set of data.

3] Combined analysis:

If the cross section & time analysis, both are combined together to study the behaviourand pattern of ratio, then meaningful & comprehensive evaluation of the performance of

the firm can definitely be made. A trend of ratio of a firm compared with the trend of the

ratio of the standard firm can give good results. For example, the ratio of operating

expenses to net sales for firm may be higher than the industry


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average however, over the years it has been declining for the firm, whereas the industry

average has not shown any significant changes.

The combined analysis as depicted in the above diagram, which clearly shows that the

ratio of the firm is above the industry average, but it is decreasing over the years & is

approaching the industry average.


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PRE-REQUISITES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful conclusions, there are

certain pre-requisites, which must be taken care of. It may be noted that these

prerequisites are not conditions for calculations for meaningful conclusions. The

accounting figures are inactive in them & can be used for any ratio but meaningful &

correct interpretation & conclusion can be arrived at only if the following points are well

considered.

1) The dates of different financial statements from where data is taken must be same.

2) If possible, only audited financial statements should be considered, otherwise there

must be sufficient evidence that the data is correct.

3) Accounting policies followed by different firms must be same in case of cross section

analysis otherwise the results of the ratio analysis would be distorted.

4) One ratio may not throw light on any performance of the firm. Therefore, a group of

ratios must be preferred. This will be conductive to counter checks.

5) Last but not least, the analyst must find out that the two figures being used to calculate

a ratio must be related to each other, otherwise there is no purpose of calculating a ratio.


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CLASSIFICATION OF RATIO

BASED ON FINANCIAL

STATEMENT

BASED ON FUNCTION BASED ON USER

BALANCE SHEET RATIO LIQUIDITY RATIO RATIOS FOR SHORT TERM

CREDITORS

REVENUE STATEMENT

RATIO

LEVERAGE RATIO RATIO FOR

SHAREHOLDER

COMPOSITE RATIO ACTIVITY RATIO RATIOS FOR

MANAGEMENT

PROFITABILITY RATIO RATIO FOR LONG TERM

CREDITORS

COVERAGE RATIO

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from financial

statements. Figures may be taken from Balance Sheet, P& P A/C, or both. One-way of

classification of ratios is based upon the sources from which are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called Balance Sheet

Ratios. E.g. Ratio of current assets to current liabilities or ratio of debt to equity. While

calculating these ratios, there is no need to refer to the Revenue statement. These ratios

study the relationship between the assets & the liabilities, of the concern. These ratios

help to judge the liquidity, solvency & capital structure of the concern. Balance sheet

ratios are Current ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt

equity ratio, and Stock working capital ratio.


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2] Revenue ratio:

Ratio based on the figures from the revenue statement is called revenue statement ratios.

These ratios study the relationship between the profitability & the sales of the concern.

Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net

operating profit ratio, Stock turnover ratio.

3] Composite ratio:

These ratios indicate the relationship between two items, of which one is found in the

balance sheet and other in revenue statement. There are two types of composite ratios-

a) Some composite ratios study the relationship between the profits and the investments

of the concern. E.g. return on capital employed, return on proprietors fund, return on

equity capital etc.

b) Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios, dividend

payout ratios, and debt service ratios


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BASED ON FUNCTION

Accounting ratios can also be classified according to their functions in to liquidity ratios,

leverage ratios, activity ratios, profitability ratios and turnover ratios.

1] Liquidity ratios:

It shows the relationship between the current assets and current liabilities of the concern

e.g. liquid ratios and current ratios.

2] Leverage ratios:

It shows the relationship between proprietors funds and debts used in financing the assets

of the concern e.g. capital gearing ratios, debt equity ratios, and Proprietary ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known as Turnover ratios

& productivity ratios e.g. stock turnover ratios, debtors turnover ratios.

4] Profitability ratios:

a) It shows the relationship between profits & sales e.g. operating ratios, gross profitratios, operating net profit ratios, expenses ratios

b) It shows the relationship between profit & investment e.g. return on investment return

on equity capital.

5] Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of the outsiders

to be paid out of such profit e.g. dividend payout ratios & debt service ratios.


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Structure Of Ratio Analysis


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BASED ON USER

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3] Ratios for management:

Return on capital employed, turnover ratios, operating ratios, expenses ratios

4] Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.


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LIQUIDITY RATIO

Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year)

obligations. The ratios, which indicate the liquidity of a company, are Current ratio,

Quick/Acid-Test ratio, and Cash ratio. These ratios are discussed below


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CURRENT RATIO

Meaning:

This ratio compares the current assets with the current liabilities. It is also known as

working capital ratio or solvency ratio. It is expressed in the form of pure ratio.

Formula:

Current ratio = Current assets / Current liabilities

The current assets of a firm represents those assets which can be, in the ordinary course

of business, converted into cash within a short period time, normally not exceeding one

year. The current liabilities defined as liabilities which are short term maturing

obligations to be met, as originally contemplated, within a year.

Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL).Current assets include cash and bank balances; inventory of raw materials, semi- finished

and finished goods; marketable securities; debtors (net of provision for bad and doubtful

debts) bills receivable; and prepaid expenses. Current liabilities consist of trade creditors,

bills payable, bank credit, provision for taxation, dividends payable and outstanding

expenses. This ratio measures the liquidity of the current assets and the ability of a

company to meet its short-term debt obligation.

CR measures the ability of the company to meet its CL, i.e., CA gets converted into cash

in the operating cycle of the firm and provides the funds needed to pay for CL. The

higher the current ratio, the greater is the short-term solvency. This compares assets,

which will become liquid within approximately twelve months with liabilities, which

will be due for payment in the same period and is intended to indicate whether there are

sufficient short-term assets to meet the short- term liabilities. Recommended current ratio

is 2: 1. Any ratio below indicates that the entity may face liquidity problem but also

Ratio over 2: 1 as above indicates over trading, that is the entity is under utilizing its

current assets.


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LIQUID RATIO

Meaning:

Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compares the

quick assets with the quick liabilities. It is expressed in the form of pure ratio.

The term quick assets refer to current assets, which can be converted into, cash

immediately or at a short notice without diminution of value.

Formula:

Liquid ratio = Quick assets / Quick liabilities

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA refers to

those current assets that can be converted into cash immediately without any value

strength. QA includes cash and bank balances, short-term marketable securities, and

sundry debtors. Inventory and prepaid expenses are excluded since these cannot be

turned into cash as and when required.

QR indicates the extent to which a company can pay its current liabilities without relying

on the sale of inventory. This is a fairly stringent measure of liquidity because it is based

on those current assets, which are highly liquid. Inventories are excluded from the

numerator of this ratio because they are deemed the least liquid component of current

assets. Generally, a quick ratio of 1:1 is considered good. One drawback of the quick

ratio is that it ignores the timing of receipts and payments.

CASH RATIO

Meaning:

This is also called as super quick ratio. This ratio considers only the absolute liquidity

available with the firm.

Formula:

Cash ratio = (Cash + Bank + Marketable securities) / Total current liabilitie

Since cash and bank balances and short term marketable securities are the most liquid

assets of a firm, financial analysts look at the cash ratio. If the super liquid assets are too

much in relation to the current liabilities then it may affect the profitability of the firm.


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INVESTMENT / SHAREHOLDERS RATIO

EARNING PER SHARE:

Meaning:

Earnings per Share are calculated to find out overall profitability of the organization.

Earnings per Share represent earning of the company whether or not dividends are

declared. If there is only one class of shares, the earning per share are determined by

dividing net profit by the number of equity shares. EPS measures the profits available to

the equity shareholders on each share held.

Formula:

Earnings per share = NPAT / Number of equity share

The higher EPS will attract more investors to acquire shares in the company as it

indicates that the business is more profitable enough to pay the dividends in time. But

remember not all profit earned is going to be distributed as dividends the company also

retains some profits for the business.


