Ratio Analysis - Ashokleyland SUDHEER

A STUDY ON RATIO ANALYSIS

INTRODUCTION Finance is the life blood of an organization. Without finance nothing is possible. It is impossible to imagine the operation of an advanced industrial society without money. In order to function the organs of the business concern properly, it should be sufficient to meet the liabilities. So I have taken up a study on the financial performance of “Ashok Leyland limited”, as a part of our curriculum activity, since we have gathered data mostly from the annual reports of the “Ashok Leyland limited”. In total five consecutive annual reports have been analyzed for this purpose from the year 2008-2012. The study is made mainly by analyzing few ratios for the given five years. The success of any business operations depends upon the manner by which its financial analysis was done. This study was conducted to ascertain the financial information. A financial statement contains summarized information of the firm’s financial affairs organized systematically. It is used to present the firm’s financial situation to the users. As these statements are used by financial analysts to examine the firm’s performance in order to make investment decisions. Financial statements are prepared from the accounting records maintained by the firm, inadequacy of working capital will lead to business failure. In business profitability and adequate liquidity are very essential. Management accounting & financial accounting provides necessary information to assist the management in the creation of the policy and in day to day operations. It enables the management to discharge all its functions of planning, organizing, staffing, directing and controlling efficiently with the help accounting information. With the background view the present study has been under taken for a proper insight into the “Financial analysis” in “ Ashok Leyland limited”. RAO’S INSTITUTE OF MANAGEMENT STUDIES

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NEED FOR THE STUDY:

1. The study has great significance and provides benefits to various parties who directly or

indirectly interact with the company. 2. It is beneficial to the management of the company by providing crystal clear picture

regarding important aspects like liquidity, leverage, activity profitability. 3. The study is also beneficial to employees and offers motivation by showing how actively they are contributing for company’s growth. 4. The investors who are interested in investing in the company’s shares will also get

benefited by going through the study and can easily take a decision whether to invest or not to invest in the company’s shares.

SCOPE OF THE STUDY:

The study is confined to the financial performance of the ASHOK LEYLAND .This study aims at analyzing with help of tools of the financial performance of the company that are: • Ratio analysis • Comparative statement Ratio analysis is the process of computing, determining and presenting the relationship of the items. A financial ratio expresses the relationship between two accounting figures.

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Comparative financial statements are those statements, which have been designed in a way so as to provide time perspective to consider various elements of financial position embodied in such statements.

OBJECTIVES

The major objectives of the recent study are to know about Financial strengths and weakness of ASHOK LEYLAND through the RATIO ANALYSIS.

The main objectives of recent study is aimed as: 1) To evaluate the performance of the company by using ratios as a yardstick to measure the efficiency of the company. 2) To understand the liquidity, profitability and efficiency positions of the company during the study period. 3) To evaluate and analyze various facts of the financial performance of the company. 4) To make comparisons between the ratios during different periods. 5) To offer appropriate suggestions for the better performance of the organization 6) To analyze the capital structure of the company with the help of Leverage ratio.

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RESEARCH METHODOLOGY: Research methodology is the way to systematically solve the research problem .it may be understand as a science of studying how research is done scientifically. This involves exploring all possible methods of solving the research problem examine the alternative methods one by one and arriving at the best possible method considering the resources at the disposal of the researcher. The information is collected through secondary sources during the project. This information was utilized for calculating performance evaluation and based on that, interpretations were made. Sources of secondary data: 1. Most of the calculations are made on the financial statements of the company provided. 2.some of the information regarding theoretical aspects were collected from reference books. 3. Method- to assess the performance of the company,method of Observation was followed in finance department as follows. • AREA COVERED It covers the financial function of the ASHOK LEYLAND limited. • PERIOD COVERED

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The study covers the five years period from 2007 to 2011 to have a comprehensive picture. The study suggests the measures for the maximization of the profit in ASHOK LEYLAND Limited.

LIMITATIONS OF THE STUDY •

No primary data is used for study.

•

The study has been limited i.e, (2007 -2011).

•

All ratio could not be covered under the study, because of inadequate information.

•

Opinions of the managers of the organization were taken into consideration. Hence there is a chance for personal bias.

•

The study provides an insight into the financial, personnel, marketing and other aspects of ASHOK LEYLAND. Every study will be bound with certain limitations.

•

One of the factors of the study was lack of availability of ample information. Most of the information has been kept confidential.

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INDUSTRY PROFILE

The automobile industry in India is the tenth largest in the world with an annual production of approximately 2 million units – is expected to become one of the major global automotive industries in the coming years. A number of domestic companies produce automobiles in India and the growing presences of multinational investment, too has led to an increase in overall growth following the economic reforms of 1991 the Indian growth as a result of increased competiveness and relaxed restrictions. History: In 1953, the Govt of India and the Indian private sector initiated manufacturing processes to help develop the automobile industry, which had emerged by the 1940‟s in a nascent form. Between 1940 to the economic liberalization of 1991, the automobile industry continued to grow at a slow pace due to the many govt restrictions. Japanese manufacturers entered the Indian market ultimately leading to the establishment of Maruti udyog. A number of foreign firms joint ventures with Indian companies. AUTOMOBILE INDUSTRY HISTORY: In the year 1769, a French engineer by the name of Nicolas J. Cugnot invented the first automobile to run on roads. This automobile, in fact, was a self-powered, three wheeler, military tractor that made use of steam engine. The range of the automobile, however, was very brief and at the most, it could only run at a stretch for fifteen minutes. In addition, these automobiles were not fit for RAO’S INSTITUTE OF MANAGEMENT STUDIES

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the roads as the steam engines made them very heavy and large, and required ample starting time. Oliver Evans was the first to design a steam engine driven automobile in the U.S. The automobile industry finally came of age with Henry Ford in 1914 for the bulk production in cars. This lead to the development of the industry and it first begun in the assembly lines of his car factory. The several methods adopted by Ford, made the new invention i.e.) car, popular amongst the rich as well as masses. According to the history of automobile industry U.S, dominated the automobile markets around the globe with no notable competitors. However, after the end of Second World War in 1945, the automobile industry of other technologically advanced nations such as Japan and certain European nations gained momentum and within a very short period, beginning in the early 1980s, the U.S automobile industry was flooded with foreign automobile companies, especially those of Japan and Germany. The current trends of the Global automobile industry reveal that in the developed countries the automobile industry are stagnating as a result of the drooping car markets, whereas the automobile industry in the developing nations, such as India and Brazil, have been consistently registering higher growth rates every passing year for their flourishing automobile markets. INDIAN AUTOMOBILE INDUSTRY: India is one of the fastest growing automobile industries in the world. After 1960, the automobile industry saw rapid growth and many automotive manufacturers started production The automobile industry in India is the seventh largest in the world with and annual production of over 2.6 million units in 2009. In 2009, India emerged as Asia’s fourth largest exporter of automobiles, behind Japan, South Korea and Thailand. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation’s roads.

