Project ii

Chapter – I

INTRODUCTION

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1.1 BACKGROUND OF THE STUDY

I am grateful to my college for giving me an opportunity to conduct a research for my final

project. This will help me to enable to have a practical exposure and help me in my career.

This project is on “Ratio Analysis”. The management of finance is important in

any type of organization irrespective of the industry to which the organization belongs. The

Finance Management is very important because it deals with the cash for run day to day

business activities. So various aspects are required to be taken into consideration while

calculating Ratio analysis.

The reason for selecting this topic as project because there is lot of scope in this

subject to learn various calculations. Preparation of statement, from those calculations one

can find out the company is having problem in its day to day functioning & what is the

current position of the company.

The organizational structure being flexible the communication between the inter

department is very effective. The working environment within the company is very good. The

company has good infrastructure which is further managed by a good management. The

project given to me is Ratio Analysis of the company using financial statements. The main

intention was to group or regroup the various figures and/or information appearing on the

financial statements (either Profitability Statement or Balance Sheet or Both) to draw the

fruitful conclusion there from.

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1.2 BACKGROUND OF THE TOPIC

Ratio analysis has emerged as the principal technique of the Analysis of financial

Statement (AFS).

A ratio is a relationship expressed in mathematical terms between two individuals or

groups of figure connected with each other in some logical manner.

A financial ratio helps to summarize a large mass of financial data into a concise form

and to make meaningful interpretations and conclusion about the performance and

positions of a firm.

Ratio analysis is an important and powerful tool in the hands of financial analyst.

It provides standardize measure of firm’s financial position, profitability and

riskiness. By calculating different group of ratio we can analyze the performance of

the firm from different point of view.

Ratio analysis can help in understanding the liquidity and short term solvency of the

firm, as well as overall capital structure and leverage position of the company in terms

of assessing perceived business risk.

Different debt ratio can help a debt investor or financial institution to evaluate the

degree of financial risk.

The operational efficiency of the firm in utilizing its assets to generate the profit can

be accessed on the basis of different turn over ratios.

The profitability of the firm can be analyzed with the help of profitability ratios.

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The long term profitability of the firm can be judged on the basis of the activity ratios

and the profitability ratios.

Ratio analysis can be used to answer the particular question namely:

Are the owners receiving an adequate return on their investment?

How liquid is the firm?

How is the firm financing its assets?

For prospective investor ratio analysis helps in securities analysis.

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1.3 COMPANY PROFILE

Introduction

M/s Silvassa Packaging is a partnership firm promoted by Shri Ajay K Desai, Smt Kalpana V

Desai and M/s Nagar Haveli real estate Pvt. Ltd. In the year 1998, the partner have

undertaken implementation of project of manufacturing of Corrugated rolls, Corrugated

Boxes, Corrugated Sheets and Accessories with an installed capacity of 2000 MT PA.

Afterwards on 24th November 2004, entire partners firm was sold to new partners Shri

Birendra Amarsingh Yadav and Shri Netrapal yadav. New partners took over firm in

cash consideration of Rs 40 lakh which was paid in 1 year.

All new partners are assisted by a team of experienced persons from the field of production,

accounts and marketing. The quality of management is considered balanced for execution &

running the project successfully.

Management & experience

Shri birendra amar singh yadav is partner in the firm. He is the key person and he is looking

after the whole management. He has got experience of 6 years in these industries (i.e.

manufacturing of corrugated rolls, corrugated boxes. He is B.A with good knowledge. He

looks at the financial matters of the company and also keeps watch on the working capital

requirement

Shri Netrapal Yadav. He is also the partner of the firm he has good experience of market. So

he basically looks to the marketing of the product. He is also the production incharge.

The firm has also appointed qualified and experienced staff at executive level to look after

the technical as well as managerial, financial, administration and marketing aspect of the

firm.

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Technical Viability

Product & use

Firm is manufacturing 2ply corrugated rolls, corrugated boxes, corrugated sheets &

accessories. The requirement of corrugated cartoons, paper tube etc, is increasing day by day.

Corrugated packaging has proved that it is better and cheaper than wooden and plastic.

Presently from household to industrial consumer product are packed. In corrugated packaging

material.

Location

The factory is located at plot no 38 Dan Udyog, sahakari sangh, Industrial Estate piparia,

Silvassa D&NH a well developed industrial area, having Textiles, plastic, bulk drug,

engineering units and big corporate etc, which is about 150 km from Mumbai and 120 km

from Surat. In deciding the above location, due care has been taken for availability of power,

water, labor, raw material and transportation. The location is also suitable from the viewpoint

of environmental aspect. So many industries localized in silvassa and surrounding areas.

Manufacturing process

Raw material is received in our factory premisis like kraft paper, duplex, etc. Firstly we have

to put raw material on the standing machine, and then start for corrugated in the corrugation

machine, after corrugation cut the boxes as per requirement size by the “cutting machine”

another activity is of pasting by pasting machine as per ply.

