Need of the Project

1.This projects is helpful in knowing the companies position of funds maintenance and
setting the standards for working capital inventory levels, current ratio level, quick
ratio, current amount turnover level.
2. This project is helpful to the managements for expanding the dualism & the project
viability & present availability of funds.
3. This project is also useful as it companies the present year data with the previous
year data and there by it show the trend analysis, i.e. increasing fund or decreasing
fund.
4. The project is done entirely as a whole entirely. It will give overall view of the
organization and it is useful in further expansion decision to be taken by
management.

Objective of the Study

The main objective of Ratio Analysis is to get
knowledge about financial position of GNA Enterprises Ltd.
Bundala.

Specially, objectives of study are as

follows :

 To find out the financial position of GNA Enterprises Ltd. For the year 2006,
2007, 2008 and 2009.
 To know the future prospect of the company.

1
  To study the organizational structure of the company and its various
departments.
 To Determine the Profitability, Liquidity and Solvency ratio of the company.
 To study the present position of the GNA Enterprises Ltd.
 To offer appropriate suggestions for the better performance of the
organization.

Scope of the study

1) The scope of study is limited to one concern only i.e. Guru Nanak Auto
Enterprises Ltd.
2) The period consider 45 days.

The scope of the study is limited to collecting the financial data published in the
annual reports of the company with reference to the objectives stated above and an
analysis of the data with a view to suggest favorable solution to various problems
related to financial performance.

2
 Research Methodology
When we talk about the research methodology, we not any talk about the research methods
but also considers the logic behind the method we use in the context of our research study
and evaluate why we are using a particular method or technique so that the research are
capable of being evaluated either by the researchers himself or but others.

Research methodology is considered with in out the solution to a

problem or need. It is also consider with the search of knowledge.

For the fulfillment of he project on the analysis of the financial statement the sources of the
data are as follow:-

 Primary Data
 Secondary Data

 Primary Data: This is the most authentic and accurate source of data collection
as it provides fresh and first hand information. Under this data is collected by personal
interview of the concerned executives, daily customers of the concern. Direct face-to-
face questioning was held with the staff members, vice president and daily customers.
 Secondary Data: This source provides second hand information. Information
collected through this source was extracted from company’s journals, pamphlets,
brochures and manuals etc.
These sources proved very fruitful and successful during the preparation of the report and
completion of the report. Without this, the report could not be at the completion stage.

3
 Guru Nanak Auto
Enterprise Ltd.

Basic Information:-

Name -------------------------------------------------------- GNA Enterprises Ltd.

Date of Incorporation------------------------------------- 30, March, 1954.
Key People------------------------------------------------- JagdishSingh (C.M.D.)
Gurinder Singh (J.M.D.)
Brand Name---------------------------------------------- “Eye”.
Product---------------------------------------------------- Rear Axle Shafts, Brake S’Cam
Shafts, Bimetallic Bushes and
Thrust Washers, etc.
Auditors-------------------------------------------------- G.S Syal &Co.(C.A. Jalandhar)
Address-------------------------------------------------- GNA Enterprises Ltd.,
BundalaVillage, Jalandhar-144034,
Punjab, India.
Phone---------------------------------------------------- +(91)- (1826)- 270111 ( 6lines).
Fax------------------------------------------------------- +(91)- (1826)- 270003.
Email---------------------------------------------------- gnae@gnaent.com
Website------------------------------------------------ www.gnaent.com

4
History of the Company
Guru Nanak Auto Enterprises Ltd. is an auto component Manufacturing plant. Sardar Amar
Singh established Guru Nanak Auto Enterprises Ltd. in 1946 as a small- scale industrial
venture in a one thousand meters plot land. In the beginning of the chaff-cutting machine
were produced but in the early 50’s due to recession in the economy, the chaff- cutting
machine workshop had to wind up.

In 1954, Late Sardar. Amar Singh along wit his sons

S.Rachhpal Singh and S. Gursharn Singh started again but time with a new venture of
manufaturing automobile Rear Axle Shafts with a capital of Rs.15000/-. At that time the
company had two lathe machines and a milling machine in the workshop. This was the
beginning of new era in the company since then it was never looked backed and has
emerged as a well establishing, quality conscious pioneer company in the auto parts
industry.

Now Guru NanakAuto Enterprises Ltd. is the flagship company

of GNA group of companies located at village Bundala in jalandhar district, Punjab. GNA
Enterprises Ltd. is spread over an area of 80;000 square meters with 30,000 square
meters of covered space in Bundala, Jalandhar expanding continuously ever since, under
the stepwardship of Mr. Jagdish Singh (C.M.D.). The company expertly applies
breaktrrough technology by providing innovative art-to-part engineering, flexible
manufacturing with world-class infrastructure an on-time delivery to everything from
passenger cars and light trucks to heavy commercial vehicles. The company coordinates
with buyers to cut development time, improve process efficiency and help rewrite product
quality and performance standards.

5
 Company Profile
GNA Enterprises Ltd. is today a company of the US $ 55 million and is single largest
integrated facility of forged and machined components. GNA Enterprises with more than
six decades of expertise is today premium auto component manufacturer in India.
Company is one of the largest exporter of auto components from India to developed
markets across the globe. With three manufacturing facilities in India and network of
facilitating offices in India and overseas, the company manufactures a wide range of safety
and critical components for M & HCVs, LCVs, Off-highway Vehicles, Passenger Cars,
SUVs and Tractors. The company also manufactures specialized components for the
railways, defense, aerospace, power, energy, oil & gas, marine, mining & construction
equipment, and other industries. It is capable of producing complex large volume parts in
all grades of steel.

Over the years, GNA Enterprises has been investing in creating state-of-the-art facilities,
world-class capacities and capabilities. Our facilities include, fully automated forging and
machining lines. GNA Enterprises has built up a strong capability in process design and
engineering, including a comprehensive product testing and validation facility.

Its customer base includes virtually every global vehicle maker like Tata Motors Ltd., Arvin
Meritor of Italy, France, Sweden, Brazil & China, Ford of Turkey, Power & Sons of USA,
Maruti Suzuki Ltd., Eicher Motors Ltd., Swaraj Mazda Ltd., Toyota Kirloskar Auto Parts,
Mahindra & Mahindra, Spicer India Ltd., Automotive Axles Ltd., Vehicle Defense Factory-
Jabalpur, International Cars & Motors Ltd., MLR Motors etc.

GNA Enterprises is a recipient of several national honors, recognition and awards.

Automotive Component Manufacturers Association of India (ACMA) has honored its export
excellence in the year 2005~06 and 2006~07. Business Sphere has recognized Mr.

6
Jagdish Singh as the "Business Man of Year" for the year 2008. Eicher Motors & Sona
Steering has decorated in the past with Best Supplier epithets.

Currently, GNA Enterprises has upgraded its capacity and capabilities. The capability
to produce technology intensive small or stub components is developed with the
installation of new Hesenclever Forging Press that comes with integrated Billet Heater.
On the other front Company has finished up with productionising of FICEP make DD
Screw Press and CEMSA MGM to produce quality forging components of near net
shape with full automation. Also the Machining line has been made more advanced
with installation of the DACKEL-MAHO VMC, HMC, MAZZAK CNCs etc. This has
created enough capabilities in the company to start with producing technology
intensive components for the Railways, Power and Oil sector, Marine and Aerospace.
Simultaneously, the company continues to pursue opportunities for inorganic growth
that would result in an enlarged geographical presence and customer base.

To be the numero uno in its class is the goal of its visionary Chairman Mr. Jagdish
Singh and company is on the track towards achieving it.

7
 Business units:-
• Business unit-I:-

Located at bundala, spread over 50000 sq. meter. With genesis even independence of India,
with complete integrated facilities to produce 1,60,000 machined components per month. The
plant is currently manufacturing rear axle shafts, torsion bar, track bars, steel forgings, brake
s’cam shafts for vehicle manufactures like –TATA motors,mahindra&mahindra, maruti
Suzuki, eicher, sawaraj mazda,Toyota,force-man, ICML and for tier 1 manufacturers like –
Spicer India andAAL.

Business unit- II:-

The state of art plant, located near phagwara has been awarded a STAR EXPORT HOUSE
(100%export oriented unit). Spread over 20,000 sq. mts. Area and has got six production
bays. Started operation in 2006 within nine months of laying foundation stone will have
integrated facilities to produce 1,50,000 machined parts per month. The structure with world
class features like seismic proofing with holds integrated rain water harvesting system and
100% standby power capacity of 3 mgw.

