Santosh Final Project
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Solapur University assets. The term net working capital can be defined in two terms the must commend deflation of net working capital in the difference between current assents and current liabilities.
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Solapur University assets. The term net working capital can be defined in two terms the must commend deflation of net working capital in the difference between current assents and current liabilities.
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Solapur University
1.2 Objective s of the study : 1. To study the financial management of firm .
2. To study in detail components of working capital requirement.
3. To study different methods methods used by the company for calculating ratio analysis.
4. To study the balance sheet of firm.
5. To give give suggestions on various ratios and working capital requirement.
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1.3 Scope of the study: 1. It helps to identify the need for funds and select select sources from which they may be obtained.
2. It helps forecasting cash flow that is matching the inflows inflows against cash outflows. 3. It helps to give analysis about financial position position of co mpany.
4. It helps to various potential investees to judge judge the solvency to the company. 5. It helps to intermit the profit earning capacity.
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1.3 Limitation of the study: 1. The study is limited up to the city of Solapur.
2. Information is collected within the two months months i.e. October & November 2009.
3. The study is related single firm fir m i.e. Aftek Infosys limited.
4. The information supplied by company is considered as true and reliable.
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1.4 Research Methodology Steps of Research:-
The following methodology is adopted for research.
Formation of statement
In this exact research problem is defined. ³ An analysis of working capital and ratio analysis statement at
Aftek
Limited
Solapur.´
Literature review
In this step review of literature is made. Data
is collected from company¶s financial statement, old project report of
company, net etc.
Collection of data
In this step actual data is collected. Secondary Sources:-
Company¶s financial statement, net books, old project report etc. The data relating have been collected from the published annual report of the company from 2008 to 2009. Primary data is also collected by discussion with the employees of finance
department of the company.
Analysis And Presentation Of Data:-
In this step data is analyzed and presented in a stable manner. Data
is analyzed and presented in tables.
Interpretation And Report Writing:-
Interpretation is made through analysis of data and report is drawn.
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2.1 Introduction to the Industry: A
study on ratio analysis and working capital to the
A ftek
Infosys
limited located at MIDC area Chinholi, Solapur. The Aftek
A ftek
Infosys limited was established on 1987 at Solapur. Th e
companies¶ non-executive director is Mr. Sandip. C.
company secretary is Mr. C.G.
Deshmukh.
Save. The
The Aftek companies¶ banker is a
bank of India, Gohil house, L.T. road, Mahim, Mumbai. Plant location :- Plot No. A/19/ 2, M.I.D.C. chinholi, Solapur. 413255. Resister office:- ³ Aftek House´ 265, Veer savarkar marg, Shivaji Park, Dadar,
Mumbai.4000 028.
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2.2 Brief History of the Organization: Aftek
starts research and development center in order to facilitate
development of new products and technologies in the areas of embedded. graphics and network computing
Aftek
its state of the art research &
development center at Pune. Pune being a university town and also an educational and cultural enter, is the best choice for staging berth to
Aftek
Aftek
innovations.
Five
technocrats give
with a strong desire and passionate drive to serve the
information technology needy of the domestic market five technocrat venture into business with the any capital being there unparalleled. Rich and dieses experience. Afteks
Initial Public Offering
Inventors. Strongly support
A ftek¶s
(IPO) gets 66 times oversubscribe d. experience plans to provide affordable
offshore software development services to its clients In the north American markets subsequently. Afteks shares get listed on bath the prestigious stock exchanges of indies. The
Bombay
(BSE) and the National Stock Exchange
(NSE) Aftek
technologies
takes 49% takes in Munich based are era information Arexera
has a suit of products for unstructured d o to
management. These product can be deployed for enterprise and internet search.
Aftek
plans to position these products for enterprise information
management. Aftek also plans to use this German presence to increase its European business. Power
safe
an
enterprise-wide
uninterruptible
power
supplies
management soft-ware receives gold certification for its interruption with unaccented from
computer associates international,
including apart from
stringent technical requirements, good certification signifies the tightest technical excrement. Good certification signifies the tightest possible integration with an significant value addition to the unaccented brand of products from computer associates.
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2.3 Subsidiaries of the company: 1) Mihir properties pvt Ltd.
2)
Aftek
sales & services Pvt Ltd.
3)
Digihome
4)
Arexera
Information Technologies GMBH.
5)
Arexera
Information Technologies AG.
Solutions Pvt Ltd. ( DSPL)
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2.4 Departments of the company: Department
Administration
Personnel
Manufacturing
Finance
Research and development
Purchase
Production
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Marketing
Maintenance
Security
Quality Assurance
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2.5 Important statistical informational:1. Name of the company: Aftek Infosys limited.
2. Established : on 1987
3.
Address:
Plot No. A/19/2 , M.I.D.C. Chincholi, Solapur 413255.
4. Working hour : 8 hours
5. No. of worker : 40
Category
No of worker
Staff / employee
12
Male worker
25
Female
03
worker
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2.6 Future Prospect: Last year has not been a year of positive growth for the A ftek company in fact the top-line has suffered a sizable reduction which is primarily due to the de-riding measures imitates by the company produces & technologies created required extensive testing and validation farming almost 35% of the engagement value.