After pasting the material goes to the process of scoring where the size of the box is set.

The last process is pinning. After pinning it is ready to dispatch

Raw Materials

Raw material is used in manufacturing of corrugated rolls, corrugated boxes corrugated

sheets and accessories are Kraft paper /board, stitching wire, gum (corrugation and pasting),

binding cloth, duplex board oil, colour dyes other chemicals to mix in gum for improving

gum quality and any other material to improve finished goods.

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Employment

The unit generates employment of 30 persons which include 5 operators, 1 supervisor, 12

office staff and rest workers. The unit works in 3 shifts of 8 hr each. There is no requirement

of supervisor in day shift as such partners themselves manage the production 1 supervisor is

required to manage night shift. The semi-skilled / unskilled labour are sourced from the

surrounding areas, where adequate labour force is available owining to extensive

industrialization

Statutory/ other licenses / permission / approval requirement

There is no license required for setting up the unit. The unit has obtained following

registration

Provisional registration as SSI Unit with DIC, Silvassa

Sales Tax number from Silvassa Dept.

Pan No.

NOC from pollution Dept.

Economic Viability

Market

The corrugated industries in small scale sector in the country now a day’s presents a broad

and important spectrum compromising a large number of units producing varied and

extensive range of packaging material from simple to sophisticated nature. The requirement

of corrugated cartoons, paper tube, etc is ever increasing. Corrugated packaging has proved

better and cheaper than wooden and plastic . presently from household, children toys to

industrial goods are packed.

The partners are in the field of manufacturing of corrugated rolls, corrugated box, corrugated

sheets industry. And their existing customers are also demanding for the proposed products,

the confidence of the promoters for marketing the product is very high. The promoters are not

envisaging any difficulty in marketing the product.

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1.4 NEED OF THE STUDY

Financial performance is necessary to identify the financial strength and weakness of

the firm. Financial analysis with the help of ratio analysis is the starting point for

making plans before using any sophisticated forecasting and planning procedures. In

financial analysis ratio is used as a benchmark for evaluating the financial position

and performance of the firm.

To decide about the future prospectus of the firm.

To understand there credit worthiness of the company as how they are making

payment to their creditors.

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1.5 SCOPE OF THE STUDY

Financial analysis includes ratio analysis, preparation of comparative statements, trend

analysis, and preparation of common size statements. The scope of my study is limited to

ratio analysis to due limitation in time.

I have tried my best to interpret all the ratios and also presented them in graphs for better

understanding. As mentioned earlier, there are four major types of ratio. I have analyzed all

the major ratios which are relevant to analyze company’s financial strength.

To give more meaning to the ratios, it is always essential to interpret them and find the reason

for increase or decrease in particular ratio. Furthermore, one can do trend analysis and

prepare common size statements to analyze financial statements in more meaningful way.

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1.6 OBJECTIVE OF THE STUDY

To analyze the various ratio of SILVASSA PACKAGING to determine the overall

financial position of the company.

The primary objective of financial analysis is to forecast and/or determine the actual

financial status and performance. This is to enable the firm to combine that

information with all other pertinent data (technical, economic, social, etc.) to assess

the feasibility, viability, and potential economic benefits, of a proposed or continuing

lending operation.

To examine overall financial health, effectiveness and efficiency of the company.

To determine long term and short term liquidity of the firm.

To estimate the earning capacity of the firm.

To allow comparisons to be made which assist in predicting the future.

To investigate the reasons for the changes.

To construct a simple explanation of a complicated financial statement by its

expression in one figure.

To provide indicators of a firm’s past performance in terms of its operational activity

and profitability; and near-present financial conditions.

To provide information about the financial position, performance and changes in

financial position of an enterprise that is useful to a wide range of users in making

economic decisions. Financial statements are prepared for this purpose to meet the

common needs of most users.

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Chapter- IIREARCH METHODOLOGY

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2.1 SOURCES OF DATA COLLECTION

The researcher can gather secondary data, primary data or both. Primary data are data

gathered for a specific purpose or for a specific research project.

What is primary data?

Primary data are those data which are collected afresh and for the first time through which it

gives more light on the problem or research. The source for the Primary data of Silvassa

Packaging was collected during the formal/informal discussion with the Internal Guide.

Queries arising in due course of the project brought into the notice of concerned authority and

necessary explanation and solutions are adapted.

What is secondary data?

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

have already been pass through statistical process. I have mainly used this already available

data from various sources such as CMIE data etc.

For the completion of the report the source for the secondary data were, the financial

statement of various years. The only way to complete the project was mainly the facts and

figure provided by Silvassa Packaging.

Secondary data are in the form of finished goods.