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A well developed transport network indicates a well developed economy. For rapid development a well-developed and well-knit transportation system is essential. As India’s transport network is developing at a fast pace, Indian automobile industry is growing too. Also, the automobile industry has strong backward and forward linkages and hence provides employment to a large section of the population. Thus the role of automobile industry cannot be overlooked in the Indian economy. Indian automobile industry includes manufacture of trucks, buses, passenger cars, defence vehicles, two wheelers etc.., the industry can be broadly divided into the car manufacturing, two-wheeler manufacturing and heavy vehicle manufacturing units. The major car manufacturers are Hindustan Motors, Maruti Udyog, Fiat India Pvt. Ltd, Ford India Ltd., General Motors Pvt. Ltd., Honda Siel Cars India Ltd., Hyundai Motors India Ltd., Skoda India Pvt. Ltd., Toyota Kirloskar Motor Ltd., to name a few. The two wheeler manufacturing is dominated by companies like TVS, Honda Motorcycle &Scooter India Pvt. Ltd., Hero Honda, Yamaha, Bajaj etc.., The heavy motors like buses, trucks, defence vehicles, auto rickshaws and other multi utility vehicles are manufactured by Tata-Telco, Ashok Leyland, Eicher Motors, Bajaj, Mahindra and Mahindra etc..,

INDIAN AUTOMOBILE MARKET: Many foreign companies have been investing in the Indian automobile market in various ways such as technology transfers, joint ventures, strategic alliances, exports and financial collaborations. The auto market in India can boast of attractive finance schemes, increasing purchase power and launch of latest products. Some vital statistics regarding the automobile market in India has been mentioned below: •

India ranks 2nd in the global two-wheeler market

•

India is the 4th biggest commercial vehicle market in the world

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•

India ranks 11th in the international passenger car market

•

India ranks 5th pertaining to the number of bus and truck sold in the world.

HEAVY VEHICLES MARKET: Heavy vehicles market in India comprises of trucks, machines, ambulances and school buses. The popular heavy vehicle brands in India are Volvo, Eicher, Tata, Telco, Ashok Leyland and Swaraj Mazda. Following are the major players in the Indian Heavy Vehicles Market: •

Tata Motors is the largest automobile manufacturing company in India that manufactures

a wide range of heavy vehicles adhering to world class standards. It is the market leader in commercial vehicles in all the segments, be it heavy vehicles, medium size vehicles, small vehicles, buses or defence vehicles. The heavy vehicles manufactured by Tata Motors have highly developed braking structure, high ground authorization, better direction competence and a muscular body. The advanced engine imparted to these heavy vehicles makes them a class apart from the other heavy vehicles running on the Indian roads and Highways. Tata Motors leads this segment with a market share of 61%.

•

Ashok Leyland is an exclusively heavy vehicle manufacturing company situated in

Chennai and was initiated in the year 1948. It is one of India’s biggest producers of heavy vehicles such as trucks, buses, military vehicles and also the second biggest commercial vehicle firm in India heavy vehicle division with a market share of around 27%. Ashok RAO’S INSTITUTE OF MANAGEMENT STUDIES

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Leyland is also renowned for producing auto spare parts and engines for marine and industrial submission. •

Eicher Motors was initiated in 3rd September, 1960. The first firm to manufacture the

first tractor in India. The indigenously manufactured tractor was introduced in the Indian market straight from Eicher’s Faridabad factory. The history of the firm can be traced back to 1948, when Good earth Company was established for vending and repairs of imported tractors in the nation. •

Swaraj Mazda, a tie up between Mazda and Swaraj Enterprise, Swaraj Mazda represents

advanced Indian expertise and manufacturing. The firm has Research and Development improvement edge on international scale. The firm manufactures various products such as Bus, Ambulance, Trucks etc.

The modern automobile market in India has been considering key issues in the process of growth: •

Customer care, and not just service

•

Domestic as well as multi-national investments

•

Searing through cut-throat competition

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Road safety

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Anti-pollution norms

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Co-ordination with government to enable advancement

•

Used vehicle trade

The future of Indian automobile market is bright as it looks forward to manufacturing and implementing new innovations such as electric cars as provided by Reva, alternate fuels like CNG and LPG and probably customized internet automobile orders.

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COMPANY PROFILE Ashok Leyland has been a major presence in India’s commercial vehicle industry since 1948, the year it was born. The origin of Ashok Leyland can be traced to the urge for selfreliance, felt by independent India. Pandit Jawaharlal Nehru, India's first Prime Minister persuaded Mr. Raghunandan Saran, an industrialist, to enter automotive manufacturing. They are one of the India’s leading manufacturers of commercial vehicles and special vehicles, engines for industrial purpose, gen sets and marine requirement equipments. For over five decades, Ashok Leyland has been the technology leader in India’s commercial vehicle industry, molding the country’s commercial vehicle profile by introducing technologies and product ideas that have gone on to become industry norms. Ashok Leyland at the time of its inception was known as Ashok Motors. It was assembling Austin cars at the first plant, at Ennore, near Chennai. In 1950, the company started assembly of Leyland commercial vehicles and soon the local manufacturing under license from British Leyland; participation in the equity capital, in 1954, the company was re christened Ashok Leyland. In 1987 the overseas holding by LRLIH (LAND ROVER LEYLAND INTERNATIONAL HOLDINGS LIMITED) was taken over by a joint venture between the

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Hinduja group, the Non Resident Indian Transnational group and IVECO Fiat SPA part of the Fiat group and Europe’s leading truck manufacturing company. Ashok P.Hinduja is the chairman of the company. The Hinduja group also associated with Ennore Foundries Limited, Automotive Coaches and Components Limited, and Gulf Ashley Motors Limited. The subsidiary holdings are Ashley Holdings Ltd., Ashley Investment Ltd., and Ashok Leyland Project Services. The chief competitors of the company are;

•

Mahindra

•

Volvo

•

Tata Motors

With a commanding strength of the about 12,000 employees the company is looking forwards to enhance the scope of its action. It is aiming at expanding its production operation overseas to make it a more globally accessible company. It is looking to acquire a small to medium sized commercial vehicle manufacturers in China and other developing nations, which have an established product line. An example would be the 2007 acquisition of the Czech based Avia’s truck business rechristened Avia Ashok Leyland Motors. Since its inception, Ashok Leyland has been a major presence and these years have been punctuated by a number of technological innovations which went to become industry standard. This tradition of technological innovations and leadership was achieved through years of vigorous in-house research and development. From 18 seater to 82 seater double-decker buses, from 7.5 tons to 49 tone in haulage vehicles, from numerous special application vehicles to diesel engines for industrial, marine and genset applications, Ashok Leyland offers a wide range of products. Ashok Leyland has seven manufacturing plants –

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•

Ennore Plant, Chennai.

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Hosur Plants Unit I, Unit II and Unit II A.

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Alwar, Rajasthan.

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Bhandara, Maharashtra.

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Pantnagar, Uttarakhand Early products of Ashok Leyland included the Leyland Comet bus chassis sold to many

operators including Hyderabad Road Transport, Ahmedabad Municipality, Travancore State Transport, Bombay State Transport and Delhi Road Transport Authority. In the popular metro cities, four out of five state transport undertaking buses come from Ashok Leyland. Some of them like the Double Decker and Vestibule buses are unique models from Ashok Leyland, tailor made high-density routes.