All
the behest of the clients these pbs of testing and
validation wren earlier been outs unraced to third parties by the company such arrangement could result into avoidable financial exposure in the event the concerned client went into financial advocates. The parking of the global melt -down and din the recent past the seems to be more of a common phenomenon indicating that the western economies are slowly and staidly coming out of the recession period. The A ftek Company more concurred with us and European Economies. The last quarter of the us economy for the first time showed a positive growth. The better than expected performance of fortune 500 companies particularly, the financial and banking companies have surprised the market. Both
Indian and china are looked upon by the world as the fastest
goring becomes. This has creates a situation which the company is leveraging to address the growing opportunities in the automation and it sector within this region, particularly in India.
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2.7 Organization Structure:-
H.R.
Assist
working
Manager
Manager
Staff
Assist Prod Manager
working staff
store Production Manager
Quality Cntrol Mngr
M.D
working staff working staff
Purchase Manager
working staff
R & D Manager
Assistant Manager
working staff
Account
working staff
Marketing
Marketing Manager
Dept
sales manager
company Secretory
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1) Working Capital:Introduction:
Working capital management arises in attempting the problems that arise in attempting to manage the current assets the current liabilities and the interrelationship that exists between then. The tern current assets refer to those assets which in the ordinal any course of business can be or will be converted into cash within one year without disrupting the operations are cash marketable recurrent assets of the firm. The major current assets receivable and imentary current liabilities are those liabilities which are into need.
At
their
inception to be paid in the ordinary course of business within a year out of the current assets or earning of the concern. The basic current liabilities are accounts payable bank overdraft, and outstanding expenses the goal of working capital management is to manage the firm¶s current assets and liabilities in such a way that a satisfactory level of working capital is maintained Domitian
of working capital:
³There are two types of working capital.´ I.
Gross working capital
II.
Net working capital
1. Gross working capital Means the current assets which represent the proportion of Investment that circulates from one form to another in the ordinal conduct of business.
2. Net working capital : Is the difference between current assents and currents liabilities or alternatively the portion of current assents financial with long term funds.
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Statement showing working capital requirement format . Particular
Rs.
y
Current Asset
y
Stock of raw materials
xxx
y
Stock of work in process
xxx
y
stock of finished goods
xxx
y
sundry debtors
xxx
y
prenatal expenses / unexpired expenses
xxx
y
cash / bank balance
xxx Total µ A¶
y
xxx
Current liabilities
1. sundry creditors
xxx
2. outstanding wages/labor
xxx
3. outstanding overhead
xxx Total µB¶
Working capital required ( A -B)
xxx xxx
Valuation: 1. Raw Material:-
Raw material is valued at raw material cost price per unit Formula :
unit X period X Raw material cost Price P.V. (Raw material)
2. Work in progress:-
WIP valued at total cost per unit. Formula
± unit X period X total cost per unit
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goods valued at Cost P.V.
Formula
= Unit X Period X total Cost P.V.
4. Sundry Debtor:-
Sundry electors are also valued at total cost per unit. Sanely debtor = unit X period X total cost per unit . 5. Prepaid Expense / expenses paid in advance or unexpired expenses. Formula: -
PE = Amount X period. 6. Sundry Creditors:-
Sundry creditors values at raw materials from credit Sundry creditors = unit X period X raw material cost P.U
7. Outstanding wages / labour
Outstanding labour valued at labour price or wages price per period outstanding labour = unit X period X la bour price. 8. Outstanding overhead:-
Outstanding overhead valued at overhead price per unit. Outstanding O.H. = Unit X period X O.H. Price P.V. Need for Working capital:-
The need for working capital (gross) or current assets cannot be overemphasized given the objective of financial decision marking to maximize the shareholders wealth, it is necessary to ge nerate sufficient profits the extent to generate sufficient profits the extent to which profits can be earned
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A
success full sales programme is in other world. Other things necessary for earring profits by any business enterprise however sales do not convert into cash instantly there is invariably a time-lag between the sales of goods and the receipt of cash. There is, therefore, are need for working capital in the from of current assents to deal with the problem arising. Out of the lack of immediate realization of cash gains goods sold. Therefore sufficient working capital in necessary to suction sales activity technically this is referred to as the operating or cash cycle can be said to be at he ting cycle and be heard of the need for working capital ³the continuing flow form cash to suppliers, to inventory, to account receivable and bank into cash is what is called the operation cycle referee the length of time necessary to competed the following cycle of events. 1. conversion of cash into inventory 2. Conversion of receivable into cash The operation cycle which is a continuous process is shown in following diagram: -
Phase 3
Receivables
Cash
Phase 2 Inventory Phase 1
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Solapur University If it were possible to compete the sequences instantaneously, there would be no need for current assent (working capital) but since it is not possible, the firm is forced to have current assets since cash inflows and outflows do not match firms to necessarily keep cash or inverts in short-term liquid securities so that they will be in apposition the meet obligation ns when they become due similarly firmly must have adequate inviter to guard against the possibility of not being able to meet demand for their products adequate inventory therefore provide a cushion against being out of stock if firms have to be competitive they must sell goods to their customers on credit which necessitates the holding of accounts receivable it is intense way that an receivable level of working capital is absolutely necessary for smooth sales activity which in turn enhances the owners wealth. The operating cycle consists of there phases. In phase I cash gets converted into inventory this includes purchase of raw materials conversion of raw materials into work In progress finished goods & finally the transfer of goods to stock at the end of the manufacturing process in the cash of trading organizations this hose is shorter as there would be no manufacturing activity and cash is directly converted into in directly converted into inventory the phase is , on course totally in the case of service organizations. In phase II of the cycle, the inventory is converted into receivable as credit sales are made to customer firms which do not sell on credit obviously not have phase III of the operating cycle. This phase completes the operating cycle thus the firm has moved form cash to inventory to receivables and the aches The last phase, Phase III, represent the stage when receivables are collected this phages completes the operating cycle thus the firms has moved from cash to inventory to receivable and to cash again.