It includes:

a. Financial statements

b. Journals

c. Books

The source of data which is required for the study is secondary data and appropriate source is

taken under consideration.

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2.2 LIMITATION

The following are the main limitations of accounting ratios:

1. Limited Comparability: Different firms apply different accounting policies.

Therefore the ratio of one firm cannot always be compared with the ratio of other

firm. Some firms may value the closing stock on LIFO basis while some other firms

may value on FIFO basis. Similarly there may be difference in providing depreciation

of fixed assets or certain of provision for doubtful debts etc.

2. False Results: Accounting ratios are based on data drawn from accounting records. In

case that data is correct, then only the ratios will be correct. For example, valuation of

stock is based on very high price, the profits of the concern will be inflated and it will

indicate a wrong financial position. The data therefore must be absolutely correct.

3. Effect of Price Level Changes: Price level changes often make the comparison of

figures difficult over a period of time. Changes in price affects the cost of production,

sales and also the value of assets. Therefore, it is necessary to make proper adjustment

for price-level changes before any comparison.

4. Qualitative factors are ignored: Ratio analysis is a technique of quantitative analysis

and thus, ignores qualitative factors, which may be important in decision making. For

example, average collection period may be equal to standard credit period, but some

debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis.

5. Effect of window-dressing: In order to cover up their bad financial position some

companies resort to window dressing. They may record the accounting data according

to the convenience to show the financial position of the company in a better way.

6. Costly Technique: Ratio analysis is a costly technique and can be used by big

business houses. Small business units are not able to afford it.

7. Misleading Results: In the absence of absolute data, the result may be misleading.

For example, the gross profit of two firms is 25%. Whereas the profit earned by one is

just Rs. 5,000 and sales are Rs. 20,000 and profit earned by the other one is Rs.

10,00,000 and sales are Rs. 40,00,000. Even the profitability of the two firms is same

but the magnitude of their business is quite different.

8. Absence of standard university accepted terminology: There are no standard ratios,

which are universally accepted for comparison purposes. As such, the significance of

ratio analysis technique is reduced.

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FEW MORE LIMITATION OF RATIO ANALYSIS :

Financial statements suffer from a number of limitations. When ratios are constructed

from those financial statements, ratios suffer from the inherent weaknesses of the

accounting system itself.

By using ratios, forecast of a future of a business may not prove correct. This is

because, ratios are all based on past happenings and not future probabilities. They are

subject to change in future.

Ratios are not free from individual bias, because accounting is man-made. Two

identical business units with the same level of operations and investments may show

highly in comparable financial results.

There is lack of proper standards for ideal ratios. There are many rules of thumb,

since it is not possible to establish well accepted absolute standards.

While constructing ratios, arithmetic window dressing is possible by concealing vital

facts and presenting the financial statements in such a fashion as to show the business

in a better position.

Computation of ratio in isolation is of little value. It should be compared with base

year ratio or standard ratio, the computation of which is very difficult because of

difficulties involved in base year and fixation of standards.

By using ratios, forecast of a future of a business may not prove correct. This is

because, ratios are all based on past happenings and not future probabilities. They are

subject to change in future.

Accounting ratios are simply clues. They do not indicate the cause of difference.

Therefore they are not considered as basis for immediate conclusion.

Ratios are calculated from past financial statements and they do not indicate future trend. The

economic conditions are also ignored.

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Chapter –IIIDATA PROCESSING AND ANALYSIS

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What is Ratio Analysis?

Meaning of Ratio: - A ratio is simple arithmetical expression of the relationship of one

number to another. It may be defined as the indicated quotient of two mathematical

expressions.

According to Accountant’s Handbook by Wixon, Kell and Bedford, “a ratio is an expression

of the quantitative relationship between two numbers”.

Ratio Analysis: - Ratio analysis is the process of determining and presenting the relationship

of items and group of items in the statements. According to Batty J. Management Accounting

“Ratio can assist management in its basic functions of forecasting, planning coordination,

control and communication”.

Ratio analysis is a systematic use of ratio to interpret/assess the performance and status of the

firm. A ratio is a relationship expressed in mathematical terms between two individual nd

group of figures connected with each other in some logical manner.

It is helpful to know about the liquidity, solvency, capital structure and profitability of an

organization. It is helpful tool to aid in applying judgment, otherwise complex situations.

Ratio analysis can represent following three methods.

Ratio may be expressed in the following three ways:

1. Pure Ratio or Simple Ratio: - It is expressed by the simple division of one number by

another. For example, if the current assets of a business are Rs. 200000 and its current

liabilities are Rs. 100000, the ratio of ‘Current assets to current liabilities’ will be 2:1.

2. ‘Rate’ or ‘so Many Times: - In this type, it is calculated how many times a figure is,

in comparison to another figure. For example , if a firm’s credit sales during the year

are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors

Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in

comparison to debtors.