Statistics reveal that the company is India’s largest exporter of medium and heavy duty trucks. It sells close to 83,000 medium and heavy vehicles each year. The company has a near 98.5% market share in the Marine Diesel engine markets in India. At 60 million passengers a day, Ashok Leyland buses carry more people than the entire Indian Railway network. The Five AL Values are: 1. International 2. Speedy 3. Value Creator 4. Innovative 5. Ethical

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GROWTH MILESTONES OF ASHOK LEYLAND: 1966 – Full air brakes introduced 1967 – Double Decker buses introduced. 1968 – Power steering offered. 1979 – Multi-axle trucks introduced. 1980 – Integral bus with air suspension. 1992 – Self-certification status for defence supplies. 1994 – ISO 9001 Certification 1997 – India’s first CNG powered bus. 1998 – QS 9000 Certification 1999 – CNG (Compressed Natural Gas) introduced. 2000 – Euro-I, Engines/vehicles introduced. 2002 – ISO 14000 Environment Management System Certification. 2002 – Exclusive Machine line – 2 for Hino cylinder. 2003 – E-Comet launched. 2004 – 50,000 mark vehicle produced. 2006- ISO/TS 16949 Corporate Certification.

ASSOCIATE COMPANIES: •

Automotive Coaches & Components Ltd (ACCL)

•

Lanka Ashok Leyland

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Hinduja Foundries

•

IRIZAR – TVS

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•

Ashok Leyland Project Services Ltd

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Gulf Ashley Motors Ltd

•

Ennore Foundries Ltd

FACILITIES: •

The company has seven manufacturing locations in India 1) Ennore, Tamilnadu 2) Hosur: Unit 1, Tamilnadu 3) Hosur: Unit 2, Tamilnadu 4) Hosur: Unit 2A, Tamilnadu 5) Alwar, Rajasthan 6) Bhandara, Maharashtra 7) Pantnagar, Uttarakhand

•

Ashok Leyland’s Technical Centre, at Vellivoyalchavadi in the outskirts of

Chennai, is a state-of-the-art product development facility, that apart from modern test tracks and component test labs, also houses India’s one and only Six Poster testing equipment. •

The company has an Engine Research and Development facility in Hosur.

•

The new plant in the North Indian state of Uttarakhand at Patnanagar is set up at an

investment outlay of Rs.1200 crores. This plant is expected to go on stream in the year 2010 to cater mainly to the North Indian market taking advantage of the excise duty and other tax concessions. The facilities have been so designed as to accommodate further expansion in terms of capacity and future models. At full capacity utilization, 75000 vehicles will roll out of the Patnanagar plant. RAO’S INSTITUTE OF MANAGEMENT STUDIES

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•

The company has signed an agreement with Ras Al Khaimah Investment

Authority (RAKIA) in UAE for setting up a bus body building unit in the Middle east. CLIENTS (Not exhaustive): •

Indian Army.

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US Army.

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Honduras Armed Forces (HAF).

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Tamilnadu State Transport Corporation (TNSTC).

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Metropolitan Transport Corporation (MTC), Chennai.

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State Express Transport Corporation (SETC), Tamilnadu.

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Kerala State Road Transport Corporation.

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Maharashtra State Road Transport Corporation (MSRTC).

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Andhra Pradesh State Road Transport Corporation (APSRTC).

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Parveen Travels.

•

Sharma Transport.

VISION Achieving leadership in the medium/heavy duty segments of the domestic commercial vehicle market and a significant presence in the world market through transport solutions that best anticipate customer needs, with the highest value -to-cost ratio.

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MISSION -Identifying with the customer. -Being the lowest cost manufacturer. -Global benchmarking our products, processes and people, against the best in the Industry. QUALITY POLICY Ashok Leyland is committed to achieve customer satisfaction by anticipating and delivering superior value to the customer in relation to their own business, through the products and services offered by the company and comply with statutory requirements. Towards this, the quality policy of Ashok Leyland is to make continual improvements in the processes that constitute the quality management system, to make them more robust and to enhance their effectiveness and efficiency in achieving stated objectives leading to 1. Superior products manufactured as also services offered by the company. 2. Maximum use of employee’s potential to contribute to quality and environment by Progressive up gradation of their knowledge and skills as appropriate to their functions. 3. Seamless involvement from suppliers and dealers in the mission of the company to address customers changing needs and protection of the environment

ORGANIZATION STRUCTURE OF M/s. ASHOK LEYLAND LTD. (AUTHORITY FLOW) RAO’S INSTITUTE OF MANAGEMENT STUDIES

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MANAGING DIRECTOR WHOLE TIME EXECUTIVE DIRECTOR SPECIAL DIRECTOR GENERAL MANAGER DEPUTY GENERAL MANAGER ASST.GENERAL MANAGER DIVISIONAL MANAGER SENIOR MANAGER MANAGER DEPUTY MANAGER ASST.MANAGER SENIOR OFFICER OFFICER

PRODUCT PROFILE

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Ashok Leyland offers a comprehensive product range with trucks from 7.5 tons GVW to 49 tons GVW (Gross Vehicle Weight). From 19 to 80 seaters in passenger transport, a host of special application vehicles and diesel engines for industrial gensets and marine application. Product profile can be broadly split into five categories viz. Buses, Trucks, defence vehicles, special Vehicles and Engines. BUSES LYNX BS-II

Viking BS-II

12 M Bus-BS II

Cheetah (Front engine)

Viking BS-III

Viking AL

Airport Tarmac Coach

Vestibule Bus

Panther (Rear engine)

Cruiser Stag BS-II

Viking CNG BS-III

Falcon (Front engine)

Double decker

TRUCKS 4x2 Haulage models

Ecomet

4x2 and Multi-axle Tipper

Tractor

Multi Axle vehicles DEFENCE VEHICLES Short Chassis Bus Topchi field Artillery tractor Stallion 6x6

Field artillery tractor

Comet 4x4

Long Chassis Bus Stallion truck fire fighting

SPECIAL VEHICLES Hippo tractor

Stallion Mk III Tipper

Beaver tractor

Rapid Intervention Vehicle

Beaver Haulage

Hippo Haulage

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Hippo Tipper

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ENNORE PLANT: Ashok Leyland has six manufacturing plants - the mother plant at Ennore near Chennai, two plants at Hosur (called Hosur I and Hosur II, along with a Press shop), the assembling plants at Alwar and Bhandara. The total covered space at these six plants exceeds 450,000 sq m and together employees over 11,500 personnel. Spread over 135 acres, Ashok Leyland Ennore is a highly integrated Mother Plant accounting for over 40% ALL production. The plant manufactures a wide range of vehicles and house production facilities for important aggregates such as Engines, Gear Box, Axles and other key in-house components. Number of employees in ennore plant are 4146 and number of models manufactured are 132. Ashok Leyland is the flagship company of the hinduja group and

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is

the

second

largest

manufacturer

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of

commercial

vehicles

in

India.