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Ratio Analysis: Meaning of Ratio Analysis.
Ratio analysis is widely-used tool of financial analysis it can be used to compare the risk and return relation ship of firms of different sizes it is defined as the systematic use of ratio to interpret the financial statement so that the strengths and weaknesses of a firm as well as its historical performance and current finance cal condition can be determined the
Fermi
ratio refers to the
numerical or quantitative relation ship between tow items /variables. Definition:
³Ratio analysis is a systematic use of ratios to interpret
/
assets
the performance and sates of the firm.´
Various types of Ratio Analysis.
Classification of ratio is made on the basis of requirement by end users and they indicate symptom as characteristic of the company.
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Solapur University Functional classification in view of financial management
A) Profitability Ratio
C) Liquidity ratio
E) Efficiency Ratio
1. Gross Profit ratio
1. Current ratio
2. Fixed Assets Turnover Ratio
1. Inventory Turnover Ratio
2. Liquid ratio
2. Net Profit ratio 3. Absolute liquid 3. Operating Profit ratio
3. Total Assets Turnover Ratio 4. Working capital Turnover
4. Expense Ratio
Ratio
a) Operating ratio
5. Debtors Turnover Ratio
b) Administrative Expenses ratio
B ) Solvency Ratio
D) Profitability Ratio
1. Debt-equity Ratio
1. Return on Investment
2. Interest coverage Ratio
2. Return on Equity
3. Proprietary Ratio
3. Earning per Share
4. Fixed Asset to Net worth 5. Capital Gearing Ratio
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Solapur University A] PRO FITABILITY R ATIO
1] Gross Profit Ratio
:-
Gross profit ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Thus it is calculated by dividing the gross profit by sales.
Gross profit ratio = Gross Profit
X
100
Net Sales
This ratio is the fundamental importance in analysis of trading result of business. Gross profit should be sufficient to cover all
Administrative
and
selling and financial expenses & to leave enough profit for proprietors. The gross profit ratio would be different types of business. Therefore standard cannot be determined.
However,
in the same industry considering past gross
profit can be fixed as to be reasonability & can be called standard. A
high gross profit margin ratio is sign of good management.
2] Net Profit Ratio:
Net profit ratio establishes a relationship between net profit and sales and indicates the efficiency of the management in manufacturing, selling, administrative activities of the firm. This ratio is the overall measure of firm¶s profitability.
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Solapur University It is calculated as under :
Net profit Ratio = Net profit after Tax
X
100
Net sales 3] Operating profit Ratio:
Operating Profit ratio establishes a relationship between operating profit and sales. The operating profit is calculated as operating profit = Gross profit ± operating expenses. operating expenses includes office & administrative expenses and selling & distribution expenses. This ratio is calculated as under :
Operating profit Ratio = Operating profit
X 100
Net sales
4] Expenses Ratio: -
Another
profitability ratio related to sales to expenses ratio. It is
computed by dividing expenses by sales. The term expenses includes, (1) Operating Ratio (2) Non operating expenses Ratio (3)
Administrative
expenses Ratio
There are different various expenses also. 22
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Solapur University The expenses ratio is closely related to profit margin gross, as well as net & also importance for analyzing the profitability of a firm. It should be compared over a period of time with industry as well as firm similar type. As a working proportion a low is favorable and high is unfavorable.
1] Operating Ratio
=
Operating Cost
X
100
Net sales
2] Administrative Expenses Ratio = Administrative Expenses
X100
Net Sales B) SOLVENCY R ATIO: 1] Debt-equity Ratio:
Debt-equity
ratio, also known as External-Internal Equity ratio is
calculated to measure the relative claims of outsiders (i.e., shareholders) against the firm¶s assets. This ratio indicates the relationship between the external equities or the outsiders fund and the internal equities or the outsider¶s funds and the internal equities o r the shareholders¶ funds, thus :
Debt-equity Ratio = outsiders Funds
X 100
Shareholders¶ fund
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Interest coverage ratio indicates the number of times interest is covered by the profits available to pay the interest charges. Long -term creditors of a firm are interested in knowing the firms¶ ability to pay interest on their long-term borrowing. Generally, higher the ratio, more safe are the long term creditors because even if earning of the fall, the firm shall be able to meet its commitment of interest charges.