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3. Percentage: - In this type, the relation between two figures is expressed in hundredth.

For example, if a firm’s capital is Rs.1000000 and its profit is Rs.200000 the ratio of

profit capital, in term of percentage, is 200000/1000000*100 = 20%

The ratio can be compared with three different ways.

Combined analysis

Time-series analysis

Cross section analysis

Combined analysis:

If the cross section analysis and time series analysis, both are combined together to study the

behavior and pattern of ratio, then meaningful and comprehensive evaluation of the

performance of the firm can definitely be made.

Time-series analysis:

The analysis is called time series analysis when a performance of a firm is evaluated over a

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

firm over last few years. The information generated by time series analysis help firm to plan

for future operations.

Cross section analysis:

One way of comparing the ratio is to compare them with the ratio of some other selected firm

in the same industry at the same point of time. So it involves the comparison of two or more

firm’s financial ratio at the same point of time.

The cross section analysis helps analyst to find out as to how a particular firm performs in

relation to its competitor. It is easy to be undertaken as most of the data required for this may

be available in the financial statement of the firm.

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Ratios can be classified into six broad groups.

i. Liquidity ratios.

ii. Capital structure/leverage ratio.

iii. Profitability ratios.

iv. Activity/Efficiency ratios.

v. Integrated analysis of ratios

vi. Growth ratios

Importance of ratio analysis:

The importance of ratio analysis lies in present fact on comparative basis assessing a

performance of the firm in related to the following aspects.

Operation efficiency:

It throws the light on degree of efficiency of management and utilization of its assets. The

various activity ratios measure this kind of operational efficiency. In fact solvency of a firm

depend upon the sales revenue generated by the use of assets

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 term maturing debt

usually within a year as well as to repay the principal. The ability is reflected in the liquidity

ratio of the firm. The liquidity ratios are particularly useful in credit analysis by banks and

other suppliers of short term loans.

Overall profitability:

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

the management is concerned about the overall profitability of the enterprise. That is they are

concerned about the ability of the firm to meet its short term as well as long term obligations

to its creditors

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Long term solvency:

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

long term solvency is measured by the profitability/leverage ratios which focus on earning

power and operating efficiency. Leverage ratio indicates whether the firm has reasonable

proportion of various sources of finance or it is heavily loaded with debt. In this case

solvency is exposed to serious.

Advantage of Ratio Analysis:

Helpful in analysis of Financial Statements.

Helpful in comparative Study.

Helpful in locating the weak spots of the business.

Helpful in Forecasting.

Estimate about the trend of the business.

Fixation of ideal Standards.

Effective Control.

Study of Financial Soundness.

Limitation of Ratio Analysis:

Ratios are meaningful only in conjunction with the firm’s past performance or other

firm or industry average.

Difficulty in comparison with a view of difference depreciation methods( straight line

v/s written down basis)

Ratio fails to account for the changes in accounting policies adopted by the firm. Such

changes may be relating to depreciation policies, inventory valuation policy, treatment

of foreign exchange transactions, evaluation of fixed assets etc.

Ratio generally, does the work of diagnosing a problem and fails to provide the

solution to the problem.

By itself, a ratio provides only limited information.

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Ratio are subjected to misinterpretation for example, it might seems that a higher

current ratio is always better and therefore a firm striving for this may ultimately

result in insufficient use of resources of the firm.

Since financial statement is based on historical cost concept and suffers from the

limitation of not covering the inflation; the ratio also suffers from the same because

most of the ratios are calculated on the basis of the information contained in financial

statement.

Comparison not possible if different firms adopt different accounting policies.

Ratio analysis becomes less effective due to price level changes.

Ratio may be misleading in the absence of absolute data.

Limited use of a single data.

Lack of proper standards.

False accounting data gives false ratio.

Ratios alone are not adequate for proper conclusions.

Effect of personal ability and bias of the analyst.

CHART 1

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CLASSIFICATION OF RATIO

I. LIQUIDITY RATIO:

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CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES

TABLE 3.01

YEAR2008 2009 2010

CURRENT RATIO 1.40 1.25 1.15

GRAPH 3.01

2008 2009 20100

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Current ratio

Current ratio

Current Ratio is one of the important accounting ratios for finding out the ability of the business fleeces to meet the short-term financial commitments. The ratio establishes the relationship between the current assets and current liabilities.

The ideal norm is 2:1 which means that every one rupee of current liability is appropriately covered by two rupee of current assets.

According to me, the above ratio of this company is declining over the years so incase of need or emergency the company would not be able to meet its current liabilities efficiently.