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Ashok motor was set up in 1948 for the assembly of Austin cars. The company name and objective changed with equity participation by British Leyland and Ashok Leyland commenced manufacturer of commercial vehicles in 1955. It has since than grown as a reputed manufacturer of quality automotive products ranging from light commercial vehicles to heavy duty vehicles and for automotive, industrial and marine applications. In 1987, the overseas hold by Land Rover Leyland International Holidays Ltd(LRLIH) was taken over by a joint venture between the Hinduja group, Non-Resident Indian Transitional group and IVECO (since July 2006,the Hinduja group is 100% stake holder of LRLIH). Ashok Leyland also acquired truck business unit of Avia, Prague (Czech Republic effective 19-10-06). The products of the company are of proven design for durability and reliability and are hence very popular both in Indian and overseas markets. In recent years the product range is upgraded in to the latest technological development in the world, for which the company has the technical support from IVECO (FIAT group), Italy for manufacture of IVECO cargo range of vehicles; Hino Motors, Japan for manufacture of fuel efficient engines; and ZF , Germany for manufacture of synchromesh gear boxes. In the journey towards the Global standard of Quality , Ashok Leyland has reached a major milestone in 1993 , when it became the first in India‟s automobile industry to win ISO 9002 Certification. The more comprehensive ISO 9001 certification came in 1994, QS 9000 in 1998 and ISO 14001 certification for all vehicle manufacturing units in 2002. It has also become the first Indian automobile company to receive the latest ISO/TS 16949 corporate certification which is specific to the auto company. The company has the corporate office register at Chennai. The marketing headquarter is at Chennai and the sales and services network, dealer network and spare parts warehouse spread throughout India with regional sales office and services centre located in all major cities and towns in the country. The products are also exported to a range of overseas countries RAO’S INSTITUTE OF MANAGEMENT STUDIIES

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The marketing personal maintain constant interaction with customers for application development and feedback for continuous improvement of the products. The services function is carried out by qualified personal whose skills are continuously upgraded through training to meet the servicing requirements of newer or improved products. The design function is carried out by the product Development Division operating through 4 centres viz. Product Development (Ennore) for R&D related to Ashok Leyland engines, Technical centre vellivoyalchavadi for design, proto-type developments of vehicle, vehicles and components testing; Engine R&D (Hosur) for design and development of Hino engines and Advanced Engineering (Chennai) for research related to future products.

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The manufacturing units of the company are located at Ennore (TN), Hosur (TN), Alwar (Rajasthan) and Bhandara (MR). The Ennore , Hosur (plant - 1), Hosur (plant-ii), Ambattur , Alwar and Bhandara manufacturing units are certified ISO 9001:2000 and QS 9000:1998 certification by Indian register Quality system. The company is also certified to ISO 14001:2000 – Environmental Management System for all the manufacturing units. The Bhandara unit of the company has won the “Golden Peacock Environmental Award 2002” of the world Environmental Foundation in the “Large/manufacturing “category. Ashok Leyland is also the 1st auto mobile company to receive the ISO/TS 16949 corporate certification in June 2006. TS 16949 reckon the nuances of automobile Industry and is more customer centric. It integrates the salient concepts of all the QMS standards has been accepted recognized and followed by all automobiles manufactures in USA , Europe and Asia.

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Ashok Leyland has also obtained ISO 27001 certificates for its Ennore Data canter and Advanced Engineering group located in Chennai. Ennore data centre obtained the certificate in May 2005 and advanced engineering in April 2007.

RATIO ANALYSIS

FINANCIAL ANALYSIS Financial analysis is the process of identifying the financial strengths and weaknesses of the firm and establishing relationship between the items of the balance sheet and profit & loss account. Financial ratio analysis is the calculation and comparison of ratios, which are derived from the information in a company’s financial statements. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and attractiveness as an investment. The information in the statements is used by • Trade creditors, to identify the firm’s ability to meet their claims i.e. Liquidity position of the company. • Investors, to know about the present and future profitability of the Company and its financial structure. • Management, in every aspect of the financial analysis. It is the responsibility of the management to maintain sound financial condition in the company.

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RATIO ANALYSIS The term “Ratio” refers to the numerical and quantitative relationship between two items or variables. This relationship can be exposed as • Percentages • Fractions • Proportion of number Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements So that the strengths and weaknesses of a firm, as well as its historical performance and current financial condition can be determined. Ratio reflects a quantitative relationship helps to form a quantitative judgment. STEPS IN RATIO ANALYSIS • The first task of the financial analysis is to select the information decision under consideration from the statements and

Relevant to the

Calculates appropriate ratios.

• To compare the calculated ratios with the ratios of the same firm relating to the pas6t or with the industry ratios. It facilitates in

assessing success or failure of the firm.

• Third step is to interpretation, drawing of inferences and report Writing conclusions are drawn after comparison in the shape of report

or recommended courses of action.

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BASIS OR STANDARDS OF COMPARISON Ratios are relative figures reflecting the relation between variables. They enable analyst to draw conclusions regarding financial operations. They use of ratios as a tool of financial analysis involves the comparison with related facts. This is the basis of ratio analysis. The basis of ratio analysis is of four types. • Past ratios, calculated from past financial statements of the firm. • Competitor’s ratio, of the some most progressive and successful competitor firm at the same point of time. • Projected ratios, ratios of the future developed from the projected or Perform financial statements

NATURE OF RATIO ANALYSIS Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. It is only a means of understanding of financial strengths and weaknesses of a firm. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios. The following are the four steps involved in the ratio analysis. • Selection

of

relevant

data

from

the

financial

statements

depending

Upon the objective of the analysis. • Calculation of appropriate ratios from the above data. • Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firms or the comparison with ratios of the industry to which the firm belong RAO’S INSTITUTE OF MANAGEMENT STUDIIES

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INTERPRETATION OF THE RATIOS The interpretation of ratios is an important factor. The inherent limitations of ratio analysis should be kept in mind while interpreting them. The impact of factors such as price level changes, change in accounting policies, window dressing etc., should also be kept in mind when attempting to interpret ratios. The interpretation of ratios can be made in the following ways. - Single absolute ratio - Group of ratios, -Historical comparison, -projected ratios, -inter-firm comparison,

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS The calculation of ratios may not be a difficult task but their use is not easy. Following guidelines or factors may be kept in mind while interpreting various ratios are • Accuracy of financial statements • Objective or purpose of analysis • Selection of ratios • Use of standards • Caliber of the analysis

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IMPORTANCE OF RATIO ANALYSIS: • Aid to measure general efficiency and solvency position • Aid in forecasting and planning • Facilitate decision making • Aid in intra and inter-firm comparison • Act as a good communication • Evaluation of efficiency • Effective tool LIMITATIONS OF RATIO ANALYSIS • Differences in definitions • Limitations of accounting records • Lack of proper standards • No allowances for price level changes • Changes in accounting procedures • Quantitative factors are ignored • Limited use of single ratio

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CLASSIFICATIONS OF RATIOS: ` The use of ratio analysis is not confined to financial manager only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. Various accounting ratios can be classified as follows: 1. Traditional Classification 2. Functional Classification 3. Significance ratios

1.Traditional Classification It includes the following. • Balance sheet (or) position statement ratio: They deal with the relationship between two balance sheet items, e.g. the ratio of current assets to current liabilities etc., both the items must, however, pertain to the same balance sheet. • Profit & loss account (or) revenue statement ratios: These ratios deal

with the relationship

between two profit & loss account items, e.g. the ratio of gross profit to sales etc., • Composite (or) inter statement ratios: These ratios exhibit the relation

between a profit & loss

account or income statement item and a balance sheet items, e.g. stock turnover ratio, or the ratio of total assets to sales. RAO’S INSTITUTE OF MANAGEMENT STUDIIES

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2. Functional Classification These include liquidity ratios, long term solvency and leverage ratios, activity ratios and profitability ratios. 3. Significance ratios Some ratios are important than others and the firm may classify them as primary and secondary ratios. The primary ratio is one, which is of the prime importance to a concern. The other ratios that support the primary ratio are called secondary ratios.

IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE 1. Liquidity ratio 2. Leverage ratio 3. Activity ratio 4. Profitability ratio

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

To measure the liquidity of a firm the following ratios can be calculated • Current ratio • Quick (or) Acid-test (or) Liquid ratio • Absolute liquid ratio (or) Cash position ratio

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(a) CURRENT RATIO: Current ratio may be defined as the relationship between current assets and current liabilities. This ratio also known as Working capital ratio is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position (or) liquidity of a firm

Current ratio = current assets /current liabilities Components of current ratio; Current assets Cash in hand/at bank Debtors Bills receivables Investment(short-term) Working progress Marketable securities Prepaid expenses Inventory

Current liabilities Bank OD Creditors Bills payables Short-term advances Dividend payables Income tax payables Out standings /occurred expenses

CURRENT ASSETS

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

Quick ratio = quick or liquid assets/current liabilities

Components of quick ratio Quick assets Cash in hand Cash at bank Bills receivables Sundry debtors Marketable securities Temporary investments

Current liabilities Bank OD Creditors Bills payables Short-term advances Dividend payables Income tax payables Out standings /occurred expenses

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(c) ABSOLUTE QUICK RATIO: Although receivable, debtors and bills receivable are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. Hence, absolute liquid ratio should also be calculated together with current ratio and quick ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets.

Absolute ratio=absolute liquid assets / current liabilities Absolute liquid assets include cash in hand etc. The acceptable forms for this ratio is 50% (or) 0.5:1 (or) 1:2 i.e., Rs.1 worth absolute liquid assets are considered to pay Rs.2 worth current liabilities in time as all the creditors are nor accepted to demand cash at the same time and then cash may also be realized from debtors and inventories Components of absolute ratio Absolute quick assets cash in hand Cash at bank Interest in fixed assets

Current liabilities Bank OD Creditors Bills payables Short-term advances Dividend payables Out standings /occurred expenses

1. LEVERAGE RATIOS RAO’S INSTITUTE OF MANAGEMENT STUDIIES

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

(a) PROPRIETARY RATIO A variant to the debt-equity ratio is the proprietary ratio which is also known as equity ratio. This ratio establishes relationship between share holder’s funds to total assets of the firm

Proprietary ratio =share holders fund/total assets Components of proprietary ratio; Share holders’ funds Share capital Reserve surplus

Total assets Current assets Fixed assets

2. ACTIVITY RATIOS

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Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly effect the volume of sales. Activity ratios measure the efficiency (or) effectiveness with which a firm manages its resources (or) assets. These ratios are also called “Turn over ratios” because they indicate the speed with which assets are converted or turned over into sales. • Working capital turnover ratio • Fixed assets turnover ratio • Capital turnover ratio • Current assets to fixed assets ratio (a) WORKING CAPITAL TURNOVER RATIO

Working capital turnover ratio = sales /working capital

Working capital = current assets –current liabilities

Working capital of a concern is directly related to sales.

It indicates the velocity of the utilization of net working capital. This indicates the no. of times the working capital is turned over in the course of a year. A higher ratio indicates efficient utilization of working capital and a lower ratio indicates inefficient utilization. (B) FIXED ASSETS TURNOVER RATIO

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It is also known as sales to fixed assets ratio. This ratio measures the efficiency and profit earning capacity of the firm. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets

FIXED ASSETS TURNOVER RATIO =COST OF SALES /NET FIXED ASSETS

•

COST OF SALES =INCOME FROM SERVIES

•

NET FIXED ASSETS =FIXED ASSETS-DEPR

(C)CAPITAL TURNOVER RATIOS Sometimes the efficiency and effectiveness of the operations are judged by comparing the cost of sales or sales with amount of capital invested in the business and not with assets held in the business, though in both cases the same result is expected. Capital invested in the business maybe classified as long-term and short-term capital or as fixed capital and working capital or Owned Capital and Loaned Capital. All Capital Turnovers are calculated to study the uses of various types of capita

CAPITAL TURNOVER RAIO=COST OF GOODS SOLD /CAPITAL EMPLOYED

•

COST OF GOODS SOLD=INCOME FROM SERVIES

•

CAPITAL EMPLOYED =CAPITAL +RESERVER&SURPLUS

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(D) CURRENT ASSETS TO FIXED ASSETS This ratio differs from industry to industry. The increase in the ratio means that trading is slack or mechanization has been used. A decline in the ratio means that debtors and stocks are increased too much or fixed assets are more intensively used. If current assets increase with the corresponding increase in profit, it will show that the business is expanding

CURRENT ASSETS TO FIXED ASSETS=Current assets/Current liabilities

Components of current assets to fixed assets Current assets Cash in hand/at bank Debtors Bills receivables Investment(short-term) Working progress Marketable securities Prepaid expenses Inventory

Fixed assets plant Machinery Good will Patents Furniture Buildings Fittings and equipment Vehicles and aircraft

3. PROFITABILITY RATIOS

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The primary objectives of business undertaking are to earn profits. Because profit is the engine, that drives the business enterprise. • Net profit ratio • Return on total assets • Reserves and surplus to capital ratio • Earnings per share • Operating profit ratio • Price – earnings ratio • Return on investments •

Gross profit

(a) NET PROFIT RATIO Net profit ratio establishes a relationship between net profit(after tax) and sales and indicates the efficiency of the management in manufacturing, selling administrative and other activities of the firm

NET PROFIT RATIO=NET PROFIT AFTER TAX / NET SALES

•

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

•

Net Sales = Income from Services It also indicates the firm’s capacity to face adverse economic conditions such as

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

(B) RETURN ON TOTAL ASSETS RAO’S INSTITUTE OF MANAGEMENT STUDIIES

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Profitability can be measured in terms of relationship between net profit and assets. This ratio is also known as profit-to-assets ratio. It measures the profitability of investments. The overall profitability can be known RETURN ON TOTAL ASSETS=NET PROFIT/TOTAL ASSETS

NET PROFIT = EARING BEFORE INETERST AND TAXS. TOTAL ASSETS = FA+CA (b) RESERVES AND SURPLUS TO CAPITAL RATIO It reveals the policy pursued by the company with regard to growth shares. A very high ratio indicates a conservative dividend policy and increased ploughing back to profit. Higher the ratio better will be the position. RESERVES AND SURPLUS TO CAPITAL RATIO=RESERVES &SURPLUS/CAPITAL

(c) EARNINGS PER SHARE Earnings per share is a small verification of return of equity and is calculated by dividing the net profits earned by the company and those profits after taxes and preference dividend by total no. of equity shares. EARNING PER SHARE=NET PROFIT AFTER TAX/ NUM OF EQUITY SHARES

The Earnings per share is a good measure of profitability when compared with EPS of similar other components (or) companies, it gives a view of the comparative earnings of a firm.

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(f) PRICE - EARNING RATIO Price earnings ratio is the ratio between market price per equity share and earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether (or) not to buy shares in a particular company. Generally, higher the price-earning ratio, the better it is. If the price earning ratio falls, the management should look into the causes that have resulted into the fall of the ratio.

Price earning ratio= market price per share/earning per share

Market price per share= capital + reserves & surplus/number of equity shares

Earnings per share = earnings before interest and tax/number of equity shares

(g) RETURN ON INVESTMENTS: Return on share holder’s investment, popularly known as Return on investments (or) return on share holders or proprietor’s funds is the relationship between net profit (after interest and tax) and the proprietor’s funds.