But
a too high interest coverage
ratio may not be good for the firm because it m ay imply t hat firm is not using debt as a source of finance so as to increase the earnings per share.
EBIT
Interest Coverage Ratio = Total fixed charges
3) Proprietary Ratio:-
This ratio establishes the relationship between shareholders fund and total funds. It is an important ratio for determining long -term solvency of a firm. The components of this ratio are equity shares, reserves & surplus and total assets.
This ratio can be calculated as under.
Proprietary Ratio
=
Equity share + Reserves & surplus Total Assets. 24
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The ratio establishes the relationship between fixed assets and shareholder¶s funds, i.e., share capital plus reserves, surpluses and retained earnings.
The ratio can be calculated as follows :
Fixed Assets to Net Worth Ratio = Fixed Assets ( After depreciation)
Shareholder ¶s Funds 5] Capital Gearing Ratio:
The term µCapital Gearing¶ used to describe the relationship between equity share capital including reserves and surplus to preference share capital and other fixed interest ± bearing loans. If the preference share and other fixed interest bearing loans exceed the equity share capital including reserves, the firm is said to be in low gear if preference share capital and other fixed interest ± bearing loans are less than equity capital & reserves.
Capital Gearing Ratio calculated as under. Capital Gearing Ratio = Equity share capital + Reserve & Surplus
Preference capital + Long ± term debt bearing Fixed interest
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1) Current Ratio:
Current Ratio may be defined as the relationship between current assets & current liabilities. This ratio also known as working capital ratio, is a measure of general liquidity.
And
in most widely used to make the
analysis of short term financial position or liquidity of the firm. It is calculated by dividing total current assets by the total assent liabilities. Thus
Current Ratio
=
Current Assets Current liabilities
Current assets includes closing Inventory, sundry debtors,
Bills
receivable, cash & bank balance, prepaid expenses etc. According
to banking regulations the standard ratio 1.33 :1 but as
practical the standard ratio is assumed to be 2. If the ratio is greater than 2 the company¶s short run financial position is assumed to be satisfactory.
2] Liquid Ratio:
The Liquid ratio is also known as quick ratio or acid test ratio. The Liquid ratio is designed to show the amount of cash available for meeting immediate payment. It establ ishes relationship between Liquid as Liquid assets and Liquid liabilities.
An
asset is liquid it can be converted into
cash liquidly without a loss of value. Cash is most liquid asset. The other assets, which can be included in liquid assets, are bills receivable, sundry debtors, marketable securities and short term investment. The Liquid ratio is calculated as under.
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Liquid ratio =
Liquid Assets Liquid Liabilities.
Liquid Assets = Current Assets - prepaid expenses. Liquid Liabilities = Current Liabilities ±
Bank
overdraft.
3] Absolute Liquid Ratio:-
Absolute
liquid assets include cash in hand & at bank and marketable
securities or temporary investments. The acceptable norm for this ratio is 50% or 1:2 i.e. Re.1 worth absolute liquid a ssets are considered adequate to pay Rs.2 worth current liabilities in time.
This can be calculated as under : -
Absolute liquid ratio =
Absolute liquid assets Current liabilities
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Solapur University D) PROFITABILITY R ATIO: a) Return on investment:
This ratio is one of the most important ratios used for measuring overall profitability of a firm as the primary objective of the business is to maximize the earnings; this ratio indicates the extent to which the primary objective of the business is being achieved. This ratio is of great importance to the present and prospective shareholders as well as the management of the company. The return of shareholders investment should be compared with the return of other similar firm in the same industry. b) Return on equity:
In real sense, ordinary shareholders are the real owners of the company. They assume the highest risk in the company. Preference shareholders have a preference over ordinary shareholders i n the payment of dividend as well as capital. Ordinary shareholders are interested in the profitability of a company and a performance of the company should be judged on the basis of return on equity capital of the company.
This can be calculated as under
Return on equity =
E AT (Net profit after tax ) ± preference dividend Equity share capital (paid-up)
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Earning per share is a good measure of profitability and when compared with E.P.S. of similar other companies, it gives of view of the comparative earnings or earnings power of the firm. E.P.S. calculated for a number of years indicates whether or not earnings power of the company has increased.
This can be calculated as under :
E.P.S. =
E AT (Net profit after tax) ± preference dividend No. of equity shares
E) EFFICIENCY RATIO: 1] Inventory Turnover Ratio: -
This ratio measures the number of times the Inventory has been sold & replaced during the year. It is computed by dividing the net sales during the year by the average Inventory in hand.
The relationship express the
frequency with which the average level of Inventory invested may recover through operation.