8
Currently plant is producing and exporting Axle shaft to OEM’s in italy, Sweden, france, china
and turkey for global truck manufacturers.

• Business unit-III :-
Located in the hub of India automobile sector at pune, the plant with total land area of 22,000
sq. mts. Is established for manufacturing stub components like- clutch shafts, coupling
flangers, wheel spindles, intermediate shafts and splined shafts etc. The plant will have state-
of-art infrastructure with high level of automation and ergonomics to produce small/stub parts
(weight between 3-30 kgs.), technology intensive auto components for the global OEMs.

9
Product Application
1.Rear axle shafts

o Passenger cars, jeeps.

o Utility vehicles, sport utility vehicles
o Light, medium & heavy commercial vehicles.
o Trailers

2. Brake S’cam shafts:

o BMW
o Mercedes
o York
o TATA
o Leyland

3. Bimetallic bushes & thrust washers:

10
o Passengers cars,jeeps.
o Utility vehicles, sport utility vehicles
o Light,medium & heavy commercial vehicles.
o Tractors.
o Two &three wheelers.

11
Clients of the Company:
GNA Enterprises is today OES to leading commercial vehicle manufacturers globally.
Through Arvin Meritor our Rear Axle Shafts find place in power transmission modules of
the trucks manufacturers like Renault, Volvo and Lveco in Europe. The company is also
supplying to Ford, BMC and Lveco in Turkey. We are proud to be associated with Indian
defence by supplying components that meet most rigorous field tests.

Names of Various Companies

MERCEDES BENZ LAND ROVER WILL’S JEEP

CHRYSLER DODGE BEDFORD/VAUXHALL FORD
TOYOTO NISSAN MAZDA
CHEVROLET GM BRITISH LEYLAND SUZUKI

12
For Light Commercial Vehicles

CUSTOMER KNOW HOW

TATA Engineering & Locomotive Co. ltd. Mercedes Benz, Germany
Swaraj Mazda ltd. Mazda, Japan
Eicher Motors ltd. Mitsubishi, Japan
Mahindra and Mahindra Nissan, Japan

For Medium, Heavy Commercial Vehicles

TATA Engineering & Locomotive Co,ltd. Mercedes

Automotive axles ltd. Meritor
Dana Spicer ltd. Data corporation ltd. (US)

For Cars & Jeeps, Pickup & Utility Vehicles

Maruti Udyog ltd. Suzuki Corp ltd Japan

Premier auto ltd. Peugeot
TATA
Mahindra & Mahindra Willys
Toyota Kirloskar Motors Toyota motors, Japan

13
Machining
• CNC lathes

• Grinders

• Cold spline rolling machines

• Rotto flow (rack rolling) machine

• Multi spindle drilling

• Hobbing

• Thread rolling machines

• Hydro-copying machines

• Special purpose machines

Testing facilities
• Metallurgical microscope with image analyzer

• Metascope

• Ultrasonic flaw detectors

• Micro hardness tester

• Profile projector

• Surface roughness testers

• Magnaflux testing

• Torque testing machine

• BHN, HRC & Vickers hardness testers

14
Logo of the Company

GNA Enterprises ltd. also uses a logo. Logo means a trademark or a symbol inserted in to
the firm’s letters & use for advertising purpose. The main aim of the logo of GNA enterprises
ltd. is given below:

• It shows the businessman’s religious faith.

• They believe that every company has a different sign in the market.

• Logo of GURU NANAK AUTO Enterprises ltd. is mainly the name of the company.

15
 SWOT Analysis of the Company
1. STRENGTHS:-

Some of the strengths of the company in international trade are as follow:-

• Leader in original equipment market
• Technology
• Lower production cost
• Quality certificate
• Government promotion

2. WEAKNESS :-

Location and infrastructure of the company have some negative effects such as roads in the
villages of Punjab are not up to the standards. There is every time a shortage of power
supply. Because the company is located in the villages, the employment levels are very low,
so there is lack of skilled workers. Some weaknesses are :-
• Location
• Less advanced technology
• Lack of skilled worker

3. OPPORTUNITIES:-

Automotive industry of India has had impressive growth in India and now findings
increasing recognition worldwide and a beginning has been made in exports of
vehicles as well as components. Some opportunities of the company in this
environment are as follows:-
• Boom in auto industry
• Open market
• Trade agreement
• Outstanding

4. THREATS:-

India has a boom in auto industry but there is always a threat of component of
competition from countries like Brazil and China. Domestic competitors such as
SPM, Raja Forging and Tabors are becoming more competitive in the market:-
• Competition
• Limited customers
• World trade organization

16
Achievement of the Company
The global quality standards of the company are attested by (UL),
Melville, NY and USA for:

Certificate Year Reason

ISO 9002 Certificate 1996 for exports.

QS 9000 Certificate 1998 for the company.

ISO 9001 Certificate 2004 for company’s facility.

TS 16949 Certificate 2004 for company’s facility.

17
 INTRODUCTION
RATIO ANALYSIS:

Fundamental Analysis has a very broad scope. One aspect looks at the general
(qualitative) factors of a company. The other side considers tangible and measurable
factors (quantitative). This means crunching and analyzing numbers from the financial
statements. If used in conjunction with other methods, quantitative analysis can produce
excellent results.
Ratio analysis isn't just comparing different numbers from the balance sheet, income
statement, and cash flow statement. It's comparing the number against previous years,
other companies, the industry, or even the economy in general. Ratios look at the
relationships between individual values and relate them to how a company has performed
in the past, and might perform in the future.

MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a mathematical yardstick that
measures the relationship two figures, which are related to each other and mutually
interdependent. Ratio is express by dividing one figure by the other related figure. Thus a
ratio is an expression relating one number to another. It is simply the quotient of two
numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute
figures as “ so many times”. As accounting ratio is an expression relating two figures or
accounts or two sets of account heads or group contain in the financial statements.
Ratio is numerical relationship between two variables which are connected with each other in
some way or the other. Ratios may be expressed in any one of the following manners:

 As a number between 500 and 100 may be expressed as 5(500 divided by 100).
 As a fraction may be expressed as former being 5 times of the later.
 As a percentage the relationship between 100 and 500 may be expressed as 20% of the
later.
 As a proportion relationship between 100 and 500 may be expressed as 1:5.

18
 MEANING OF RATIO ANALYSIS:

Ratio analysis is the method or process by which the relationship of items or group of items
in the financial statement are computed, determined and presented.
Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial
health and profitability of business enterprises. Ratio analysis can be used both in trend and
static analysis. There are several ratios at the disposal of an annalist but their group of ratio
he would prefer depends on the purpose and the objective of analysis.
While a detailed explanation of ratio analysis is beyond the scope of this section, we will
focus on a technique, which is easy to use. It can provide you with a valuable investment
analysis tool.

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

compares financial ratios of several companies from the same industry. Ratio analysis can
provide valuable information about a company's financial health. A financial ratio measures a
company's performance in a specific area. For example, you could use a ratio of a
company's debt to its equity to measure a company's leverage. By comparing the leverage
ratios of two companies, you can determine which company uses greater debt in the conduct
of its business. A company whose leverage ratio is
higher than a competitor's has more debt per equity. You can use this information to make a
judgment as to which company is a better investment risk.
However, you must be careful not to place too much importance on one ratio. You obtain a
better indication of the direction in which a company is moving when several ratios are taken
as a group.
Ratio analysis facilitate the presentation of information of financial statements in simplified
and concise and summarized form.

Definition: In the words of Hund, William,” Ratios are simply a

means of highlighting in arithmetical terms the relationship
between figures drawn from financial statements.”

19
 FORMS OF RATIO:

Forms of Ratio

As a Pure As a Rate of As a Percentage

Ratio Times

A] As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 & the
preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share
capital is 20,00,000: 5,00,000 or simply 4:1.

B] As a rate of times:

In the above case the equity share capital may also be described as 4 times that of
preference share capital. Similarly, the cash sales of a firm are
Rs. 12,00,000 & credit sales are Rs. 30,00,000. so the ratio of credit sales to cash sales can
be described as 2.5 [30,00,000/12,00,000] or simply by saying that the credit sales are 2.5
times that of cash sales.

C] As a percentage:

In such a case, one item may be expressed as a percentage of some other item. For
example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs.
10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]

20
 STEPS IN RATIO ANALYSIS

Selection of
Relevant Data

Calculation of
Appropriate Ratios

Comparison of
Ratios

Interpretation
of Ratios

• 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

21
 of some other firms or the comparison with ratios of the industry to which the
firm belongs.