RETURN ON SHARE HOLDER’S INVESTMETNS=NET RAO’S INSTITUTE OF (AFTER MANAGEMENT STUDIIES PROFIT INTEREST AND TAX)/SHAREHOLDER’S FUNDS

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The ratio is generally calculated as percentages by multiplying the above with 100

DATA ANALYSIS AND INTERPRETATION The following are some of the ratios that have been used in this for analyzing the company performance with particular reference to “Ashok Leyland limited”

LIQUIDITY RATIOS : The liquidity of a business firm is measured by its ability to satisfy its short – term obligations as they come due. Liquidity refers to the solvency of the firm’s over all financial position the case with which it can pay its bills 1) Current ratio:

The current ratio is one of the most commonly cited financial ratios, measures of the firm’s ability to meet its short-term obligations. (It Also known as "liquidity ratio", "cash asset ratio"

and

"cash

ratio".)

It is calculated as follows  Current ratio= current assets / current liabilities

(Rs in Millions) Years

Current assets

Current liabilities

Ratio in %

2007-08

22,324.13

14,085.16

1.58

2008-09

26,977.14

17,558.55

1.53

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2009-10

28,752.56

22,719.40

1.26

2010-11

31,656.15

21,369.45

1.48

2011-12

41,396.84

29,607.57

1.39

Note :  An ideal current ratio is 2:1.  A firm having a seasonal trading activity may show a lower or higher current ration at a

certain period of the year .so, it does not possible to maintain ideal ratio.  The current ratio can also be manipulated very easily

Chart-1

CURRENTRATIO 2 1.5 1 0.5 0 2007-08

2008-09

2009-10

2010-11

2011-12

Series1

. Interpretation:

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•

The ideal current ratio is 2:1.

•

The industry average ratio is 1.55.

•

Current ratio of the company was 1.58 in the year 2008. It is the highest ratio in the entire study period.

•

The rest of four year from 2009 to 2012, the current ratio is fluctuating.

•

The overall performance of the company is not satisfactory because the company is not maintaining idle ratio.

2) QUICK RATIO( Acid test ratio):

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the

quick

ratio, the better

the

position

of

the company.

The quick ratio as follows.

 Quick ratio= quick assets-inventories /current liabilities.

(Rs in Million) Years

Quick assets

Current liabilities

Ratio in %

2007-08

13,298.52

14,085.16

0.94

2008-09

16,270.93

17,558.55

0.92

2009-10

16,513.43

22,719.40

0.72

2010-11

18,356.16

21,369.45

0.85

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2011-12

25,014.44

29,607.57

0.84

Note :  The quick ratio is more conservative than the current ratio, a more well-known liquidity

measure, because it excludes inventory from current assets.  The ratio is also an indicator of short-term solvency of the company.

Chart-2

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QUICKRATIO 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2007-08

2008-09

2009-10

2010-11

2011-12

quick ratio

Interpretation: •

In the year 2008 the quick ratio was high and 2010 the ratio is very low and again in the year 2011 and 2012 was increased.

•

The standard of quick ratio is 1:1 and the company should not maintain the ideal ratio.

•

The company not able to meet current obligations .it can interpreted based on the previous ratio.

3) ABSOLUTE QUICK RATIO:

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The absolute quick rtio is represented by cash and near cash items. It is a ratio of absolute liquid assets to current liabilities. In the computation of this ratio only the absolute liquid assets are compared with the liquid liabilities

 Absolute quick ratio=quick assets/current liabilities. (Rs in Millions) Years

Absolute Quick assets Current liabilities

Ratio in %

2007-08

6,081.32

14,085.16

0.43

2008-09

4,531.41

17,558.55

0.247

2009-10

4,533.01

22,719.40

0.19

2010-11

985.766

21,369.45

0.046

2011-12

5,926.81

29,609.52

0.20

Note:  Ideal ratio of absolute ratio is 0.5:1.  This ratio is ascertained by comparing the liquid assets (i.e., assets which are immediately

convertible into cash without much loss)

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Chart-3

ABSOLUTE QUICKRATIO 0.5 0.45 0.4 0.35 0.3 O IT 0.25 A R 0.2

Series 1

0.15 0.1 0.05 0 2007-08

2008-09

2009-10

2010-11

2011-12

Interpretation: •

Absolute ratio of the company was 0.43 in the year 2008. And the rest of the following years the ratio is fluctuating .and in 2011 the ratio has decreased to 0.046 .

•

The company is not maintaining proper liquidity assets to meet current obligations.

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LEVERAGE RATIO : 1) PROPRIETOR RATIO

proprietary ratio establishes relationship between proprietors fund and tangible assets. This ratio is also termed as ‘net worth to assets or assets ratio. It may expressed as

 Proprietors ratio or equity ratio=shareholders funds/total assets.

(Rs in Millions) Years

Shareholders’ funds

Total assets

Ratio in %

2007-08

14,124.53

36,860.79

0.38

2008-09

18,945.68

44,633.32

0.42

2009-10

21,489.82

55,399.59

0.38

2010-11

34,738.99

78,265.78

0.44

2011-12

36,687.58

92,768.68

0.39

Note:  A high proprietary ratio will indicate a relatively little danger to the creditors, etc., in the

event of forced reorganization or winding up of the company.  A ratio below 50% alarming for the creditors since they may have to lose heavily in the event of the company’s liquidation on account of heavy losses.

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Chart -4 (Rs in Millions )

proprietorratio 0.46 0.44 0.42 0.4 0.38 0.36 0.34 2007-08

2008-09

2009-10

2010-11

2011-12

ratio

Interpretation: In the year 2008 the proprietary ratio was 0.38 but in the next year 2009 , it increased to 0.42 and again in the year 2010 it come down to 0.38 and it increased to 0.44 in next year and the following year 2012 ratio was fell down to 0.39.

It can analyses that the proprietary ratio has fluctuating.

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ACTIVITY RATIO: 1) WORKING CAPITAL TURNOVER RATIO: It indicates the velocity of the utilization of net working capital. This indicates the no. of times the working capital is turned over in the course of a year. The ratio is calculated as follows.  Working capital turnover ratio = sales/working capital

(Rs in Millions) YEARS

Sales

WORKING CAPITAL

RATIO

2007-08

52,476.57

8,238.97

6.36

2008-09

71,681.76

9,418.59

7.61

2009-10

77,291.23

6,033.16

12.81

2010-11

59,810.73

10,286.69

5.81

2011-12

72,447.10

11,789.27

6.14

Note:

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 A company's efficiency, financial strength and cash-flow health show in its management of

working capital.

CHART-5

WORKINGCAPITALTURNOVERRATIO 8 7 6 5 O IT A4 R 3

Interpretation : RATIO

•

A

2 1 0 2007-08

2008-09

2009-10

2010-11

2011-12

high working capital turnover ratio may be the result of favourable turnover of inventories and receivables. The low working capital turnover ratio indicates the efficient utilization of working capital.

•

Working capital turnover ratio of the company was 6.36 in the year 2008 and it had been increasing till the 2009,and in next the ratio was slow down to 5.81,and in the year 2012 the ratio again increased to 6.14.

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•

In the 2009 the working capital ratio was very high, compare to rest of the years.