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DIVIDEND PER SHARE:

Meaning:

DPS shows how much is paid as dividend to the shareholders on each share held.

Formula:

Dividend per Share = Dividend Paid to Shareholders / Number of Ordinary Shares

DIVIDEND PAYOUT RATIO:

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividends paid to equity

shareholders out of the profit available to the equity shareholders.

Formula:

Dividend Payout ratio = (Dividend per share / Earning per share) * 100

D/P ratio shows the percentage share of net profits after taxes and after preference

dividend has been paid to the preference equity holders.


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GEARING RATIO

CAPITAL GEARING RATIO

Meaning:

Gearing means the process of increasing the equity shareholders return through the use

of debt. Equity shareholders earn more when the rate of the return on total capital is more

than the rate of interest on debts. This is also known as leverage or trading on equity. The

Capital-gearing ratio shows the relationship between two types of capital wiz: - equity

capital & preference capital & long term borrowings. It is expressed as a pure ratio.


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Formula:

Capital gearing ratio = (Preference capital + secured loan) / Equity capital and

reserve & surplus

Capital gearing ratio indicates the proportion of debt & equity in the financing of assets

of a concern.


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PROFITABILITY RATIO

These ratios help measure the profitability of a firm. A firm, which generates a

substantial amount of profits per rupee of sales, can comfortably meet its operating

expenses and provide more returns to its shareholders. The relationship between profitand sales is measured by profitability ratios. There are two types of profitability ratios:

Gross Profit Margin and Net Profit Margin.

GROSS PROFIT RATIO

Meaning:

This ratio measures the relationship between gross profit and sales. It is defined as the

excess of the net sales over cost of goods sold or excess of revenue over cost. This ratio

shows the profit that remains after the manufacturing costs have been met. It measures

the efficiency of production as well as pricing. This ratio helps to judge how efficient the

concern is I managing its production, purchase, selling & inventory, how good its control

is over the direct cost, how productive the concern , how much amount is left to meet

other expenses & earn net profit.

Formula:

Gross profit ratio = (Gross profit / Net sales) * 100


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NET PROFIT RATIO

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales it is usually

expressed in the form of a percentage.

Formula:

Net profit ratio = (NPAT / Net sales) * 100

This ratio shows the net earnings (to be distributed to both equity and preference

shareholders) as a percentage of net sales. It measures the overall efficiency of

production, administration, selling, financing, pricing and tax management. Jointly

considered, the gross and net profit margin ratios provide an understanding of the cost

and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED

The profitability of the firm can also be analyzed from the point of view of the total

funds employed in the firm. The term fund employed or the capital employed refers to

the total long-term source of funds. It means that the capital employed comprises of

shareholder funds plus long-term debts. Alternatively it can also be defined as fixed

assets plus net working capital.

Capital employed refers to the long-term funds invested by the creditors and the owners

of a firm. It is the sum of long-term liabilities and owner's equity. ROCE indicates the

efficiency with which the long-term funds of a firm are utilized.


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FINANCIAL RATIO

These ratios determine how quickly certain current assets can be converted into cash.

They are also called efficiency ratios or asset utilization ratios as they measure the

efficiency of a firm in managing assets. These ratios are based on the relationship

between the level of activity represented by sales or cost of goods sold and levels of

investment in various assets. The important turnover ratios are debtors turnover ratio,

average collection period, inventory/stock turnover ratio, fixed assets turnover ratio, and

total assets turnover ratio. These are described below:

DEBTORS TURNOVER RATIO (DTO)

Meaning:DTO is calculated by dividing the net credit sales by average debtors outstanding during

the year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit

sales minus returns, if any, from customers. Average debtors are the average of debtors

at the beginning and at the end of the year. This ratio shows how rapidly debts are

collected. The higher the DTO, the better it is for the organization.

Formula:

Debtors turnover ratio = Credit sales / Average debtors


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INVENTORY OR STOCK TURNOVER RATIO (ITR)

ITR refers to the number of times the inventory is sold and replaced during the

accounting period.