• Interpretation of ratio:- 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

22
 TYPES OF COMPARISONS

Types of
comparisons

Cross Section Time Series Combined

Analysis Analysis Analysis

The ratio can be compared in three different ways –

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare them with the ratio or
ratios of some other selected firm in the same industry at the same point of time. So it
involves the comparison of two or more firm’s financial ratio at the same point of time. The
cross section analysis helps the analyst to find out as to how a particular firm has performed
in relation to its competitors. The firms performance may be compared with the performance
of the leader in the industry in order to uncover the major operational inefficiencies. The
cross section analysis is easy to be undertaken as most of the data required for this may be
available in financial statement of the firm.

23
2] Time series analysis:

The analysis is called Time series analysis when the performance of a firm is evaluated over
a period of time. By comparing the present performance of a firm with the performance of the
same firm over the last few years, an assessment can be made about the trend in progress

of the firm, about the direction of progress of the firm. Time series analysis helps to the firm
to assess whether the firm is approaching the long-term goals or not. The Time series
analysis looks for (1) important trends in financial performance (2) shift in trend over the
years (3) significant deviation if any from the other set of data.

3] Combined analysis:

If the cross section & time analysis, both are combined together to study the behavior &
pattern of ratio, then meaningful & comprehensive evaluation of the performance of
the firm can definitely be made. A trend of ratio of a firm compared with the trend of the ratio
of the standard firm can give good results. For example, the ratio of operating expenses to
net sales for firm may be higher than the industry average however, over the years it has
been declining for the firm, whereas the industry average has not shown any significant
changes.

24
The combined analysis as depicted in the above diagram, which clearly shows that the ratio
of the firm is above the industry average, but it is decreasing over the years & is approaching
the industry average.

PRE-REQUISITIES TO RATIO ANALYSIS

In order to use the ratio analysis as device to make purposeful conclusions, there are certain
pre-requisites, which must be taken care of. It may be noted that these prerequisites are not
conditions for calculations for meaningful conclusions. The accounting figures are inactive in
them & can be used for any ratio but meaningful & correct interpretation & conclusion can be
arrived at only if the following points are well considered:
1) The dates of different financial statements from where data is taken must be same.
2) If possible, only audited financial statements should be considered, otherwise there
must be sufficient evidence that the data is correct.
3) Accounting policies followed by different firms must be same in case of cross section
analysis otherwise the results of the ratio analysis would be distorted.
4) One ratio may not throw light on any performance of the firm. Therefore, a group of
ratios must be preferred. This will be conductive to counter checks.
5) Last but not least, the analyst must find out that the two figures being used to calculate
a ratio must be related to each other, otherwise there is no purpose of calculating a ratio.

25
 CLASSIFICATION OF RATIO

CLASSIFICATION OF RATIO

BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER

STATEMENT

1] BALANCE SHEET 1] LIQUIDITY RATIO 1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM
2] REVENUE 3] ACTIVITY RATIO CREDITORS
STATEMENT 4] PROFITABILITY 2] RATIO FOR
RATIO RATIO SHAREHOLDER

3] COMPOSITE 5] COVERAGE 3] RATIOS FOR

RATIO RATIO MANAGEMENT

4] RATIO FOR
LONG TERM
CREDITORS

26
 BASED ON FINANCIAL STATEMENT:
Accounting ratios express the relationship between figures taken from financial statements.
Figures may be taken from Balance Sheet , P& L A/C, or both. One-way of classification of
ratios is based upon the sources from which are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called Balance Sheet Ratios.
E.g. ratio of current assets to current liabilities or ratio of debt to equity. While calculating
these ratios, there is no need to refer to the Revenue statement. These ratios study the
relationship between the assets & the liabilities, of the concern. These ratio help to judge the
liquidity, solvency & capital structure of the concern. Balance sheet ratios are Current ratio,
Liquid ratio, and Proprietory ratio, Capital gearing ratio, Debt equity ratio, and Stock working
capital ratio.

2] Revenue ratio:
Ratio based on the figures from the revenue statement is called revenue statement ratios.
These ratio study the relationship between the profitability & the sales of the concern.
Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net
operating profit ratio, Stock turnover ratio.

3] Composite ratio:
These ratios indicate the relationship between two items, of which one is found in the
balance sheet & other in revenue statement.
There are two types of composite ratios-
Some composite ratios study the relationship between the profits & the investments of the
concern. E.g. return on capital employed, return on proprietors fund, return on equity capital
etc.
Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios, dividend payout
ratios, & debt service ratios.

27
BASED ON FUNCTION:
Accounting ratios can also be classified according to their functions in to liquidity ratios,
leverage ratios, activity ratios, profitability ratios & turnover ratios.

1] Liquidity ratios:
It shows the relationship between the current assets & current liabilities of the concern e.g.
liquid ratios & current ratios.
2] Leverage ratios:
It shows the relationship between proprietors funds & debts used in financing the assets of
the concern e.g. capital gearing ratios, debt equity ratios, & Proprietory ratios.
3] Activity ratios:
It shows relationship between the sales & the assets. It is also known as Turnover ratios &
productivity ratios e.g. stock turnover ratios, debtors turnover ratios.
4] Profitability ratios:
It shows the relationship between profits & sales e.g. operating ratios, gross profit ratios,
operating net profit ratios, expenses ratios
It shows the relationship between profit & investment e.g. return on investment, return on
equity capital.
5] Coverage ratios:
It shows the relationship between the profit on the one hand & the claims of the outsiders to
be paid out of such profit e.g. dividend payout ratios & debt service ratios.

28
BASED ON USER:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios
2] Ratios for the shareholders:
Return on proprietors fund, return on equity capital.
3] Ratios for management:
Return on capital employed, turnover ratios, operating ratios, expenses ratios
4] Ratios for long-term creditors:
Debt equity ratios, return on capital employed, proprietor ratios.

29
LIQUIDITY RATIO: -
Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year) obligations.
The ratios, which indicate the liquidity of a company, are Current ratio, Quick/Acid-Test ratio,
and Cash ratio. These ratios are discussed below

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 assets
Current ratio =
Current liabilities

30
 Components of current ratio
CURRENT ASSETS CURRENT LIABILITIES
Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Bills receivable Bills payable
Inventories Short-term advances
Work-in-progress Sundry creditors
Marketable securities Dividend payable
Short-term investments Income-tax payable
Sundry debtors
Prepaid expenses

The current assests of a firm represents those assets which can be, in the ordinary course of
business, converted into cash within a short period time, normally not exceeding one year.
The current liabilities defined as liabilities which are short term maturing obligations to be
met, as originally contemplated, with in a year.
Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL).
Current assets include cash and bank balances; inventory of raw materials, semi-finished
and finished goods; marketable securities; debtors (net of provision for bad and doubtful
debts); bills receivable; and prepaid expenses. Current liabilities consist of trade creditors,
bills payable, bank credit, provision for taxation, dividends payable and outstanding
expenses. This ratio measures the liquidity of the current assets and the ability of a company
to meet its short-term debt obligation.
CR measures the ability of the company to meet its CL, i.e., CA gets converted into cash in
the operating cycle of the firm and provides the funds needed to pay for CL. The higher the
current ratio, the greater the short-term solvency. This compares assets, which will become
liquid within approximately twelve months with liabilities, which will be due for payment in
the same period and is intended to indicate whether there are sufficient short-term
assets to meet the short- term liabilities. Recommended current ratio is 2: 1. Any ratio

31
below indicates that the entity may face liquidity problem but also Ratio over 2: 1 as
above indicates over trading, that is the entity is under utilizing its current assets.

LIQUID RATIO:

Liquid ratio is also known as acid test ratio or quick ratio. Liquid ratio compare the quick
assets with the quick liabilities. It is expressed in the form of pure ratio. E.g. 1:1.
The term quick assets refer to current assets, which can be converted into, cash immediately
or at a short notice without diminution of value.

Quick or liquid assets

Quick ratio =
Current liabilities

Components of Quick or Liquid ratio

QUICK ASSETS CURRENT LIABILITIES
Cash in hand Out standing or accrued expenses

Cash at bank Bank over draft

Bills receivable Bills payable

Sundry debtors Short-term advances

Marketable securities Sundry creditors

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA refers to those
current assets that can be converted into cash immediately without any value strength. QA
includes cash and bank balances, short-term marketable securities, and sundry debtors.
Inventory and prepaid expenses are excluded since these cannot be turned into cash as and
when required.