2) FIXED ASSETS TURNOVER RATIO:

This ratio indicates the extent to which the investments in fixed assets contribute towards sales. If compared with a previous period, it indicates whether the investments in fixed assets has been judicious or not. The ratio is calculated as follows:

 Fixed assets turnover ratio = Cost of sales / net fixed assets

(Rs in Millions) Years 2007-08 2008-09 2009-10 2010-11 2011-12

Cost of sales 46,720.36 65,281.07 69,210.63 55,427.74 64,937.72

Net fixed assets 9,423.71 13,070.33 15,255.50 33,991.16 42,495.59

Ratio 4.95 4.99 4.53 1.63 1.64

NOTE:  The fixed assets turnover can further be divided into turnover of each item of fixed assets to find out the extent each fixed assets has been properly used. For example - plant and machinery to turnover - land and buildings to turnover RAO’S INSTITUTE OF MANAGEMENT STUDIIES

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Chart-6

Fixed assetsturnover ratio 6 5 4 3

tle T is x A

Series 1

2 1 0 2007-08

2008-09

2009-10

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2010-11

2011-12

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Interpretation:

•

In the year 2008 the fixed assets turnover ratio was 4.95, and rest of the following year the ratio was slow down like 4.95, 4.53, 1.63, 1.64.

•

The overall performance of fixed assets turnover ratio of the company is not satisfactory up to the year 2012.

•

The company following straight line method so net fixed assets was decreased.

2) CAPITAL TURNOVER RATIO: Sometimes the efficiency and effectiveness of the operations are judged by comparing the cost of sales or sales with amount of capital invested in the business and not with assets held in the business, though in both cases the same result is expected. Capital invested in the business maybe classified as long-term and short-term capital or as fixed capital and working capital or Owned Capital and Loaned Capital. All Capital Turnovers are calculated to study the uses of various types of capita

 Capital turnover ratio = cost of goods sold/capital employed.

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(Rs in Millions) Years 2007-08 2008-09 2009-10 2010-11 2011-12

Cost of goods sold 43,830.63 61,623.23 65,289.69 51,745.71 60,176.82

Capital employed 14,124.53 18,945.68 21,489.82 34,738.99 36,687.58

Ratio 3.10 3.25 3.03 1.48 1.64

Chart-7

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CAPITALTURNOVERRATIO 3.5 3 2.5 2 1.5 1 0.5 0 2007-08

2008-09

2009-10

2010-11

2011-12

Series 1

Interpretation:

• The capital turnover ratio was very high in the year 2009. • Capital turnover of the company was 3.10 in the year 2008 and next following year

the ratio had increased to 3.25 and the ratio came to down to 1.48 in the year 2011 and again has increased .

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3)CURRENT ASSETS TO FIXED ASSETS: This ratio differs from industry to industry. The increase in the ratio means that trading is slack or mechanization has been used. A decline in the ratio means that debtors and stocks are increased too much or fixed assets are more intensively used. If current assets increase with the corresponding increase in profit, it will show that the business is expanding

 Current assets to fixed assets = current assets/fixed assets

(Rs in Millions) Years

Current assets

Fixed assets

Ratio

2007-08

22,324.13

14,528.66

1.53

2008-09

26,977.14

17,656.18

1.52

2009-10

28,752.56

26,646.95

1.07

2010-11

31,656.15

46,609.62

0.69

2011-12

41,396.84

51,371.83

0.80

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Chart-8

CURRENTASSETSTO FIXEDASSETS 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2007-08

2008-09

2009-10

2010-11

2011-12

ratio

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Interpretation:

• This is ratio expressed relationship between current asset to fixed assets. • In the year 2008 the percentage of ratio was very high compare to rest of the years. • Current assets to fixed assets ratio of the company was 1.53 in the year 2008 and 1.52

in the year 2009.it is gradually degreased in the year 2010-12.

PROFITABILITY RATIO

1)Gross profit ratio: This ratio expresses relationship between gross profit and net sales. Its formula is

 Gross profit = gross profit/net sales *100

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(Rs in Millions ) Years

Gross profit

Net sales

Ratio*100

2007-08

5400.70

52476.57

10.29 (0.1029)

2008-09

7026.85

71681.76

9.8

(0.098)

2009-10

8039.89

77291.23

10

(0.10)

2010-11

4694.35

59810.73

7.8

(0.078)

2011-12

7628.39

72.447.10

10.5 (0.105)

Chart-9

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GROSSPROFITRATIO 12 10 8 6 4 2 0 2007-08

2008-09

2009-10

2010-11

2011-12

RATIO*100

Interpretation: •

The ratio has multiple with 100.

•

In the year 2012 gross profit is very high because of sale is more.

•

In the year 2011 the gross sales is high.

•

In the year 2011 the gross profit is low and the rest of the year 2008, 2009,2010 the profit had fluctuating .

•

The Company lost 1.8 percentage market share in the Indian medium and heavy commercial vehicle market during the financial year 2010-11, mainly due to loss of sales in the truck segment.

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2)NET PROFIT:

This ratio indicate net margin earned on a sales of Rs.100.it is calculated as follows

 Net profit=net profit(AIT)/net sales*100

(Rs in Millions) YEARS

NET PROFIT

NET SALES

RATIO*100

2007-08

3,273.20

52,476.57

6.2(0.062)

2008-09

4,412.86

71,681.76

6.1(0.061)

2009-10

4,693.10

77,291.23

6.0(0.060)

2010-11

1,899.963

59,810.739

3.1(0.031)

2011-12

4,236.748

72,447.105

5.8(0.058)

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Chart-10

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NETPROFITRATIO 7 6 5 4 3 2 1 0 2007-08

2008-09

2009-10

2010-11

2011-12

RATIO*100

Interpretation: • Net profit ratio of the company was 0.62(6.20) in the year 2008. It is the highest

ratio in the entire study period. •

In the year 2009 the net profit was 4,412(Millions),it was highest profit compare to the rest of the years.

• From 2008 to 2011 the net profit ratio is continually decreased like 6.2 (2008),

6.1 (2009),6.0 (2010), 3.1(2011) and the end of the year 2012 the net ratio again hiked to 5.8.

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3)RETURN ON TOTAL ASSETS:

It measures the overall effectiveness of management in generating profits with its available assets, also called return on investment.

 Return on total assets = net profit (BIT) / total assets*100

(Rs in Millions) YEARS

NET

TOTAL ASSETS

RATIO*100

2007-08

PROFIT(AIT) 3,273.20

36,830.79

8.8(0.088)

2008-09

4,412.86

44,633.32

9.8(0.098)

2009-10

4,693.10

55,399.51

8.4(0.084)

2010-11

1,899.963

78,265.78

2.4(0.024)

2011-12

4,236.748

92,768.68

4.5(0.045)

Note: Return on total assets, can be computed in three types.  Net profit after tax / total *100  Net profit after tax + interest / total assets *100 RAO’S INSTITUTE OF MANAGEMENT STUDIIES

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 Net profit after tax + interest / total assets excluding fictitious assets * 100

Chart -11

RETURNON TOTALASSETS 12 10 8 6 4 2 0 2007-08

2008-09

2009-10

2010-11

2011-12

Column2

Interpretation: The return on total assets of the company in year 2008 is 8.8 ,in the year 2009 is 9.8 but in the year 2010 the ratio is slow down to 8.4.

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Over all study of the return on total assets of the company is fluctuating.