Formula:

Stock Turnover Ratio = COGS / Average stock

ITR reflects the efficiency of inventory management. The higher the ratio, the more

efficient is the management of inventories, and vice versa. However, a high inventory

turnover may also result from a low level of inventory, which may lead to frequent stock

outs and loss of sales and customer goodwill. For calculating ITR, the average ofinventories at the beginning and the end of the year is taken. In general, averages may be

used when a flow figure (in this case, cost of goods sold) is related to a stock figure

(inventories).

FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed assets.

Formula:

Fixed assets turnover = Net sales / Net fixed assets

This ratio measures the efficiency with which fixed assets are employed. A high ratio

indicates a high degree of efficiency in asset utilization while a low ratio reflects an

inefficient use of assets. However, this ratio should be used with caution because when

the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover

ratio tends to be high (because the denominator of the ratio is very low).

PROPRIETORS RATIO

Proprietary ratio is a test of financial & credit strength of the business. It relates

shareholders fund to total assets. This ratio determines the long term or ultimate solvency

of the company.In other words, Proprietary ratio determines as to what extent the

owners interest & expectations are fulfilled from the total investment made in the

business operation.


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Proprietary ratio compares the proprietor fund with total liabilities. It is usually

expressed in the form of percentage. Total assets also know it as net worth.

Formula:

Proprietary ratio = Proprietary fund / Total fund

OR

Proprietary ratio = Shareholders fund / (Fixed assets + current liabilities STOCK

WORKING)

CAPITAL RATIO

This ratio shows the relationship between the closing stock & the working capital. It

helps to judge the quantum of inventories in relation to the working capital of the

business. The purpose of this ratio is to show the extent to which working capital is

blocked in inventories. The ratio highlights the predominance of stocks in the current

financial position of the company. It is expressed as a percentage.

Formula:

Stock working capital ratio = Stock / Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition & quality of

the working capital. This ratio also helps to study the solvency of a concern. It is a

qualitative test of solvency. It shows the extent of funds blocked in stock. If investment

in stock is higher it means that the amount of liquid assets is lower.

DEBT EQUITY RATIO

This ratio compares the long-term debts with shareholders fund. The relationship

between borrowed funds & owners capital is a popular measure of the long term

financial solvency of a firm. This relationship is shown by debt equity ratio.

Alternatively,this ratio indicates the relative proportion of debt & equity in financing the

assets of the firm. It is usually expressed as a pure ratio.

Formula:

Debt equity ratio = Total long-term debt / Total shareholders fund

Debt equity ratio is also called as leverage ratio. Leverage means the process of the

increasing the equity shareholders return through the use of debt. Leverage is also known


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as gearing or trading on equity. Debt equity ratio shows the margin of safety for long-

term creditors & the balance between debt & equity.

RETURN ON PROPRIETOR FUND

Return on proprietors fund is also known as return on proprietors equity or return on

shareholder's investment or investment ratio. This ratio indicates the relationship

between net profits earned & total proprietors funds. Return on proprietors fund is a

profitability ratio, which the relationship between profit & investment by the proprietors

in the concern. Its purpose is to measure the rate of return on the total fund made

available by the owners. This ratio helps to judge how efficient the concern is in

managing the owners fund at disposal. This ratio is of practical importance to

prospective investors & shareholders.

Formula:

Return on proprietors fund = (NPAT / Proprietors fund ) * 100

CREDITORS TURNOVER RATIO

It is same as debtors turnover ratio. It shows the speed at which payments are made to

the supplier for purchase made from them. It is a relation between net credit purchase

and average creditors

Credit turnover ratio = Net credit purchase / Average creditors

Average age of accounts payable = Months in a year / Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases. Higher creditors

turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid

promptly. It enhances credit worthiness of the company. A very low ratio indicates that

the company is not taking full benefit of the credit period allowed by the creditors.