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CASH RATIO = CASH EQUIVALENT + CASH CURRENT LIABILITIES

TABLE 3.02

YEAR2008 2009 2010

CASH RATIO 0.03 0.04 0.02

GRAPH 3.02

2008 2009 20100

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

0.045

CASH RATIO

CASH RATIO

The ratio of a company's total cash and cash equivalents to its current liabilities, the cash ratio

is most commonly used as a measure of company liquidity. It can therefore determine if, and

how quickly, the company can repay its short-term debt. A strong cash ratio is useful to

creditors when deciding how much debt, if any, they would be willing to extend to the asking

party.

From the above graph we can see that the ratio has increased in 2009 as compared to 2008 it

means that the company capacity to pay liabilities has increased but it significantly decreased

in the year 2010 describing that the company ability sudden decrease. It might be because the

cash might be getting blocked in some other assets.

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II. PROFITABILITY RATIO:

GROSS PROFIT RATIO = GROSS PROFIT *100 NET SALES

TABLE 3.03

YEAR2008 2009 2010

GROSS PROFIT RATIO 23.35 15.98 18.85

GRAPH 3.03

2008 2009 20100

5

10

15

20

25

GROSS PROFIT RATIO

GROSS PROFIT RATIO

This is the ratio between gross profit and net sales. The gross profit is the difference between

Net sales and Cost of goods sold (i.e., the direct cost of sales). Net sales mean total sales less

returns. This ratio is expressed as a percentage of sales. The more the gross profit earned the

better. The gross profit of the company must cover its operating and other expenses. It

measures the efficiency of production, purchase and pricing as well.

From the above table and diagram we can see that the profit of the company decrease in the

year 2009 as compared to 2008 it means that the company profit decrease in 2009 may be

because of recession and also due to increase in the direct expense of the company but by the

year 2010 the company profit started showing steady growth.

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NET PROFIT RATIO = NET PROFIT * 100 NET SALES

TABLE 3.04

YEAR2008 2009 2010

NET PROFIT RATIO

14.30 8.60 10.76

GRAPH 3.04

2008 2009 20100

2

4

6

8

10

12

14

16

NET PROFIT RATIO

NET PROFIT RATIO

This is the ratio between net profit and net sales. Net profit is excess of Total sales of a give

accounting period over total expense of that period. A good net profit margin indicates

management’s ability to operate with sufficient success not only to cove cost of production,

expenses including depreciation, but also to leave a margin of reasonable compensation for

owners- who have provided funds at a risk.

The Net Profit ratio of the company shows the similar effect as that of the Gross Profit Ratio

as it directly affect the Net Profit of the firm.

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RETURN ON TOTAL ASSETS RATIO = NET INCOME TOTAL ASSETS

TABLE 3.05

YEAR2008 2009 2010

RETURN ON ASSETS RATIO 0.40 0.33 0.39

GRAPH 3.05

2008 2009 20100

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

RETURN ON ASSETS RATIO

RETURN ON ASSETS RATIO

It is the relationship between Earnings before Interest and Tax (EBIT) and Capital Employed.

The long-term fund providers are very concerned about the rate of return on capital

employed. It measures how well the firm is using all of its assets- both those provided by its

owner and those provided by its lenders. Capital employed includes – shareholders’ funds

and long-term loan. The higher ratio shows the firm’s ability to use available resources to

generate income.

From the above table and graph we can see that the firm ability to use its assets has increase

effectively in the year 2010 as compared to that of 2009 means the company has use it assets

wisely and using it assets to its maximum to gets the maximum returns.

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RETURN ON NET ASSETS (RONA) = NET PROFIT AFTER TAX AVERAGE TOTAL ASSETS

TABLE 3.06

YEAR2008 2009 2010

RONA 1.28 1.10 0.85

GRAPH 3.06

2008 2009 20100

0.2

0.4

0.6

0.8

1

1.2

1.4

RONA

RONA

RONA or Return on Net Assets equals the Net Operating after Tax divided by the sum of

cash, the working capital requirement and the fixed assets. A strong virtue of using RONA

compared to traditional methods for measuring company success is that also considers the

assets a company uses to achieve its output. The higher the return, the better the profit

performance for the company

RONA of the firm is getting on decreasing means that the firm is unable to utilize its net

assets to its maximum ability. The firm has uses its Net assets most effectively in the year

2008 but was unable to keep its good work and hence RONA of the firm went on decreasing.

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RETURN ON CAPITAL EMPLOYED = PROFIT AFTERTAX +INTEREST DEBT + EQUITY

TABLE 3.07

YEAR2008 2009 2010

RETURN ON CAPITAL EMPLOYED 0.94 0.54 0.74

GRAPH 3.07

2008 2009 20100

0.10.20.30.40.50.60.70.80.9

1

RETURN ON CAPITAL EMPLOYED

RETURN ON CAPITAL EMPLOYED

A ratio that indicates the efficiency and profitability of a company's capital investments. A

variation of this ratio is return on average capital employed (ROACE), which takes the

average of opening and closing capital employed for the time period.