32
QR indicates the extent to which a company can pay its current liabilities without relying on
the sale of inventory. This is a fairly stringent measure of liquidity because it is based on

those current assets, which are highly liquid. Inventories are excluded from the numerator of
this ratio because they are deemed the least liquid component of current assets. Generally, a
quick ratio of 1:1 is considered good. One drawback of the quick ratio is that it ignores the
timing of receipts and payments.

ABSOLUTE LIQUID 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 liquid assets

Absolute liquid ratio =
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 Liquid Ratio

ABSOLUTE LIQUID ASSETS CURRENT LIABILITIES

Cash in hand Out standing or accrued expenses
Cash at bank Bank over draft
Interest on Fixed Deposit Bills payable
Short-term advances
Sundry creditors
Dividend payable

33
 Income tax payable

INVESTMENT / SHAREHOLDER RATIO:

EARNING PER SAHRE:-

Earnings per Share are calculated to find out overall profitability of the organization. An
earnings per Share represents earning of the company whether or not dividends are
declared. If there is only one class of shares, the earning per share are determined by
diniding net profits by the number of equity shares. EPS measures the profits available to the
equity shareholders on each share held.
Formula:

NPAT
Earning per share =
Number of equity share

34
 The higher EPS will attract more investors to acquire shares in the company as it indicates
that the business is more profitable enough to pay the dividends in time. But remember not
all profit earned is going to be distributed as dividends the company also retains some profits
for the business.

DIVIDEND PER SHARE:

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

Formula:

Dividend Paid to Ordinary Shareholders

Dividend per Share =

Number of Ordinary Shares

DIVIDEND PAYOUT RATIO:-

Dividend Pay-out Ratio shows the relationship between the dividend paid to equity
shareholders out of the profit available to the equity shareholders.
Formula:

Dividend per share

Dividend Pay out ratio = *100

35
 Earning per share

D/P ratio shows the percentage share of net profits after taxes and after preference dividend
has been paid to the preference equity holders.

GEARING RATIO

CAPITAL GEARING RATIO:-

Gearing means the process of increasing the equity shareholders return through the use of
debt. Equity shareholders earn more when the rate of the return on total capital is more than
the rate of interest on debts. This is also known as leverage or trading on equity. The Capital-
gearing ratio shows the relationship between two types of capital viz: - equity capital &
preference capital & long term borrowings. It is expressed as a pure ratio.
Formula:

Preference capital+ secured loan

Capital gearing ratio =
Equity capital & reserve & surplus

36
Capital gearing ratio indicates the proportion of debt & equity in the financing of assets of a
concern.

PROFITABILITY RATIO
These ratios help measure the profitability of a firm. A firm, which generates a substantial
amount of profits per rupee of sales, can comfortably meet its operating expenses and
provide more returns to its shareholders. The relationship between profit and sales is
measured by profitability ratios. There are two types of profitability ratios: Gross Profit Margin
and Net Profit Margin.

GROSS PROFIT RATIO:-

This ratio measures the relationship between gross profit and sales. It is defined as the
excess of the net sales over cost of goods sold or excess of revenue over cost. This ratio
shows the profit that remains after the manufacturing costs have been met. It measures the
efficiency of production as well as pricing. This ratio helps to judge how efficient the concern
is I managing its production, purchase, selling & inventory, how good its control is over the
direct cost, how productive the concern , how much amount is left to meet other expenses &
earn net profit.

37
 Formula:

Gross profit
Gross profit ratio = * 100

Net sales

NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales it is usually
expressed in the form of a percentage.

Net profit after tax

Net profit ratio=
Net sales

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

Net Sales = Income from Services

This ratio shows the net earnings (to be distributed to both equity and preference
shareholders) as a percentage of net sales. It measures the overall efficiency of production,
administration, selling, financing, pricing and tax management. Jointly considered, the gross
and net profit margin ratios provide an understanding of the cost and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:-

The profitability of the firm can also be analyzed from the point of view of the total funds
employed in the firm. The term fund employed or the capital employed refers to the total
long-term source of funds. It means that the capital employed comprises of shareholder

38
funds plus long-term debts. Alternatively it can also be defined as fixed assets plus net
working capital.
Capital employed refers to the long-term funds invested by the creditors and the owners of a
firm. It is the sum of long-term liabilities and owner's equity. ROCE indicates the efficiency
with which the long-term funds of a firm are utilized.

Formula:

NPAT
Return on capital employed = *100
Capital employed

FINANCIAL RATIO
These ratios determine how quickly certain current assets can be converted into cash. They
are also called efficiency ratios or asset utilization ratios as they measure the efficiency of a
firm in managing assets. These ratios are based on the relationship between the level of
activity represented by sales or cost of goods sold and levels of investment in various assets.
The important turnover ratios are debtors turnover ratio, average collection period,
inventory/stock turnover ratio, fixed assets turnover ratio, and total assets turnover ratio.
These are described below:

39
 DEBTORS TURNOVER RATIO (DTO) :

Meaning:
DTO is calculated by dividing the net credit sales by average debtors outstanding during the
year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit sales
minus returns, if any, from customers. Average debtors are the average of debtors at the
beginning and at the end of the year. This ratio shows how rapidly debts are collected. The
Higher the DTO, the better it is for the organization.
Formula:

Credit sales
Debtors turnover ratio =

Average debtors

Days in a year
Average collection Period =
Debtor turnover ratio

CREDITORS TURNOVER RATIO:

It is same as debtors turnover ratio. It shows the speed at which payments are made to the
supplier for purchase made from them. It is a relation between net credit purchase and
average creditors.

Net credit purchase

Credit turnover ratio =
Average creditors

Days in a year
Average of accounts payable =
Credit turnover ratio

40
Both the ratios indicate promptness in payment of creditor purchases. Higher creditors
turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid
promptly. It enhances credit worthiness of the company. A very low ratio indicates that the
company is not taking full benefit of the credit period allowed by the creditors.

INVENTORY OR STOCK TURNOVER RATIO (ITR):

ITR refers to the number of times the inventory is sold and replaced during the accounting
period.
Formula:

COGS
Stock Turnover Ratio =
Average stock

ITR reflects the efficiency of inventory management. The higher the ratio, the more efficient is
the management of inventories, and vice versa. However, a high inventory turnover may also
result from a low level of inventory, which may lead to frequent stock outs and loss of sales
and customer goodwill. For calculating ITR, the average of inventories at the beginning and
the end of the year is taken. In general, averages may be used when a flow figure (in this
case, cost of goods sold) is related to a stock figure (inventories).

FIXED ASSETS TURNOVER (FAT):

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

Net sales
Fixed assets turnover =

41
 Net fixed assets

This ratio measures the efficiency with which fixed assets are employed. A high ratio
indicates a high degree of efficiency in asset utilization while a low ratio reflects an in efficient
use of assets. However, this ratio should be used with caution because when the fixed
assets of a firm are old and substantially depreciated, the fixed assets turnover ratio tends to
be high (because the denominator of the ratio is very low).

PROPRIETORS RATIO:
Meaning:

Proprietary ratio is a test of financial & credit strength of the business. It relates shareholders
fund to total assets. This ratio determines the long term or ultimate solvency of the company
In other words, Proprietary ratio determines as to what extent the owner’s interest &
expectations are fulfilled from the total investment made in the business operation.
Proprietary ratio compares the proprietor fund with total liabilities. It is usually expressed in
the form of percentage. Total assets also know it as net worth.
Formula:

Proprietary fund

Proprietary ratio =
Total fund

OR

Shareholders fund

Proprietary ratio =
Fixed assets + current liabilities

42
 Components of Proprietary Ratio

SHARE HOLDERS FUND TOTAL ASSETS

Share Capital Fixed Assets

Reserves & Surplus Current Assets

Cash in hand & at bank

Bills receivable

Inventories

Marketable securities

Short-term investments

Sundry debtors

Prepaid Expenses

STOCK WORKING CAPITAL RATIO:

Meaning:
This ratio shows the relationship between the closing stock & the working capital. It helps to
judge the quantum of inventories in relation to the working capital of the business. The
purpose of this ratio is to show the extent to which working capital is blocked in inventories.
The ratio highlights the predominance of stocks in the current financial position of the
company. It is expressed as a percentage.
Formula:

Stock
Stock working capital ratio =
Working Capital

43
Stock working capital ratio is a liquidity ratio. It indicates the composition & quality of the
working capital. This ratio also helps to study the solvency of a concern. It is a qualitative test
of solvency. It shows the extent of funds blocked in stock. If investment in stock is higher it
means that the amount of liquid assets is lower.