4) RESERVE & SURPLUS TO TOTAL CAPITAL: It reveals the policy pursued by the company with regard to growth shares. A very high ratio indicates a conservative dividend policy and increased plugging back to profit. Higher the ratio better will be the position.

 Reserve & Surplus to total capital = reserve & surplus /capital

(Rs in Millions) YEARS

RESERVE

& CAPITAL

RATIO

SURPLUS

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2007-08

12,902.94

1,221.59

10.56

2008-09

17,621.81

1,323.87

13.31

2009-10

20,159.48

1,330.34

15.15

2010-11

33,408.64

1,330.342

25.11

2011-12

35,357.23

1,330.342

26.57

Chart-12

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30

RESERVE&SURPLUSTO CAPITAL

25 20 15 10 5 0 2007-08

2008-09

2009-10

2010-11

2011-12

Series 1

Interpretation :

•

This is ratio expressed relationship between reserve& surplus to capital.

•

The ratio has continuously increasing.

•

In the year 2008 the ratio was 10.56 and the following years are 13.13(2009), 15.15(2010), 25.11(2011), and 26.57(2012).

•

The overall performance of the company is satisfactory because the company performed well.

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5)EARNINGS PER-SHARE:

In order to avoid confusion on account of the varied meaning of the term capital employed , the overall profitability can also be judged by calculating earning per share with help of the following formula.

 Earnings per-share = net profit (AIT) / no. of equity shares

YEARS

NET PROFIT(AIT)

NO. OF EQUITY RATIO SHARE

2007-08

3,273.20

1192.92

2.74

2008-09

4,412.86

1303.89

3.38

2009-10

4,693.10

1328.59

3.53

2010-11

1,899.963

1330.33

1.42

2011-12

4,236.748

1330.33

3.18

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Note:  The earning per share helps in determining the market price of the equity shares of the company.  It is also estimating the company’s capacity to pay divided to its equity shareholders.

Chart -13

EARNINGPER-SHARE RATIO

2.74

3.38

3.53 3.18 1.42

2007-08

2008-09

2009-10

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2010-11

2011-12

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Interpretation :

• The company has following weighted average method while calculating earning per share. • In my observation last three year the company has issued same no of share . • In the year 2010 the ratio was 3.53.it is the highest ratio in the entire study

period. • The company has performance well in satisfactory of earning per share.

6)PRICE-EARNING RATIO:

This ratio indicates the number of times the earning per share is covered by its market price. This is calculated according to the following formula:

 Price earning ratio = Market price per share/no. of equity shares

(Rs in millions)

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YEARS

MERKET

PRICE NO. OF EQUITY RATIO

2007-08 2008-09 2009-10 2010-11 2011-12

PER SHARE 11.84 14.53 16.17 26.11 27.57

SHARES 3.79 4.63 4.80 1.56 4.09

3.12 3.13 3.36 16.73 6.74

NOTE:

 Price earning ratio helps the investor in deciding whether to buy or not to buy the share of a company at a particular market price.

Chart-14

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PRICE-EARNINGSRATIO RATIO

16.73

3.12

2007-08

3.13

2008-09

6.74

3.36

2009-10

2010-11

2011-12

Interpretation :

•

The price-earnings ratio of the company was 3.12 in the year 2008, the price earning ratio is gradually increasing .those ratio are consequently 3.12, 3.13, 3.36, 16.73 and the end of the year the company’s price earning ratio slow down to 6.74.

•

The company is maintaining the sufficient ratio,it shows the investor to invest their investments.

•

The overall price earning ratio position of the company is satisfactory up to the year 2011 and in the year 2012 the ratio has come down.

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7)RETURN ON INVESTMENT:

Return on share holder’s investment, popularly known as Return on investments (or) return on share holders or proprietor’s funds is the relationship between net profit (after interest and tax) and the proprietor’s funds

 Return on investment = net profit (AIT) / Share holders funds

YEARS

NET PROFIT(AIT0

SHARE

RATIO*100

HOLDERS FUND 2007-08

3,273.20

14,124.53

23 (0.23)

2008-09

4,412.86

18,945.68

23 (0.23)

2009-10

4,693.10

21,489.82

21 (0.21)

2010-11

1,899.963

34,738.99

5.4 (0.054)

2011-12

4,236.748

36,687.58

11.5(0.115)

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Chart-15

RETURNON INVESTMENT 25 20 15 10 5 0 2007-08

2008-09

2009-10

2010-11

2011-12

RATIO*100

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Interpretation:

•

The return on investment of the company was 23 in the year 2008 and the return on investment ratio is gradually degreasing ,those ratio are 23, 23, 21, 5.4, and 11.5.

•

In the year 2008 and 2009 the ratio was 23 , it is highest ratio in my entire study period.

•

The overall performance of the company is not satisfactory because company is not maintaining proper idle ratio.

FINDINGS: • The current ratio of the firm is not maintaining standard i.e. 2:1 in selecting

period. So it indicates the idle funds and inefficient utilization of funds and indicates the weak position of the firm.

• The company’s current ratio maintaining average ratio 1:5.

•

The quick ratio of the company is also not at all supporting standard norm i.e. 1:1. So it indicates inefficient utilization of the company funds.

•

In case of proprietor ratio the company could not maintain the optimum level of the ratio. It is fluctuating.

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•

The company maintained the efficient reserve and surplus throughout my study analysis.

•

The company is maintaining weighted average method while calculating earnings per share.

•

The return on investment ratio has continuously degreasing .

•

Gross profit of the company is fluctuating.

•

Net profit of the company is continuously degreasing trend in my analyses.

• The company is maintaining fixed assets & current assets in proper manner.

SUGGESTIONS: •

It is suggested that the company should maintain required level of current assets ratio.

•

It is suggested that the company should maintain standard norm then only it can enhance the maximum profits.

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•

It is suggested that the company should maintain optimum level of proprietor ratio.

•

Sales are very important to every organization to sustain the growth , so company should try to control the cost of goods sold.

•

They have to go in for advertisement and sales promotion policy.

•

The company profit has fluctuating so better to take strategic decisions, it must be made for the profit to increase.

•

Funds are utilizing in proper manner.

•

The company is following straight line method in depreciation so better to adopt diminishing method.

•

Earnings per share value is continuously fluctuating trend so the must be maintain increasing trend.

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CONCLUSION:

This study on financial performance of “ASHOK LEYLAND LIMITED” has proved to be extremely useful for the company to evaluate its financial position. The study has brought the problem in maintaining constant liquidity of the firm and the working capital which has to be improved to avoid financial crunch. In the future, the study was extremely useful in identifying the major areas of concern affecting the financial of the firm.

The study was also extremely useful for the researcher it gave several opportunities to learn the financial process of the company. It was a learning experience for the researcher as the study acted as a bridge to apply theory with practical application.

The study could be used as base for future studies in this area. The financial analysis is the powerful mechanism of determining financial strength & weakness of the firm. The financial performance of the “ASHOK LEYLAND LIMITED “ is good.

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Bibliography :

Books:  Cost & Management accounting by Dr.S.N Majeswari .

 F inancial Management by prof.I.M Pandey, Prof.Emeritus,IIMA.

 Financial accounting by T.S Reddy and A.Murthy

Web sites:

 www.google.com  www.wikipedia.com  www.investopedia.com  www.accountingformanagement.com

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