Inventory Turnover Ratio is calculated as under : -
Inventory Turnover Ratio =
Cost of goods Sold Average Inventory
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Inventory is calculated as under : -
Average Inventory = Opening Stock + Closing Stock
2 2] Fixed Asset Turnover Ratio : -
This ratio expresses the relationship between the total fixed assets that are financed by the owner¶s fund of company. This ratio should be high because the fixed assets are permanent assets, which cannot be sold for recovery in normal circumstances. If the ratio is low it means that the owners are using more debts for financing fixed assets. This is bad sign. This could be lead to deduction of working capital. Where working capital is efficiently used at higher percentage of owned funds can be converted into fixed assets. This can be calculated as under
Fixed assets turnover ratio s= Cost of goods sold Fixed assets
3] Total Assets Turnover Ratio:
Total assets turnover ratio establishes a relationship between cost of goods sold and total assets. This can be calculated as under :
Total assets turnover ratio =
cost of goods sold Total assets
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Working capital of concern is directly related to sales. The current ratio like debtors, bills receivables, cash, stock etc. change with increase or decrease in sales the working capital is taken as : Working capital = current assets ± current liabilities This ratio indicates the number of times of the working capital turned over in the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm a higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. This can be calculated as under :
Working capital tu rnover ratio =
cost of goods sold Average working capital
5] Debtors turnover ratio:
Debtors
turnover ratio indicates the number of times the debtors are
turned over during a year. Generally the higher the value of debtors tu rnover the more efficient the management of debtors /sales or more liquid are the debtors. Similarly, low debtors turnover implies inefficient management of less liquid debtors. This can be calculated as under : Debtors turnover ratio =
Annual credit sales Average trade receivables
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Solapur University Importance of ratio Analysis: As
a tool of financial management ratios are of crucial significance the
importance of rate analysis lies in the fact that it presents facts on a comparative basis and enables the dewing
inference regarding the
performance of a firm ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects. i) Liquidity position ii) Long term solving iii) Operation efficiency iv) Overall profitability v) Inter-firm comparison and vi) Trend analysis.
i) Liquidity position:-
with the help of ratio analysis conclusions can be drowns regarding the liquidity posit form of firm the liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become awe. A firm can be said to have the ability to meant its shirt term liabilities if it has sufficient liquid funds to pay the interest on it s short maturing debt usally within a year as well as to repay the principal. This ability is reflected. In the liquidity ratios rations of a firm the liquidity ration are particularly useful in credit analysis by banks and other suppliers of short-tem loons.
ii) Long-term Solvency:-
Ratio analysis is equally useful for assessing the long-term financial viability of a firm this aspect of the financial position of barrower is of concern to the long term creditor¶s security analysis and the present and potential 32
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term solvency is measured by the
leverage/capital structure and profitability rations which fours on earring power and operating efficiency ratio analysis reveals the strengths and weaknesses of a firm in this respect the leverage ratios for instance will indicate whether a firm has a reasonable proportion of various source of finance or if it is heavily loaded with debt in which case its solvency is exposed
to serious strain.
Similarly the various profitability ratites would reveal whether or that the firm is able to defter adequate to its wooers consistent with the risk involved.
ii) Operating efficiency:-
yet another dimension of the usefulness of the ratio analysis relevant from the viewpoint of management is that it throws light on the degree of efficiency in the management and utilization of its assets the various activity ratios measure this kind of operational efficiency in fast the solvency of affirm is in the ultimate analysis dependent upon the sales revenues generated by the use of its ascots total as well as its components
iv) Overall Profitability:-
Unlike the outside parties which are interested in one aspect of the financial position of a firm the management is constantly concerned about the ever all profitability of the interiorize 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 to ensure a reasonable return to its owners and secure.
Optimum
utilization of the assets of the firm this is possible firm integrated vi ew is taken and the entire ratio are considered together.
v) Inter-firm comparison:-
Ratio analysis not any throws light on the financial position of a firm but also serves as a stepping stone to rams dial measures this is made 33
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vi) Trend Analysis:Finally
ratio analysis enables a firm to take the time dimension into
account in other words whether the financial position of firm is imparting or deteriorating over the years this is made possible by the use of trend analysis the significance of trend analysis of ratios lies in the fact that the analysis can know the direction of management is favorable or un favorable for example the ratio may be low as compared to the norm but the trend may be upward on the other hand though the present level may be satisfactory but the trend may be a declining one.
Limitations of ratio Analysis :
Ratio analysis is a widely used tool of facial analysis yet it suffers from various limitations the operational implication of this is that while using rations the conclusions should not be taken on their face value some of the limitations which characterize ratio analysis are i) Difficulty in comparison ii) Impact of inflation and iii) Considerers diversity.