DEBT EQUITY RATIO:

MEANING:
This ratio compares the long-term debts with shareholders fund. The relationship between
borrowed funds & owners capital is a popular measure of the long term financial solvency of
a firm. This relationship is shown by debt equity ratio. Alternatively, this ratio indicates the
relative proportion of debt & equity in financing the assets of the firm. It is usually expressed
as a pure ratio. E.g. 2:1
Formula:

Total long-term debt

Debt equity ratio =

Total shareholders fund

Debt equity ratio is also called as leverage ratio. Leverage means the process of the
increasing the equity shareholders return through the use of debt. Leverage is also known as
‘gearing’ or ‘trading on equity’. Debt equity ratio shows the margin of safety for long-term
creditors & the balance between debt & equity.

RETURN ON PROPRIETOR FUND:

Meaning:
Return on proprietors fund is also known as ‘return on proprietors equity’ or ‘return on
shareholders investment’ or ‘ investment ratio’. This ratio indicates the relationship between
net profit earned & total proprietors funds. Return on proprietors fund is a profitability ratio,

44
which the relationship between profit & investment by the proprietors in the concern. Its
purpose is to measure the rate of return on the total fund made available by the owners. This
ratio helps to judge how efficient the concern is in managing the owner’s fund at disposal.
This ratio is of practical importance to prospective investors & shareholders.

Formula:

NPAT
Return on proprietors fund = * 100
Proprietors fund

45
 IMPORTANCE OF RATIO ANALYSIS

As a tool of financial management, ratios are of crucial significance. The importance of ratio
analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of
interference regarding the performance of a firm. Ratio analysis is relevant in assessing the
performance of a firm in respect of the following aspects:
1] Liquidity position,
2] Long-term solvency,
3] Operating efficiency,
4] Overall profitability,
5] Inter firm comparison
6] Trend analysis.

46
 Liquidity
position

Long
Trend
term
Analysis
solvency

Importanc
e
Of
Ratio
Analysis

Inter firm
Operating
Comparis
Efficiency
- on

Overall
Profitabilit
-y

1] LIQUIDITY POSITION: -
With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a
firm. The liquidity position of a firm would be satisfactory if it is able to meet its current
obligation when they become due. A firm can be said to have the ability to meet its short-term
liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually
within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a
firm. The liquidity ratio are particularly useful in credit analysis by bank & other suppliers of
short term loans.

2] LONG TERM SOLVENCY: -

47
Ratio analysis is equally useful for assessing the long-term financial viability of a firm.
This respect of the financial position of a borrower is of concern to the long-term
creditors, security analyst & the present & potential owners of a business. The long-
term solvency is measured by the leverage/ capital structure & profitability ratio Ratio
analysis s that focus on earning power & operating efficiency.
Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage
ratios, for instance, will indicate whether a firm has a reasonable proportion of various
sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to
serious strain. Similarly the various profitability ratios would reveal whether or not the firm is
able to offer adequate return to its owners consistent with the risk involved.

3] OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of
management, is that it throws light on the degree of efficiency in management & utilization of
its assets. The various activity ratios measures this kind of operational efficiency. In fact, the
solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated
by the use of its assets- total as well as its components.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial position of a
firm, the management is constantly concerned about overall profitability of the enterprise.
That is, they are concerned about the ability of the firm to meets its short term as well as long
term obligations to its creditors, to ensure a reasonable return to its owners & secure
optimum utilization of the assets of the firm. This is possible if an integrated view is taken &
all the ratios are considered together.

5] INTER – FIRM COMPARISON:

48
Ratio analysis not only throws light on the financial position of firm but also serves as a
stepping-stone to remedial measures. This is made possible due to inter firm comparison &
comparison with the industry averages. A single figure of a particular ratio is meaningless
unless it is related to some standard or norm. one of the popular techniques is to compare
the ratios of a firm with the industry average. It should be reasonably expected that the
performance of a firm should be in broad conformity with that of the industry to which it
belongs. An inter firm comparison would demonstrate the firms position vice-versa its
competitors. If the results are at variance either with the industry average or with the those of
the competitors, the firm can seek to identify the probable reasons & in light, take remedial
measures.

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into account. In other words,
whether the financial position of a firm is improving or deteriorating over the years. This is
made possible by the use of trend analysis. The significance of the trend analysis of ratio lies
in the fact that the analysts can know the direction of movement, that is, whether the
movement is favorable or unfavorable. 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.

ADVANTAGES OF RATIO
ANALYSIS
Financial ratios are essentially concerned with the identification of significant accounting data
relationships, which give the decision-maker insights into the financial performance of a
company. The advantages of ratio analysis can be summarized as follows:

49
  Ratios facilitate conducting trend analysis, which is important for decision making
and forecasting.
 Ratio analysis helps in the assessment of the liquidity, operating efficiency,
profitability and solvency of a firm.
 Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons.
 The comparison of actual ratios with base year ratios or standard ratios helps the
management analyze the financial performance of the firm.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below:
1] Information problems:

 Ratios require quantitative information for analysis but it is not decisive about
analytical output .

50
  The figures in a set of accounts are likely to be at least several months out of date,
and so might not give a proper indication of the company’s current financial position.
 Where historical cost convention is used, asset valuations in the balance sheet
could be misleading. Ratios based on this information will not be very useful for decision-
making.

2] Comparison of performance over time:

 When comparing performance over time, there is need to consider the changes in
price. The movement in performance should be in line with the changes in price.
 When comparing performance over time, there is need to consider the changes in
technology. The movement in performance should be in line with the changes in
technology.
 Changes in accounting policy may affect the comparison of results between
different accounting years as misleading.

3] Inter-firm comparison:

 Companies may have different capital structures and to make comparison of

performance when one is all equity financed and another is a geared company it may not
be a good analysis.
 Selective application of government incentives to various companies may also
distort inter company comparison. comparing the performance of two enterprises may be
misleading.

 Inter-firm comparison may not be useful unless the firms compared are of the
same size and age, and employ similar production methods and accounting practices.
 Even within a company, comparisons can be distorted by changes in the price
level.
 Ratios provide only quantitative information, not qualitative information.
 Ratios are calculated on the basis of past financial statements. They do not
indicate future trends and they do not consider economic conditions.

51
 PURPOSE OF RATIO

ANALYSIS:

1] To identify aspects of a businesses performance to aid decision making

2] Quantitative process – may need to be supplemented by Qualitative Factors to get a
complete picture.
3] 5 main areas:-
 Liquidity – the ability of the firm to pay its way
 Investment/shareholders – information to enable decisions to be made on the
extent of the risk and the earning potential of a business investment
 Gearing – information on the relationship between the exposure of the business
to loans as opposed to share capital
 Profitability – how effective the firm is at generating profits given sales and or its
capital assets
 Financial – the rate at which the company sells its stock and the efficiency with
which it uses its assets.

ROLE OF RATIO ANALYSIS:

It is true that the technique of ratio analysis is not a creative technique in the sense
that it uses the same figure & information, which is already appearing in the financial

52
statement. At the same time, it is true that what can be achieved by the technique of ratio
analysis cannot be achieved by the mere preparation of financial statement.

Ratio analysis helps to appraise the firm in terms of their profitability &
efficiency of performance, either individually or in relation to those of other firms in the same
industry. The process of this appraisal is not complete until the ratio so computed can be
compared with something, as the ratio all by them do not mean anything. This comparison
may be in the form of intra firm comparison, inter firm comparison or comparison with
standard ratios. Thus proper comparison of ratios may reveal where a firm is placed as
compared with earlier period or in comparison with the other firms in the same industry.

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

management to impart the basic functions like planning & control. As the future is closely
related to the immediate past, ratio calculated on the basis of historical financial statements
may be of good assistance to predict the future. Ratio analysis also helps to locate & point
out the various areas, which need the management attention in order to improve the
situation.

As the ratio analysis is concerned with all the aspect of a firms financial analysis i.e.
liquidity, solvency, activity, profitability & overall performance, it enables the interested
persons to know the financial & operational characteristics of an organisation & take the
suitable decision.

Liquidity Ratio
Liquid ratio measures the ability of the unit to meet its short term
obligations and reveals the short – term financial strength or weakness.