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IMPORTANCE OF RATIO ANALYSIS

As a tool of financial management, ratios are of crucial significance. The importance of

ratio analysis lies in the fact that it presents facts on a comparative basis & enables the

drawing of interference regarding the performance of a firm. Ratio analysis is relevant in

assessing the performance of a firm in respect of the following aspects:

1] Liquidity position

2] Long-term solvency

3] Operating efficiency

4] Overall profitability

5] Inter firm comparison

6] Trend analysis.

1] LIQUIDITY POSITION:

With the help of Ratio analysis conclusion can be drawn regarding the liquidity position

of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its

current obligation when they become due. A firm can be said to have the ability to meet

its short-term liabilities if it has sufficient liquid funds to pay the interest on its short

maturing debt usually within a year as well as to repay the principal. This ability is

reflected in the liquidity ratio of a firm. The liquidity ratios are particularly useful in

credit analysis by bank & other suppliers of short term loans.

2] LONG TERM SOLVENCY:

Ratio analysis is equally useful for assessing the long-term financial viability of a firm.

This respect of the financial position of a borrower is of concern to the long-term

creditors, security analyst & the present & potential owners of a business. The long-term

solvency is measured by the leverage/ capital structure & profitability ratio Ratio

analysis that focus on earning power & operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage

ratios, for instance, will indicate whether a firm has a reasonable proportion of various

sources of finance or if it is heavily loaded with debt in which case its solvency is

exposed to serious strain. Similarly the various profitability ratios would reveal whether

or not the firm is able to offer adequate return to its owners consistent with the risk

involved.


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3] OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of

management, is that it throws light on the degree of efficiency in management &

utilization of its assets. The various activity ratios measure this kind of operational

efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the

sales revenues generated by the use of its assets- total as well as its components.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial position of

a firm, the management is constantly concerned about overall profitability of the

enterprise. That is, they are concerned about the ability of the firm to meets its short term

as well as long term obligations to its creditors, to ensure a reasonable return to its

owners & secure optimum utilization of the assets of the firm. This is possible if an

integrated view is taken & all the ratios are considered together.

5] INTER FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but also serves as a

stepping-stone to remedial measures. This is made possible due to inter firm comparison

& comparison with the industry averages. A single figure of a particular ratio is

meaningless unless it is related to some standard or norm. One of the popular techniques

is to compare the ratios of a firm with the industry average. It should be reasonably

expected that the performance of a firm should be in broad conformity with that of the

industry to which it belongs. An inter firm comparison would demonstrate the firms

position vice-versa its competitors..

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into account. In other

words, whether the financial position of a firm is improving or deteriorating over the

years. This is made possible by the use of trend analysis. The significance of the trend

analysis of ratio lies in the fact that the analysts can know the direction of movement,

that is, whether the movement is favourable or unfavourable.


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ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the identification of significant accounting

data relationships, which give the decision-maker insights into the financial performance

of a company. The advantages of ratio analysis can be summarized as follows:

Ratios facilitate conducting trend analysis, which is important for decision

making and forecasting.

Ratio analysis helps in the assessment of the liquidity, operating efficiency,

profitability and solvency of a firm.

Ratio analysis provides a basis for both intra-firm as well as inter-firm

comparisons.

The comparison of actual ratios with base year ratios or standard ratios helps the

management analyze the financial performance of the firm.


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LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below:

1] Information problems

Ratios require quantitative information for analysis but it is not decisive about

analytical output.

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 companys current financial

position.

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.

2] Comparison of performance over time

When comparing performance over time, there is need to consider the changes in

price. The movement in performance should be in line with the changes in price.

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 intechnology.

Changes in accounting policy may affect the comparison of results between

different accounting years as misleading.

3] Inter-firm comparison

Companies may have different capital structures and to make comparison of

performance when one is all equity financed and another is a geared company itmay not be a good analysis.

Selective application of government incentives to various companies may also

distort intercompany comparison. Comparing the performance of two enterprises

may be misleading.

Inter-firm comparison may not be useful unless the firms compared are of the

same size and age, and employ similar production methods and accounting

practices.