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one serious limitation of ratio analysis yet it suffers from various limitations the operational implication of this is that while using rations the conclusions should not be taken on their face value some of the limitations which characterize comparability one technique the is employed is interterm comparison but such comparisons are vitiated by different procedures adopted by various firms the differences may relate to. y
Differences
in the basis of inventory valuation.
y
Different
y
Estimated working life of assets particularly of plant end equipment.
y
Amortization
depreciation methods.
of intangible assets like good will patents and so on
amortization of deferred
revenue expenditure such as preliminary
expenditure and discount on issue of shares
:
y
Capitalization of lease
y
Treatment of extraordinary items of income and expenditure and so on secondary part from different accounting procedures comparison may have
different
accounting
periods
implying
differences
in
the
composition of the assets particularly current assents for these reasons the ration of two firms may not be strictly comparable. Another
basis of comparison the industry group average this
Presupposes the availability on a compare pensive scale of various rater for each industry group over a period of time if hawker as sis likely such information is not competed and available the utility of ratio analysis would be limited.
ii) Impact of Inflation:-
The second major limitation of the ratio analysis as a tool of financial analysis is associated with price level changes this in fact is a weak nests of the traditional financial statement which are based on historical costs.
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An
Solapur University implication of this feature of the financial stamens as regards ration analysis is hat assents acquired at different periods are in effect.
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Solapur University Re-arrangement of balance sheet for the year ended 31 -3-2009
Liabilities
Share capital
Assets
Rs.
1,87,062
Reserves &
Rs.
Fixed Assets
28,41,663
28,55,480 Investment
40,807
surplus Secured loan
4,94,796 Good will arising
35,340
on consolidation
Unsecured loan Deflexed
tax
4,59,420 16,298 Current Assets
30,90,575 Inventories
Add- Balance
35,444
carried forward from P and L
A/c
Current
Sundry debtor
13,46,582
cash & Bank
28,43,011
liabilities
balance Liabilities
2,11,930 Other current
262
Assets
Provision
1,24,113 Loans & advances
Total
74,39,674
37
BBA
2,96,565 Total
74,39,674
DHB
SONI
Solapur University Re-arrangement of profit & loss A /c. for the year ended 31 -3-2009. Particular
Schedule
Gross Sales
Rs.
Rs.
22,03,966
Less-Return, Sales tax
-
Net Sales
22,03,966
Less-Cost of goods sold 1. Cost of sales & services (opening stock + purchases - closing stock) 2. Factory overhead
11,22,278 A
40,358
Total cost of goods sold
11,62,636
Gross Profit
10,41,330
(Net sales-cost of goods sold) Less ± operating expenses 1) Administrative exp.
B
2,59,690
2) Selling & distribution exp.
C
18,910
3) Finance exp.
D
32,986
4) depreciation
5,38,995 8,50,581
Operating Profit
1,90,749
Add-Non
9,55,560
operating income
Less-Non operating exp
E
38
BBA
2,316
DHB
SONI
Solapur University 11,43,993
Net Profit before tax & exceptional item Less - provision for tax
F
Less - exceptional item
27,658 12,03,659
12,31,317 87,324
Net - loss before share of minority interest in loss Less - share of minority interest in loss
5,145
Net loss Add- Balance
82,179
of profit
31,72,754
Less- Appropriate preference dividend balance appropriation 31 -3-2009 Profit available for appropriation Transfer to general reserve
-
proposed dividend
-
corporate dividend tax
-
Balance carried forward to balance
-
30,90,575
sheet
39
BBA
DHB
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Solapur University SC HEDULE:-
A : Factory Overhead
1) Rent
38,879
2) Insurance charges
191
3) Repairs & Maintenance
1,288 40,358
B : Administration Expenses
1) Salaries, wages &
Bonus
1,97,713
2) Contribution to provident fund
7,744
3) Staff welfare
2,964
4) Stock compensation exp
2,393
5) Professional fees
5,271
6) Auditors remuneration
5,103
7) Commission
1,285
8) Electricity exp.
6,582
9) Provision for doubtful loans & advance
6,118
10) Provision for doubtful debts
7,624
11) Rates & taxes
1,736
12) Telephone & commission
3,739
13) Bad debts written off
4
14) Mislenious exp.
11,414
40
BBA
DHB
SONI
Solapur University 2,59,690 D : Selling & Distribution exp.
1) Traveling exp.
15,233
2) Advertisement
2,057
3) Commission paid non executive
1,620
member 18,910 E : Finance exp.
1) Bank charges
1,160
2) Bill discounting charges
2,197
3) Interest on cash credit
5,476
4) Interest of FCCB
5,125
5) Interest to others
19,028 32,986
F : Non-operating Exp.
1) Research & development exp.
2,316 2,316
41
BBA
DHB
SONI
Solapur University
CALCUL ATION OF RATIOS: A) LIQUIDITY R ATIO
Current Assets 1) Current ratio
=
Current Liability
Current Assets
y
1)
Inventory
-
35,444
2)
Sundry debtor
-
13, 46,582
3)
Cash and Bank
-
28, 43,011
4)
Other current assets
-
262
5)
Loans and advance
-
2, 96,565 45, 21,864
Current liability
y
Liabilities
-
2, 11,930
Provision
-
1, 24,113 3, 36, 043
:.