1. CURRENT RATIO

53
 (Amount in lacs)

Current Ratio

Year Current Assets Current Liabilities Ratio

2006 4508 3660 1.23

2007 5686 5041 1.12

2008 7530 6325 1.19

2009 6854 6477 1.05

GRAPHICAL REPRESENTATION

54
 Current Ratio

1.25 1.23
1.2 1.19
1.15
1.12
Ratio 1.1
1.05 1.05 Ratio
1
0.95
2006 2007 2008 2009
Year

Interpretation:
• As a rule, the current ratio with 2:1 (or) more is considered as satisfactory position of
the firm.
• From the above diagram it is shown that the current ratio of GNA Enterprises Ltd. For
year 2006, 2007, 2008 and 2009 are 1.23, 1.12, 1.19 and 1.05 respectively.
• In 2009 the current Ratio is decreased by 1.05 from the previous year i.e 1.19.
• It shows liquidity Position of the company is not good and the company shall not be
able to pays its current liabilities in time without facing difficulties.
• Decrease in the Current Ratio Indicates that there has been a deterioration in the
liquidity position of the company.

2. QUICK RATIO:
(Amount in lacs.)

55
 Quick Ratio

Year Quick Assets Current Liabilities Ratio

2006 2365 3660 0.65

2007 3354 5041 0.67

2008 4798 6325 0.76

2009 4675 6477 0.72

GRAPHICAL REPRESENTATION

56
 Quick Ratio

0.76 0.76
0.74
0.72 0.72
0.7
Quick 0.68 0.67
Ratio 0.66 0.65
0.64
Quick Ratio
0.62
0.6
0.58
2006 2007 2008 2009
Year

Interpretation:

• As a Rule of Thumb or as a convention quick ratio of 1:1 is considered

satisfactory.

• From the above diagram it is shown that the Quick Ratio of GNA Enterprises Ltd. For
year 2006, 2007, 2008 and 2009 are 0.65, 0.67, 0.76 and 0.72 respectively.

• Compare with 2008, the Quick ratio is decreased because the sundry debtors are
decreased due to the decrease in the corporate tax and for that the provision created is
also decreased. So, the ratio is also decreased with the 2009.
• So it show low quick ratio represents that the Company liquidity position is not good.

57
 3. ABOSULTE LIQUIDITY RATIO:
(Amount in Lacs.)

Absolute Liquid Ratio

Year Absolute Liquid Assets Current Liabilities Ratio

2006 28 3660 0.007

2007 452 5041 0.089

2008 669 6325 0.11

2009 400 6477 0.06

GRAPHICAL REPRESENTATION

58
 Ab. Liquidity Ratio

0.12
0.11
0.1 0.089
0.08
Ab. Liquid 0.06
0.06
Ratio Ab. Liquid
0.04
Ratio
0.02 0.007
0
2006 2007 2008 2009

Year

Interpretation:
• As a Rule of Thumb or as a convention Absolute Liquid or Cash ratio of 0.5 is
considered satisfactory.

• From the above diagram it is shown that the Absolute Liquid Ratio of GNA Enterprises
Ltd. For year 2006, 2007, 2008 and 2009 are 0.007, 0.089, 0.11 and 0.06 respectively.

• In 2009 Absolute Liquid ratio is decreased by 0.06 as compared to 2008 i.e 0.11.

Efficiency Ratio/ Activity Ratio

59
1. a) Debtor Turnover Ratio:-
(Amount in lacs.)

Debtor Turnover Ratio

Year Net Cr. Sale Avg. Debtor Ratio

2006 10613 1963 5.41

2007 15385 2354 6.53

2008 17769 3302 5.38

2009 12860 3023 4.25

GRAPHICAL REPRESENTATION

60
 Debtor Turnover Ratio

7 6.53
6 5.41 5.38
5
4.25
4
DTR
3 DTR
2
1
0
2006 2007 2008 2009
Year

Interpretation:
• The higher the turnover ratio the better the trade credit management & the
better the liquidity of debtors

• From the above diagram it is shown that the Debtor Turnover Ratio of GNA
Enterprises Ltd. For year 2006, 2007, 2008 and 2009 are 5.41, 6.53, 5.38 and 4.25
respectively.

• In 2009 debtor turnover ratio is lower i.e 4.25 than the previous year i.e 5.38.

• So it shows company’s position is not good in 2009.

61
b) Avg. Collection Period:
(Amount in lacs.)

Average Collection Period

Year Days Debtor Turnover Ratio ACP

2006 365 5.41 67

2007 365 6.53 56

2008 365 5.38 68

2009 365 4.25 86

62
GRAPHICAL REPRESENTATION

Average Collection Period

100
86
80
67 68
60 56
Avg.
ACP 40 Collection
20 Period

0
2006 2007 2008 2009
Year

Interpretation:

• There is no rule of thumb..

• From the above diagram it is shown that the average collection period of GNA
Enterprises Ltd. For year 2006, 2007, 2008 and 2009 are 67, 56, 68 and 86 days
respectively.

• During the year 2007 average collection period is very low which indicates the better
quality of debtors as the quick payments by them with in a shot period.

• During the year 2009 average collection period is very high as 86 days which
indicate ting the inefficient performance of the debtor as by late payments.

63
2. a) Creditor Turnover Ratio:
(Amount in lacs.)

Creditor Turnover Ratio

Year Net Cr. Purchases Avg. Creditor CTR

2006 5974 896 6.67

2007 8277 1180 7.01

2008 9492 1114 8.52

2009 6527 1081 6.03

64
GRAPHICAL REPRESENTATION

Creditor Turnover Ratio

10
8.52
8
6.67 7.01
6 6.03 Creditor
CTR Turnover
4 Ratio
2
0
2006 2007 2008 2009
Year
Interpretation:

• Lower the ratio better for the concern, there is no rule of thumb.

65
 • From the above diagram it is shown that the creditor turnover ratio of GNA Enterprises
Ltd. For year 2006, 2007, 2008 and 2009 are 6.67, 7.01, 8.52 and 6.03 days respectively.

• Compared with 2008 the creditor turnover ratio is decreased by 6.03 in 2009.

b) Average Payment Period:

(Amount in lacs.)

Average Payment Period

Year Days Avg. Creditors APP

2006 365 6.67 55

2007 365 7.01 52

2008 365 8.52 43

66
 2009 365 6.03 61

GRAPHICAL REPRESENTATION

Average Payment Period

70
60 61
55 52
50
40 43 Avg.
APP
30 Payment
20 Period
10
0
2006 2007 2008 2009
Year
Interpretation:
• Lower the ratio, the better is the liquidity position of the company and the Higher
the ratio less liquid is the position of the company.

67
 • From the above diagram it is shown that the average payment period of GNA
Enterprises Ltd. For year 2006, 2007, 2008 and 2009 are 55, 52, 43 and 61 days
respectively.

• During the year 2009 average payment period is very high which indicatating the less
liquidity position of the company.

3.a) Stock Turnover Ratio:

(Amount in lacs.)

Stock Turnover Ratio

Year COGS Avg. Stock STR

2006 5596 1954 2.86

2007 8088 2238 3.61

2008 9022 2532 3.56

68
 2009 7081 2455 2.88

GRAPHICAL REPRESENTATION

Stock Turnover Ratio

4
3.61 3.56
3 2.86 2.88
STR 2 Stock
Turnover
1 Ratio

0
2006 2007 2008 2009
Year
Interpretation:
• High Stock Turnover Ratio Indicates efficient management of inventory and the lower
Stock Turnover Ratio indicates an inefficient management of inventory.

69
 • From the above diagram it is shown that the stock turnover ratio of GNA Enterprises Ltd.
For year 2006, 2007, 2008 and 2009 are 2.86, 3.61, 3.56 and 2.88 respectively.

• In 2009 the STR is decreased by 2.88 as compared to previous year.

b) Average Consumption Period

(Amount in lacs.)

Average Consumption period

Year Days Stock Turnover Ratio ACP

2006 365 2.86 128

2007 365 3.61 101

2008 365 3.56 103

70
 2009 365 2.88 127

GRAPHICAL REPRESENTATION

Average Consumptio Period

140
128 127
120
100 101 103
80
ACP
60 Avg.
Consumptio
40 Period
20
0
2006 2007 2008 2009
Year
Interpretation:

71
 • From the above diagram it is shown that the Average consumption period of GNA
Enterprises Ltd. For year 2006, 2007, 2008 and 2009 are 128, 101, 103 and 127 days
respectively.

• In 2009 the ACP is Increased by 127 days as compared to previous year.

4) Working Capital Turnover Ratio:

(Amount in lacs.)