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PURPOSE OF RATIO ANALYSIS

1) To identify aspects of a business performance to aid decision making

2) Quantitative process may need to be supplemented by qualitative factors to get

a complete picture.

3) 5 main areas:

Liquidity the ability of the firm to pay its way

Investment/shareholders information to enable decisions to be

made on the extent of the risk and the earning potential of a business

investment

Gearing information on the relationship between the exposure of

the business to loans as opposed to share capital

Profitability how effective the firm is at generating profits given

sales and or its capital assets

Financial the rate at which the company sells its stock and the

efficiency with which it uses its assets


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ROLE OF RATIO ANALYSIS

It is true that the technique of ratio analysis is not a creative technique in the sense that it

uses the same figure & information, which is already appearing in the financial

statement. At the same time, it is true that what can be achieved by the technique of ratio

analysis cannot be achieved by the mere preparation of financial statement.

Ratio analysis helps to appraise the firm in terms of their profitability & efficiency of

performance, either individually or in relation to those of other firms in the same

industry. The process of this appraisal is not complete until the ratio so computed can be

compared with something, as the ratio all by them do not mean anything. This

comparison may be in the form of intra firm comparison, inter firm comparison or

comparison with standard ratios. Thus proper comparison of ratios may reveal where a

firm is placed as compared with earlier period or in comparison with the other firms in

the same industry.

Ratio analysis is one of the best possible techniques available to the management to

impart the basic functions like planning & control. As the future is closely related to the

immediate past, ratio calculated on the basis of historical financial statements may be of

good assistance to predict the future. Ratio analysis also helps to locate & point out the

various areas, which need the management attention in order to improve the situation.As the ratio analysis is concerned with all the aspect of a firms financial analysis i.e.

liquidity, solvency, activity, profitability & overall performance, it enables the interested

persons to know the financial & operational characteristics of an organisation & take the

suitable decision.


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OBJECTIVE OF THIS STUDY

Working capital management is very important in modern business. The analysis of

working capital is also very useful for short-term management of funds. The major

objective of the study is to know about financial strengths and weakness of I Banking

Sectors through FINANCIAL RATIO ANALYSIS.

The following are objective of study:

To determine Importance of working capital management in the organization.

To understand the proper meaning, concept and kinds or tools of working capital

management.

To calculate working capital of the company and to evaluate it by means of ratioanalysis.

To evaluate the performance of the company by using ratios as a yardstick to

measure the efficiency of the company.

To understand the liquidity, profitability and efficiency positions of the company

during the study period.

To evaluate and analyze various facts of the financial performance of the

company. To make comparisons between the ratios during different periods.

The study will also include data collection and presentation, data analysis, suggestions

for the improvement in working capital.


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RESEARCH METHODOLOGY

When we talk of research methodology, we not only talk of the research methods but

also the comparison of the logic behind the methods, we used in this context of our

research study and explain why we are using a particular method or technique and why

using the others. Research methodology is a way to systematically solve the research

problem. It may be understood as a science of studying how research is done

systematically. In this, we study the various steps that are generally adopted by

researcher in studying his research problem along with the logic behind them.

As the study is analyzing probing in nature, thus, entirely based on the secondary data

gathered through the annual reports of the industry. Therefore it provides a historical

perspective of decisions.

RESEARCH

Research refers to search for knowledge. Research is an original contribution to the

existing stock of knowledge making for its advancement. It is the pursuit of truth with

the help of study, observation, comparison and experiment. In short, the search for

knowledge through objective and systematic method of finding solution of the problem

is research. The advance learners dictionary of current English gives the meaning of

research a careful investigation or inquiry especially through search for new facts in any

branch of knowledge.

RESEARCH METHODS

Research methods may be understood as those methods/techniques that are used for

conduction of research. All those methods which are used by the researcher during the

course of studying his research problem are termed as research methods. Keeping in

view, the research methods can be put into following three groups:

1 In the first group we include those methods which are concerned with the

collection of data. These methods will be used where the data already

available are sufficient to arrive at the required solution.