Current ratio =
Current Assets Current liabilities
45, 21,864 =
3, 36,043
Current Ratio: 13.46:1 42
BBA
DHB
SONI
Solapur University Remark: The present current ratio is 13.46 :1 while standard current ratio is
2:1. Actual current ratio is bellow standard it means companies short financial position is not satisfactory. 2) LIQUID R ATIO / QUICK R ATIO
Liquid asset =
Liquid liability
Liquid asset
Liquid liability =
=
Current asset ± closing stock
=
45, 21,864 ± 35,444
=
44, 86,420
Current liability ±
Bank
=
3, 36,043 - 0
=
3, 36,043
over draft
44, 86,420 @
3, 36,043
Liquid
Ratio: 13.35:1
Remark: The actual acid test ratio is 13.35:1, while standard liquid ratio is 1:1
it means present liquid ratio is greater than standard ratio. It means the liquidity position of the company is satisfactory.
43
BBA
DHB
SONI
Solapur University 3) STOCK OF WOR KING CAPITA L R ATIO
Closing stock =
Working capital
35,440 =
41, 85,821
= 0.01
Stock
of working capital ratio = 0.01
Remark: The ratio is an index of the position of over stocking it shows. What
part of the working capital is representing by the closing stock.
44
BBA
DHB
SONI
Solapur University B) PROFITABILITY R ATIO
Gross
1) Gross Profit ratio
profit x 100
=
Net sales
10, 41,330 =
22, 03,966
=
Gross
x 100
47.25 %
Profit ratio = 47.25 %
Remark: The present gross profit of the company is 47.25 % of the sales it is
a good sign of trading activities because normally company finals at least 20 to 25 % gross profit, on total sales. Therefore the gross profit is more than normal acceptation.
Net profit after tax 2) Net profit ratio =
x 100
Net sales
Remark: The present net profit is zero because the company is in loss.
45
BBA
DHB
SONI
Solapur University
O perating
profit
3) Operating profit ratio =
x 100
Net sales
1, 90,749 =
x 100
22, 03,966
= 8.65 %
Operating
profit ratio = 8.65 %
Remark: The operating profit of the company is about 8.65 of the sales the
operating profit is not satisfactory because sales are less & traditional production expenses are comparatively more which dec reased profit margin.
Cost of goods sold + operating exp 4) Operating ratio =
x 100
Net sales
11, 62,636 + 8, 50,581 =
x 100
22, 03,966
= 91.35 %
Operating
ratio = 91.35 %
46
BBA
DHB
SONI
Solapur University Remark: Operating ratio indicates that companies¶ official and financial exp
about 91.35% of the total sales this exp. are on higher side, selling & distribution exp are incurred on average basis. This ratio expresses the relationship between all operating exp. w ith its sales.
Net profit after tax 5) Return on share holders =
x 100
Share holder fund
Remark: There is no return on share holders fund or proprietor fund because
the company is in loss.
Net profit (before interest tax) x 100
6) Return on share holders=
Capital Employed
Capital Employed
= Proprietor funds + long term loan = 71, 03,631 + Nil = 71, 03,631
11, 43,993 @
=
71, 03,631
= 0.16
Return on capital Employed = 0.16 % 47
BBA
DHB
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Solapur University Remark: It shows efficiency management has used the funds provided by the
creditors and owners.
Net profit after tax 7) Return on equity share capital =
No. of equity share
Remark: There is no return on equity share capital because company is in
loss.
48
BBA
DHB
SONI
Solapur University C) Expenses Ratio:
Administrative exp. x 100
1) Administrative exp. ratio =
Net sales
2, 59,690 =
x 100
22, 03,966
= 11.78 % Administrative
exp. ratio = 11.78 %
Remark: Present administration exp. is on higher side normally 5% to 6%
administration expenses are expected.
Sell & dist. exp. x 100
2) Selling & distribution exp ratio =
Net sales
18,910 =
x 100
22, 03,966
= 0.87 % Selling
& distribution exp. ratio = 0.87 %
49
BBA
DHB
SONI
Solapur University Remark: As compare to total sales the selling & distribution exp. are very low
it means company has ad-vided larger selling exp. by controlling expenditure on sales man salary, advertisement & publicity & also on showroom exp.
Finance
3) Financial exp. ratio
exp.
=
x 100
Net sales
32,986 =
x 100
22, 03,966
= 1.50 % Financial
Remark:
exp. ratio = 1.50 %
Financial
exp. is controlled by the company it means company has
not believed on bank finance.
50
BBA
DHB
SONI
Solapur University D) ACTIVITY R ATIO:±
Cost of goods sold 1) Inventory / stock turnover ratio =
Average stock
O pening @
Average stock
stock + closing stock
=
2
18,340 + 35,444 =
2
53,784 =
2
= 26,892 :.
Stock turnover ratio = Cost of goods sold Average
stock
11, 62,636 @
53,784 = 21.62 times.
Stock
turnover ratio = 21.62
51
BBA
DHB
SONI
Solapur University Remark: Stock inventory is 21.62 times of cost of sales it means cost of sales
are more than average stock. This ratio indicates that maximum production is disposed by the company.