Working Capital Turnover Ratio

Year Net Sales Working Capital WCTR

2006 10613 848 12.5

2007 15385 645 23.8

72
 2008 17769 1205 14.7

2009 12856 377 34.1

GRAPHICAL REPRESENTATION

Working Capital Turnover Ratio

35 34.1
30
25 23.8
20
WCTR
15 14.7 WCTR
12.5
10
5
0
2006 2007 2008 2009
Year
Interpretation
• Higher working capital turnover ration indicates efficient utilization of working
capital and vice versa.

73
 • From the above diagram it is shown that the Working capital Turnover ratio of
GNA Enterprises Ltd. For year 2006, 2007, 2008 and 2009 are 12.5, 23.8, 14.7 and 34.1
respectively.

• Compared with 2008, working capital turnover ratio is increased by 34.1 in

2009, so it indicates efficient utilization of working capital of the company.

5) Total Asset Turnover Ratio:

(Amount in lacs.)

Total Asset Turnover Ratio

Year Net Sales Total Assets TATR

2006 10613 7264 1.46

2007 15385 9361 1.64

74
 2008 17769 13346 1.33

2009 12856 13802 0.93

GRAPHICAL REPRESENTATION

Total Asset Turnover Ratio

2
1.64
1.5 1.46
1.33
TATR 1 0.93 Total Asset
Turnover
Ratio
0.5

0
2006 2007 2008 2009
Year
Interpretation:

75
 • From the above diagram it is shown that the total Asset Turnover ratio of GNA
Enterprises Ltd. For year 2006, 2007, 2008 and 2009 are 1.46, 1.64, 1.33 and 0.93
respectively.

• From 2007 it is decrease by year by year. In 2009 Total Asset Turnover ratio is decrease
by 0.93 as compare to previous year i.e 1.33.

6) Fixed Asset Turnover Ratio:

(Amount in lacs.)

Fixed Asset Turnover Ratio

Year Sales Fixed Assets FATR

2006 10613 2757 3.8

76
 2007 15385 3675 4.2

2008 17769 5816 3.1

2009 12856 6947 1.9

GRAPHICAL REPRESENTATION

Fixed Asset Turnover Ratio

4.5
4.2
4 3.8
3.5
3 3.1
2.5 Fixed Asset
FATR
2 1.9 Turnover
Ratio
1.5
1
0.5
0
2006 2007 2008 2009
Year

77
Interpretation:
• From the above diagram it is shown that the fixed Asset Turnover ratio of GNA
Enterprises Ltd. For year 2006, 2007, 2008 and 2009 are 3.8, 4.2, 3.1 and 1.9
respectively.

• From 2007 it is decrease by year by year. In 2009 Fixed Asset Turnover ratio is decrease
by 1.9 as compare to previous year i.e 3.1.

7) Current Asset Turnover Ratio:

(Amount in lacs.)

Current Asset Turnover Ratio

Year Sales Current Assets CATR

2006 10613 4508 2.4

78
 2007 15385 5686 2.7

2008 17769 7530 2.4

2009 12856 6854 1.9

GRAPHICAL REPRESENTATION

Current Asset Turnover Ratio

3
2.7
2.5 2.4 2.4
2 1.9
CATR 1.5 Current Asset
1 Turnover
Ratio
0.5
0
2006 2007 2008 2009
Year
Interpretation:

79
 • From the above diagram it is shown that the Current Asset Turnover ratio of GNA
Enterprises Ltd. For year 2006, 2007, 2008 and 2009 are 2.4, 2.7, 2.4 and 1.9
respectively.

• From 2007 it is decrease by year by year. In 2009 Current Asset Turnover ratio is
decrease by 1.9 as compare to previous year i.e 2.4.

Profitability Ratio
1) Gross Profit Ratio:
(Amount in lacs.)

Gross Profit Ratio

Year Gross Profit Net Sales G.P Ratio

80
 2006 10444 10613 98

2007 14974 15385 97

2008 16817 17769 95

2009 12057 12856 94

GRAPHICAL REPRESENTATION

99
Gross Profit Ratio
98 98
97 97
G.P Ratio

96

95 95
94 94
93

92
2006 2007 2008 2009
G.P Ratio 98 97 95 94

Year

81
Interpretation:

• There is no rule of thumb for gross profit ratio, Higher the ratio is better for the
concern and vice versa.
• From the above diagram it is shown that the Gross Profit ratio of GNA Enterprises Ltd.
For year 2006, 2007, 2008 and 2009 are 98%, 97%, 95% and 94% respectively.

• The gross profit ratio of the company is decrease year by year from 98% to 94%
from 2006 to 2009.

2) Net Profit Ratio:

(Amount in lacs.)

Net Profit Ratio

Year Net Profit Net Sales N.P Ratio

2006 121 10613 1.2%

82
 2007 504 15385 3.3%

2008 665 17769 3.7%

2009 (86) 12856 (0.66)%

GRAPHICAL REPRESENTATION

Net Profit Ratio

N.P Ratio

3.70%
3.30%
N.P Ratio

1.20%

2006 2007 2008 2009

-0.66%

Year

83
 Interpretation:

• Higher the ratio better is the Profitability for the concern.

• From the above diagram it is shown that the Net Profit ratio of GNA Enterprises Ltd.
For year 2006, 2007, 2008 and 2009 are 1.2%, 3.3%, 3.7% and (0.66)% respectively.

• From 2006 to 2008 Net Profit ratio is increased every year but in 2009 it
decreased by (0.66)% so it indicate that company profitability position is not
good.

3) Operating Cost Ratio:

(Amount in lacs.)

Operating Cost Ratio

Year Operating Cost Net Sales OCR

2006 15675 10613 1.5

2007 22255 15385 1.4

84
 2008 25720 17769 1.4

2009 19030 12856 1.5

GRAPHICAL REPRESENTATION

85
 Operating Cost Ratio
Operating Cost Ratio

1.5

1.5

1.4
1.4

2006
2007
2008
Year 2009

Interpretation:

• Lower the Ratio is better for the concern.

• From the above diagram it is shown that the operating cost ratio of GNA
Enterprises ltd for the year 2006, 2007, 2008 and 2009 are 1.5, 1.4, 1.4 and 1.5
respectively.
• From 2007 and 2008 the operating cost ratio is same but in 2009 it is increased
by 1.5.

86
Solvency Ratio
1) Debt Equity Ratio:

(Amount in lacs.)

Debt Equity Ratio

Year Long Term Debt Equity DER

2006 5741 1523 3.8

2007 6934 2427 2.9

2008 10254 3092 3.3

2009 10811 2991 3.6

87
GRAPHICAL REPRESENTATION

Debt Equity Ratio

4
3.8
3.5 3.6
3.3
3 2.9
Debt Equity Ratio

2.5

1.5

0.5

0
2006 2007 2008 2009
Debt Equity Ratio 3.8 2.9 3.3 3.6
Year
Interpretation:

• Generally a low ratio is considered as a favourable for the concern.

• From the above diagram it is shown that the Debt Equity ratio of GNA
Enterprises ltd for the year 2006, 2007, 2008 and 2009 are 3.8, 2.9, 3.3 and 3.6
respectively.
• Compare with 2008 the debt equity ratio is increased by 3.6 in 2009.

88
2)Funded Debt to Total Capitalisation Ratio:

(Amount in lacs.)

Funded Debt to Total Capitalisation Ratio

Equity+ Long Term

Year Long Term Debt Debt Ratio

2006 5741 7264 79%

2007 6934 9361 74%

2008 10254 13346 76%

2009 10811 13802 78%

89
GRAPHICAL REPRESENTATION

Funded Debt toTotal Capitalisation Ratio

80% 79%
78%
78% 76%
76%
Ratio 74%
74%
72% Ratio

70%
2006 2007 2008 2009
Ratio 79% 74% 76% 78%
Year

Interpretation:

• There is not rule of thumb but if the ratio is smaller better it will be, upto 50%
or 55% this ratio may be to tolerable and not beyond.
• From the above diagram it is shown that the Funded Debt to Total
Capitalisation ratio of GNA Enterprises ltd for the year 2006, 2007, 2008 and
2009 are 79%, 74%, 76% and 78% respectively.
• Compare with 2008 the ratio is increased by 78% in 2009.

90
2) Proprietory/ Equity Ratio :
(Amount in lacs.)