2 The second group consists of those statistical techniques which are used

to establish relationships between the data and the unknown.

3 The third group consists of those methods which are used to evaluate the

accuracy of the obtained results.


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COLLECTION OF DATA

There are several ways of collecting the appropriate data which differ considerably in

context of money, cost, time and other sources at the disposable of the researcher.

There are two types of data:

1 Primary data

2 Secondary data

Primary data

Primary data are those which are collected afresh and for the first time, and thus happen

to be original in character. In case of descriptive research, researcher performs survey

whether sample survey or census survey, thus we obtain primary data either through

1 Observation

2 Direct communication with respondent

3 Personal interview

Secondary data

Secondary data are those which have already been collected by someone else and have

already been passed through statistical process.

In this project report, both types of data have been used. Mainly, secondary data is used

such as annual reports of last many years of Bank.


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ANALYSIS OF BALANCE SHEET AND OTHER FINANCIAL DATA WITH

RATIO ANALYSIS AND ITS INTERPRETATION

EXAMPLE:- ANALYSIS OF BALANCE SHEET


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Turnover of IFFCO has increased over the years but it has increased 73.41% from last

year. i.e [(32933.3 12162.8) / 12162.8] * 100 =73%

Over the years Net Worth of IFFCO has increased, and during last year it has increased

by 7.32 %. This shows that the Shareholders equity has increased and organization is

consistent in increasing shareholders equiy.


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Although the above graph shows a lot of variation it is hard to comment on companys

standing on the basis of PAT. As the PAT is very much variable and keeps on changing

each year. But IFFCO has booked a PAT ofRs. 360.01 Crore. Which has increased by

39.76% from last year. This is a good increase even in the time of economic slowdown.


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Net working capital increased year on year. The factors contributing to the increase are:

Increase in Inventory from Rs. 1577.10 crore in 2008 to Rs.1731.36 crore in 2009

Increase in Other Current Assets and Loans and Advances by Rs. 3541.56 crore

in 2008 to Rs. 5464.77 crore in 2009.

The Company is shifting to an aggressive Financing policy as the short term borrowings

are increasing at a faster rate than the long term borrowings and more % of the changes

in WC requirements are being taken care by short term borrowings.

However, increase in Current Liabilities has offset the increase in Current Assets thereby

making marginal impact on the working capital.


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WC/TURNOVER data shows that Bank was not managing there working capital

properly but during past two years they have managed it nicely.


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A higher current ratio can suggest that a company is hoarding assets instead of using

them to grow the business not the worst thing in the world, but it's something that could

affect long-term returns.

From the table we can observe that the CL/CA ratio is very low throughout the period.

The firm has maintained a ratio between 20% and 40%. This implies that around 40% of

the current assets are financed by current liabilities while the rest (60%) are financed by

long term liabilities. Thus the company has less short term borrowing and looks at long

term funds for financing remaining current assets. This approach reduces risk of

refinancing but interest cost may increase reducing the profitability.


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Current asset are high mainly due to Loans and Advances this means libral credit policy.

Quick ratio shows companys liquidity condition is good and it is able to pay back.


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There are more short term borrowings as compared to industry average. The shorter the maturity schedule of a company greater is the risk that the firm

will be unable to meet principal and interest payments in short term period. As a

lender may not roll over or renew the loan, hence higher is the refinancing risk.

There is uncertainty associated with interest costs. Hence shorter the maturity

profile the greater is the fluctuation in interest rate. Hence at refinancing the

interest cost will increase hence firm may pay higher overall interest costs.

Since the cost of capital for long term is more than short term the company hasmore profitability.

Company is following aggressive financing policy over recent years.


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Increase in DE Ratio over the past years shows that the risk taking apatite of the

company has increased.A high ratio usually indicates that the business has a lot of risk

because it must meet principal and interest on its obligations. Potential creditors are

reluctant to give financing to a company with a high debt position so company can face

problems in future.