Cost of goods sold 2) Fixed asset turnover ratio
= Fixed
assets
11, 62,636 @
Average stock
=
28, 41,663
= 0.41 Fixed
asset turnover ratio = 0.41
Remark: The ratio measures the efficiency in the utilization of fixed assets.
This ratio indicates weather the fixed assets are being fully utilized.
Sales 3) Total asset turn turn over ratio = Total
assets
22, 03,966 =
74, 39,674 = 0.30 Total
asset turnover ratio = 0.30
52
BBA
DHB
SONI
Solapur University Remark: The ratio indicates the sales generated per rupee of investment in
total assets. The standard taken 2 times. So the above ratio indicates below standard it is off sound.
Account receivable x 365 days.
4) Debtors turnover ratio =
Net credit sales
@
Account receivable
= Sundry debtor + Bill receivable = 13, 46,582 + 0 = 13, 46,582
13, 46,582 =
@
22, 03,966
x 365
= 223.01 @
Debtors
Remark:
turnover ratio = 223.01 days.
The rule of thumb that the collection period should not exceed
above showing 223.01 days ratio.
53
BBA
DHB
SONI
Solapur University 5) Creditors turnover ratio = Account payable
x 365 days.
Net credit purchases @
Account payable = Sundry creditors + Bill payable
= 79,282 + 0 = 79,282 = 79,282
@
x 365
33,834 = 855.29 days @
Creditors turnover ratio = 855.29 days
Remark: This ratio indicates the frequency with which the debts are paid by a
business firms smaller the debtor¶s turnover, the larger the period of credit enjoyed by the company.
Sales 6) Capital turnover ratio
=
Capital employed
22, 03,966 =
71, 03,631
= 0.31
Capital turnover ratio: 0.31
54
BBA
DHB
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Solapur University E) Long term solvency ratio:
Fixed
1) Proprietary ratio
assets
=
Capital employed
28, 41,663 =
71, 03,631
= 0.10
Proprietary ratio: 0.40
Remark : This ratio is normally indicates that the strength if credit worth ness
of concern, higher proprietary ratio indicates frequently indicative of over capitalization and on excessive investment in fixed assets in relation of actual needs.
Equity share capital + reserve & sur lus + rofit & loss 2) Capital gearing ratio
= Pref.
sh. capital + long term loans debentures
1, 87,062 + 59, 46,055 =
0 + 9, 70,514 61, 33,117
=
9, 70,514
= 6.32
Capital gearing ratio = 6.32 55
BBA
DHB
SONI
Solapur University Statement showing working capital requirement year ended 31 -3-2009. Particular
Rs.
A) Current assets
- Raw material
35,031
- Work in progress
413
- Sundry debtor
13,46,582
-Cash and Bank balance
28,43,011
-loans and advances
2,96,565
-other current assets
262 Total A
45,21,864
B) Current Liabilities
- Sundry creditors
79,282,
- Advance from customer
14,569
- Premium payable on redemption of FLLB¶s
96,740
-Investor Education and protection fund
4,040
-be credited by unclaimed dividends
3,947
- Interest accrued but not due
13,352
- Other liabilities
1,24,113
- Provision Total B
Working capital requited ( A -B)
41,85,821
56
BBA
3,36,043
DHB
SONI
Solapur University
Observations:1]
The overall profitability of the factory is not satisfactory as
Aftek
is
unable to earn sufficient profit after meeting all cost & expenditures. The installed capacity of the plant is underutilized. The implementing the production program of its
2]
By
Aftek
has not
Product.
The factory is not using the techniques of cost
Accounting,
i.e.
budgetary control, Standard costing.
3]
The overall liquidity position of factory is not satisfactory but the quick ratio of the factory is above the standard of 1 :1, which indicates that substantial part of the current assets is in the form of stock. The absolute liquid ratio of the factory is also above the standard which indicates that factory may face difficulty in liquidating it¶s current liabilities
4]
Fixed
assets turnover ratio of factory indicates that the fixed assets of
the factory are underutilized.
5]
Total assets turnover ratio of factory indicates that there is over investment in the assets of factory and the assets of the factory are underutilized.
6]
Working capital turnover ratio of the factory indicates that there is excess investment in working capital of the factory.
57
BBA
DHB
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Solapur University 7]
The debtor¶s turnover ratio of the factory indicates that there is poor management of receivables.
8]
The debt-equity ratio of the factory is higher than the standard which indicates there is dominance of out spiders on the affairs of the factory.
9]
The interest coverage ratio of the factory indicates that
Aftek
is hardly
able to earn to profit to the extent of interest on loans which is below the standard.
10]
The proprietary ratio of factory indicates that there is on an average 0.40 % investment of shareholder¶s funds in the total assets of the Aftek
11]
Fixed
assets to net worth ratio indicate that fixed assets are partly
financed by shareholder¶s funds and partly by outsider¶s funds.
12]
The capital gearing ratio of the factory indicates that the factory¶s capital is highly geared.
13]
There is a heavy loss of factory on account of slow moving stock and stock carrying cost and interest.
14]
Inventory turnover ratio of the factory is far below the standard of 8 which indicates that there is over investment in stock
58
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DHB
SONI
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