From the above chart and diagram, it is witnessed that the return generated from the total

capital employee decreases in 2009 from 2008. This is mainly because that capital is utilized

for acquiring more assets. However, the company was able to increase this ratio to some

extent in the year 2010.

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COST OF GOOD SOLD = SALES - GROSS PROFIT

TABLE 3.08

YEAR2008 2009 2010

COST OF GOOD SOLDS RATIO 37789148 40965739 43119672

GRAPH 3.08 COST OF GOODS SOLD

2008 2009 201035000000

36000000

37000000

38000000

39000000

40000000

41000000

42000000

43000000

44000000

Series1Series2

COGS are the costs that go into creating the products that a company sells; therefore, the only

costs included in the measure are those that are directly tied to the production of the products.

For example, the COGS for an automaker would include the material costs for the parts that

go into making the car along with the labor costs used to put the car together. The cost of

sending the cars to dealerships and the cost of the labor used to sell the car would be

excluded. The exact costs included in the COGS calculation will differ from one type of

business to another.

From the above chart, we have seen that the COGS of the company are increasing over the

years.

Thus indicates the inflationary trend in the company expenses.

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COST OF GOOD SOLDS RATIO = SALES - GROSS PROFIT SALES

TABLE 3.09

YEAR2008 2009 2010

COST OF GOOD SOLDS RATIO 0.78 0.82 0.81

GRAPH 3.09

2008 2009 20100.75

0.76

0.77

0.78

0.79

0.8

0.81

0.82

0.83

COST OF GOOD SOLDS RATIO

COST OF GOOD SOLDS RATIO

This ratio indicates the relationship between total cost of goods sold and the effective /net

sales of the firm. It directly reflects the profitability of the firm as lower the COGS and higher

the effective sales lead to increasing the profit and vice-versa.

From the above chart and table, it has been witnessed that the ratio of COGS to sales has

increased in the year 2009 from the year 2008. This means that the proportion of COGS to

sales has increased dramatically. Thus affecting the profits of the company which we have

seen that the profit of the company has also decreased in these two years. The increase in the

ratio is an important factor leading to the decline in the profits. However, the company was

able to lessen this ratio in the year 2010 to some extent, indicating the management is

throwing lights on it and taking effective steps towards it.

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III. LEVERAGE RATIO

CURRENT ASSETS TO NET WORTH RATIO = CURRENT ASSETS NET WORTH

TABLE 3.10

YEAR2008 2009 2010

CURRENT ASSETS TO NET WORTH RATIO 1.14 1.10 1.00

GRAPH 3.10

2008 2009 20100.9

0.95

1

1.05

1.1

1.15

1.2

CURRENT ASSETS TO NET WORTH RATIO

CURRENT AS-SETS TO NET WORTH RATIO

This ratio estimates the relationships between the current assets and net worth of the firm.

Thus it’s directly checks the leverage of the firm.

From the above chart, it has been seen that the proportion of current assets to the total capital

of the company is increasing over the years. This is might be either because of increase in the

current assets or decrease in the total capital of the company. In our case, it is seen that that

the company is utilizing its capital in building up the fixed assets value. Thus, it is signifying

the better utilization of funds.

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PROPRIETORY RATIO = CAPITAL EMPLOYED/OWNERS EQUITY TOTAL ASSETS

TABLE 3.11

YEAR2008 2009 2010

PROPRIETORY RATIO 0.89 0.61 0.53

GRAPH 3.11

2008 2009 20100

0.10.20.30.40.50.60.70.80.9

1PROPRIETORY RATIO

PROPRIETORY RATIO

The total assets belonging to a concern are financed by a combination of resources provided

by shareholders and creditors. The proportion of business assets financed by the shareholders

is measured by proprietary ratio. This ratio indicates more use of shareholder’s fund in

acquiring total assets of the business. It can be used to ascertain the solvency and financial

stability of the firm in the long run. If it is too high (more than .9), it can be concluded that

the firm is not willing to use more debt capital.

From the above table and chart, it has witnessed that the capital of the company to its net

assets is decreasing over the years. In our company, we have seen that the company is making

use of revenues to acquire more fixed assets. Thus, the company is converting its capital into

fixed assets.

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FIXED ASSTES TO NET WORTH RATIO = FIXED ASSTETS NET WORTH

TABLE 3.12

YEAR2008 2009 2010

FIXED ASSETS TO NET WORTH RATIO

0.30 0.49 0.86

GRAPH 3.12

2008 2009 20100

0.10.20.30.40.50.60.70.80.9

1

FIXED ASSETS TO NET WORTH RATIO

FIXED ASSETS TO NET WORTH RA-TIO

A measure of the extent of an enterprise's investment in non-liquid and often over valued

fixed assets (Fixed Assets / Liabilities + Equity). A ratio of .75 or higher is usually

undesirable as it indicates possible over-investment and causes a large annual depreciation

charge that will be deducted from the income statement.