We can see decrease in Gross Profit Margin over the years this is because this is because

from 2002-03 to 2008-09 Cost of sales have increased marginally more then sales.

This indicate that Profit margin on sales in decreasing.


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Return on Equity is not much variable this indicate profit earned fom shareholders

holders investments is not much variable.


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OBSERVATION & SUMMERY

Banking/Company has good liquidity condition.

Libral credit policy has been addopted by the company.

Company is moving from conservative approach to aggrassive financing

approach.

Company is moving from aggrassive approach to conservative investment

approach.

Reduced profitability.

D/E Ratio is high it means company is depending on external financing more

then spontanious financing which increases risk.


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CONCLUSION AND RECOMMENDATIONS

Banking/Company should follow moderate investment policy so as to

increse profitability.

Alternatively cash flow cycle should be improved.

Cost of sales should be controled to improve profitability.

There are more short term borrowings as compared to industry average.

The shorter the maturity schedule of a company greater is the risk that the

firm will be unable to meet principal and interest payments in short term

period. As a lender may not roll over or renew the loan, hence higher is

the refinancing risk.

There is uncertainty associated with interest costs. Hence shorter the

maturity profile the greater is the fluctuation in interest rate. Hence at

refinancing the interest cost will increase hence firm may pay higher

overall interest costs.

Since the cost of capital for long term is more than short term the

company has more profitability.


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Questionnaire

Name: ________________________

Age: ______

Gender: M F

Marital Status: Married Single

Occupation: ___________________

Contact No: __________________

Annual Income (appx. in Rs.)

Upto 1.50 lacs 1.50 lacs-3 lacs

3 lacs-5 lacs above 5 lacs

Q1) Are you aware about what is financial planning?

YES NO

Q2) Mention the names of Life insurance companies you have heard of:

1) ________________ 4) ________________

2) ________________ 5) ________________

3) ________________ 6) ________________

Q3) How much do you save approximately of your annual income?

____________________________________________________

Q4) where do you invest/would like to invest your savings?

(Rank in order of preference, 1 being most preferable)

Banks Share Market

Insurance Bonds & Securities

Mutual Funds Real Estate/Property


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Q5) Have you taken any life insurance policy on your own life or on life of any of

your family member?

YES NO

Q6) which company(s) policy(s) you have?

LIC ICICI PRUDENTIAL

BIRLA SUNLIFE ING VYSYA

HDFC STANDARD LIFE INSURANCE SBI LIFE

HDFC STANDARD LIFE INSURANCESTD. LIFE

TATA AIG

MAX NEW YORK LIFE AVIVA

RELIANCE KOTAK MAHINDRA

MET LIFE OTHER ____________ (specify)

Q7) which type of plan did you buy?

Money Back Plan

Endowment Plan

Pension Plan

ULIP

Q8) What was your purpose/will be your likely purpose of taking insurance?

RANK THEM (1 being most ideal)

PROTECTION OF FAIMLY

TAX BENEFIT

INVESTMENT

RETIREMENT PLANNING


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Q9) Have you ever been approached for Life insurance by any of the following

(please ), also Rank according to your preference from whom you are most

likely to buy insurance? ( Here) (Rank)

1) Known/Current Advisor

2) Advisors referred by friends/family

3) Telesales and subsequent visit by unknown Advisor

4) Schemes offered by your bank (Banc assurance)

5) Group Insurance Policies offered by your employer

Q10) Do you feel opening up of the sector has created more insurance

awareness among the public?

YES NO

Q11) How many dependents do you have?

6

Q12) Do you really think insurance cover in todays scenario is not

Essential?

_____________________________________________________

_____________________________________________________

THANKS YOU FOR YOUR CONTRIBUTION


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BIBLIOGRAPHY

Annual Reports of Banking. Book: Financial Management By I.M.Pandey

http://www.investopedia.com

http://www.iffco.nic.in
http://www.investopedia.com/http://www.iffco.nic.in/http://www.investopedia.com/http://www.iffco.nic.in/

Orignal Ing Vysya Research Report

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