Proprietory/ Equity Ratio

Year Equity Total Assests Ratio

2006 1523 7264 20%

2007 2427 9361 25%

2008 3092 13346 23%

2009 2991 13802 21%

91
GRAPHICAL REPRESENTATION

Proprietory Ratio
25%
23%
25%
20% 21%
20%

Proprietory 15%
Ratio 10% Proprietory
5% Ratio

0%
2006 2007 2008 2009
Year
Interpretation:

• Higher the ratio or the share of the shareholders in the total capital of the
company, better is the long term solvency position of the company.
• From the above diagram it is shown that the Proprietory/ equity ratio of GNA
Enterprises ltd for the year 2006, 2007, 2008 and 2009 are 20%, 25%, 23% and
21% respectively.
• In 2009 the proprietory ratio decreased by 21% as compare to the previous year
i.e 23%.

92
3) Fixed Assets to Net Worth Ratio:
(Amount in lacs.)

Fixed Assets to Net Worth Ratio

Year Net Fixed Assets Equity Ratio

2006 2757 1523 181

2007 3675 2427 151

2008 5816 3092 188

2009 6947 2991 232

93
GRAPHICAL REPRESENTATION

Fixed Assests to Net Worth Ratio

250% 232%
188%
200% 181%
151%
150%
Ratio
100%
Ratio
50%
0%
2006 2007 2008 2009
Year
Interpretation:

• From the above diagram it is shown that the Fixed Assets to Net Worth ratio
of GNA Enterprises ltd for the year 2006, 2007, 2008 and 2009 are 181%,
151%, 188% and 232% respectively.
• In 2009 the ratio is increased by 232% as compare to the previous year i.e
188%.
• If the ratio more than the 100% it implies that owner’s funds are not sufficient
to finance the fixed assets and the company has to depend upon outsiders to
finance the fixed assets.

94
 4) Current Assets to Equity Ratio:
(Amount in lacs.)

Current Assets to Equity Ratio

Year Current Assets Equity Ratio

2006 4508 1523 2.9

2007 5686 2427 2.3

2008 7530 3092 2.4

2009 6854 2991 2.2

GRAPHICAL REPRESENTATION

95
 Current Assests to Equity Ratio

3 2.9
2.3 2.4
2.5 2.2
2
Ratio 1.5
1 Ratio
0.5
0
2006 2007 2008 2009
Year
Interpretation:

• From the above diagram it is shown that the Current Assets to equity ratio of
GNA Enterprises ltd for the year 2006, 2007, 2008 and 2009 are 2.9, 2.3, 2.4
and 2.2 respectively.
• In 2009 the ratio is decreased by 2.2% as compare to the previous year i.e
2.4.

Overall Profitability Ratio

1) Return on Shareholders Investment Ratio:

96
 (Amount in lacs.)

Return On Shareholder Investment Ratio

Year Profit after Tax Equity Ratio

2006 154 1523 0.10

2007 559 2427 0.23

2008 700 3092 0.22

2009 (17) 2991 (0.005)

GRAPHICAL REPRESENTATION

97
 Return On Shareholders Investment
Ratio
0.25
0.23
0.22
0.2

0.15
Ratio

0.1 0.1 Ratio

0.05

0 -0.005
2006 2007 2008 2009
-0.05
Year

Interpretation:

• Higher the ratio better for the overall efficiency for the concern.
• From the above diagram it is shown that the Return on Shareholders
Investment ratio of GNA Enterprises ltd for the year 2006, 2007, 2008 and
2009 are 0.1, 0.23, 0.22 and (0.005) respectively.
• In 2009 the ratio is decreased by (0.005) as compare to the previous year i.e
0.22.
• So this ratio indicates that company overall efficiency is not satisfactory.

Findings

98
• The company has maintained proper records showing full particulars including
quantitative details and situation of fixed assets.
• The company does not have an internal audit system conducted by the firm of
chartered accountants.
• According to the records of the company, there are no dues of sales tax, income tax,
customs tax/ wealth tax, excise duty which have not been deposited on account of any
dispute.
• The company has not defaulted in repayment of dues to a financial institution, bank
or debenture holders.
• The company has not given any guarantee for loans taken by others from bank or
financial institution.
• The term loans have been applied for the purpose for which they were raised.
• The company has not issued any debentures.
• The company has not raised any money by public issues during the year.
• The Current ratio of the company in 2009 is decreased by 1.05 as compared to the
previous year i.e 1.19.
• Quick ratio of the company in 2009 is decreased by 0.72 as compare to last year i.e
0.76.
• The Quick ratio of the company is less <1 that indicates unsound short term
solvency position of the company.
• The Debtor turnover ratio is high in 2007 and 2008 years are 6.53 and 5.38
respectively but in 2009 it is decreased by 4.25.
• The Creditor turnover ratio is increased in 2006 to 2008 by 6.67 to 8.52 respectively
But in 2009 it falls down by 6.03.
• The stock turnover ratio of the company has been decreased from 3.61 to 2.88 from
2007 to 2009.
• Fixed Assets Turnover Ratio is decreased from every year i.e 3.8 to 1.9 from 2006 to
2009.

• Current ratio is fall down by 1.9 in 2009 as compared to last year i.e 2.4.
• Gross profit ratio is fall by every year i.e 98% to 94% from 2006 to 2009 respectively.

99
• Net profit ratio is negative in 2009 year by (0.66) it indicates that company’s
profitability position is noy sound.
• In 2009 working capital is increased by 34.1 that indicates efficient utilization of
working capital of the company.
• In 2009 operating cost ratio is increased by 1.5 as compared to previous year i.e 1.4.
• Debt equity ratio is increased by 3.6 in 2009 yr so it is considered as unfavourable
for the company.
• In 2009 Proprietory/ Equity ratio is decreased by 21% as compare to the previous
year i.e 23%.
• Fixed Assets to Net Worth ratio is increased by 232% in 2009 it shows that owner’s
funds of the company are not sufficient to finance the fixed assets and the company has to
depend upon outsiders to finance the fixed assets.
• Return on Shareholder investment ratio is negative in 2009 i.e (0.005); it shows
company overall efficiency is not satisfactory.

Limitation of the study

100
 1) The project on Financial Performance Analysis is very time constraint process.
2) To gather information, I had to depend on some of the personnel of the firms; some of
the them were too busy.
3) According to Company’s norms, ethics, strategies etc the Financial Managers and
Executives were not allowed to disclose each and every information related to the topic.
4) There is some area restriction for trainee.

Suggestions

101
• GNA Enterprises Ltd. Should Increase its capacity utilization. It should work full
capacity to minimize its cost of production. With this increase in capacity utilization, the
total cost will spread over more units by decreasing per unit cost.
• Gross profit of the Company is reducing continuously last four years and Net profit
should be increase through Control of raw material costs and other overhead costs. It
also possible through improvement in research and development.
• The company need to Improve their liquidity position.
• GNAE Ltd must move into higher segment to capture more market.
• The Company must take serious steps to reduce the cost of inputs like coal, power
etc.
• To face the present global challenges the human resources development should be
develop to improve various skills among the employees specially the motivational skills
and having the regular training for the employees about various development in the
market.
• The sundry Debtors should be efficiently managed so that the outstanding are to be
cleared at short intervals.
• Company should
• The Company should have an internal audit system conducted by the firm of
chartered accountants.
• The Company need to be issue the debentures.
• The Company should increase their capital through public invitation.
• The Company should reduce taking loan from banks.

102
 Conclusion
Financial ratios are a useful by product of financial statement and provide
standardized measures of Company financial position, profitability and riskiness. It is an
important and powerful tool in the hands of financial analyst. By calculating one or other
ratio or group of ratios he can analyze the performance of a firm from the different point of
view.
The ratio analysis can help in understanding the liquidity and short-term solvency
of the firm, particularly for the trade creditors and banks. Long-term solvency position as
measured by different debt ratios can help a debt investor or financial institutions to
evaluate the degree of financial risk. The operational efficiency of the firm in utilizing its
assets to generate profits can be assessed on the basis of different turnover ratios. The
profitability of the firm can be analyzed with the help of profitability ratios.
So after calculating the ratio on the basis of information provided by the GNA
enterprises Ltd. Company, I can say that the liquidity and profitability position of the
company is not satisfactory because of the recession. Working capital turnover ratio of
the company indicates the efficient utilization of working capital of the company.
However the ratio analyses suffers from different limitations also. The ratios need
not be taken for granted and accepted at face values. These ratios are numerous and
there are wide spread variations in the same measure. Ratios generally do the work of
diagnosing a problem only and failed to provide the solution to the problem.

103
104