From the above table and chart, it is witnessed that the proportion of net fixed assets of the

company to its total capital is increasing over the years, thus signifying that that company is

making use of profits/revenues to build up its balance sheet value by increasing the fixed

assets value.

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INTEREST COVERAGE RATIO = EARNING BEFORE INTEREST AND TAX INTEREST

TABLE 3.13

YEAR2008 2009 2010

INTEREST COVERAGE RATIO 46.89 44.84 43.97

GRAPH 3.13

2008 2009 201042.5

4343.5

4444.5

4545.5

4646.5

4747.5

INTEREST COVERAGE RATIO

INTEREST COVERAGE RATIO

A ratio used to determine how easily a company can pay interest on outstanding debt. The

interest coverage ratio is calculated by dividing a company's earnings before interest and

taxes (EBIT) of one period by the company's interest expenses of the same period. The lower

the ratio, the more the company is burdened by debt expense. When a company's interest

coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An

interest coverage ratio below 1 indicates the company is not generating sufficient revenues to

satisfy interest expenses.

From the above chart and table, it is witnessed that the proportion of interest paid by the

company over its revenues/profits in declining. That directly signifies that either the profits of

the firm is decreasing or the interest payment in increasing. In over company, we have seen

that the profit of the company has declined over the years.

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IV. ACTIVITY RATIO

STOCK TURNOVER RATIO = COST OF GOOD SOLD AVERAGE STOCK

TABLE 3.15

YEAR2008 2009 2010

STOCK TURNOVER RATIO 10.35 5.04 10.11

GRAPH 3.15

2008 2009 20100

2

4

6

8

10

12

STOCK TURNOVER RATIO

STOCK TURNOVER RATIO

This ratio measures how quickly inventory is sold, i.e., the number of times a business’s

stock turnover during a year. This ratio is likely to differ from one business to another. This

indicates whether business is fast or slow moving. If there is sign decrease in stock turnover it

is considered as a bad signal. A sharp increase in this ratio indicates stock accumulation,

which is associated with risk of obsolesce.

From the above chart and table, it has been seen that the ratio was higher in the year 2008

which declined in the year 2009 indicating the poor performance of the firm. It signifies that

the stock remains in the go down for the longer period of time. That means, the sales of the

company were taking more time to take place. However, the ratio came back on the track in

the year 2010.

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DEBTORS TURNOVER RATIO = CREDIT SALES DEBTORS

TABLE 3.16

YEAR2008 2009 2010

DEBTORS TURNOVER RATIO 35.50 40.44 32.42

GRAPH 3.16

2008 2009 20100

5

10

15

20

25

30

35

40

45

DEBTORS TURNOVER RATIO

DEBTORS TURNOVER RATIO

It is the ratio between the credit sales and average (Avg) debtors plus average bills receivable.

This ratio indicates the numbers of times per year that the average balances of debtors are

collected. A high ratio may indicate an improvement in business conditions, a tightening of

credit policy, or improved collection procedure. A low ratio may be an indication of long

credit period, or slow realization from debtors.

From the above table and chart, in the year 2009 this ratio increased as compared to that in

the year 2008 indicating that the collection from the debtors was taking more time or the

period of collection was increasing. This signifies that the money was getting locked for more

period of time with the debtors.

However, the ratio came down drastically in the year 2010, indicating the more efficient

collection cycle of the firm.

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CREDITORS TURNOVER RATIO = AVERAGE PAYABLE (IN DAYS) CREDIT PER SALE

TABLE 3.17

YEAR2008 2009 2010

CREDITORS TURNOVER RATIO

51.23 52.24 53.44

GRAPH 3.17

2008 2009 201050

50.5

51

51.5

52

52.5

53

53.5

54



This is the ratio between the credit purchase and average (Avg.) creditors plus average bills

payable. This ratio indicates the number of times per year that the average balance of

creditors is paid. A high creditor turnover ratio may indicate strict credit terms granted by

suppliers. A low ratio may indicate liberal credit terms allowed by suppliers.

In the above chart and diagram, we can see that the Creditors turnover ratio is increasing over

the years. Thus, the firm capability of paying off its debt is increasing in terms of number of

days, i.e., the firm is utilizing its creditor’s funds for a large period of time.

This signifies that either the company is fetching more returns by investing this funds in some

other business that can compensate the interest which has to be paid to creditors or is having

a poor recovery system of its debts from debtors that directly affects is paying capability to its

creditors.

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FIXED ASSTES TURNOVER RATIO = SALES FIXED ASSETS

TABLE 3.18

YEAR2008 2009 2010

FIXED ASSTES TURNOVER RATIO

6.26 10.03 7.95

GRAPH 3.18

2008 2009 20100

2

4

6

8

10

12



The ratio is useful to determine the amount of sales that are generated from the net fixed

assets. This ratio illustrates how much the sales are generated by the total fixed assets in the

company.

Higher the fixed assets turnover ratio better is the position of the company in utilizing its

fixed assets and vice versa. This ratio is generally used by the companies in a growth stage to

determine whether the company is able to utilize its fixed assets completely or not.

From the above diagram and table, it is witnessed that the firm is generating more returns

from its fixed assets over the years. This signifies that the firm is making a effective and

efficient utilization of its fixed assets to generate more profits.

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TOTAL ASSETS TURNOVER RATIO = SALES TOTAL ASSETS

TABLE 3.19

YEAR2008 2009 2010

TOTAL ASSTES TURNOVER RATIO 4.56 2.99 3.67

GRAPH 3.19

2008 2009 20100

0.51

1.52

2.53

3.54

4.55

TOTAL ASSTES TURNOVER RATIO

TOTAL ASSTES TURNOVER RATIO

This ratio is useful to determine the amount of sales that are generated from each rupee of

assets. As noted above, companies with low profit margins tend to have high asset turnover,

those with high profit margins have low asset turnover.

Form the above table and chart, it is witnessed the firm was better utilizing its assets to

generate more sales in the year 2008. This ratio decreased in the year 2009 that signifies that

the firm’s capability of generating sales from its total assets decreased. As we have seen in

the previous ratio of sales over fixed asset being increasing over the years; the decline in the

ratio is due to increase in its current assets. The increase in current assets might have resulted

due to increase in debtors. However, the ratio started increasing again in the year 2010

indicating the increase in the efficiency.

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Chapter – IV

Findings

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FINDINGS:

1. Net profit ratio of any should be always greater than the risk free return because if the

net profit margin ration is less than the risk free return then it’s of no loose to continue

with the business as risk involved is much more.

2. The asset turnover should be always greater as the asset utilized is in a proper manner,

which will help the companies to increase more profit.

3. Following ratios are less than the standard norms:

Current assets ratio

Interest coverage ratio

4. Company gets the amount from debtors within 32 days which is good for the

company in the year 2009 –2010.

5. Financial year 2009 was not good for the company as compared to 2010 due to

Recession.

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Chapter - V

Conclusions

Conclusions:

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I have examined the balance sheet of SILVASSA PACKAGING as at 31st march 2009 to 31st

march 2010 and also Profit and Loss account for the same year. Here in this organization I

have study different accounting ratio.

The in-depth analysis of key financial ratios is this project helps in measuring

the financial strength, liquidity condition and operating efficiency of Silvassa Packaging. It

also provides valuable interpretation separately for each ratio that helps the organization in

implementing the findings that would help the organization to increase its efficiency.

Ratio is only a post mortem analysis of what has happened between financial

years. For one thing, the position of the company in the interim period not revealed by ratio

analysis, moreover they give no clue about the future. Ratio analysis in view of its several

limitations should be considered only as a tool analysis rather than as an end in itself.

Creditor’s turnover ratio is increasing over the years. Thus, the firm capability of

paying off its debt is increasing in terms of number of days, i.e. the firm is utilizing its

creditor’s funds for a large period of time.

The company is making use of revenues to acquire more fixed assets. Thus, the

company is converting its capital into fixed assets.

COGS of the company are increasing over the years. Thus indicates the inflationary

trend in the company expenses.

The firm has uses its Net assets most effectively in the year 2008 but was unable to

keep its good work and hence RONA of the firm went on decreasing.

The Net Profit ratio of the company has increased in the year 2009 as compared to

that of 2010, means that the company business is doing good and company should

continuously focus on it.

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Chapter - VI

Recommendations

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Recommendations:

1. Fixed assets to Net worth ratio is low as compared to standard norms of the same

ratio. So company should have to invest in fixed assets to increase this ratio.

2. Return on capital employed ratio is also lower than the standard norm. So to increase

this ratio company has to increase Profit after Tax.

3. Since the requirement of corrugated cartoons, paper tube etc. is increasing day by day

the company should try and install the automated version of the machine. In that case

the company unit production cost will also come down as labor cost would come

down and company could earn more profit.

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BIBILOGRAPHY

1. MANGEMENT ACCOUNTING

Published by: Nirali Prakashan

Author: Dr. Prakash S. Pardeshi

2. FINANCIAL MANAGEMENT

Professional Education (Course: II)

Board of Studies

The Institute of Chartered Accountancy of India.

3. PRINCIPAL OF MANAGEMENT ACCOUNTING

Published by: Sahitya Bawan

Author: Dr. Manmohan

Dr. S.N. Goyal

Website:

www.investopedia.com

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http://www.investopedia.com/

Project ii

Education

Transcript of Project ii