Ratios Origina

8/8/2019 Ratios Origina

1/19

PROFITABILITY RATIOS

Profitability is an indication of the efficiency with which the operations of the business

are carried on. Poor operational performance may indicate poor sales and hence poor profits.a

lower profitability may arise due to the lack of control over the expenses.bankers, financial

institutions and other creditors look at the profitability ratios as an indicator whether or not the

firm earns substantially more than it pays interest for the use of borrowed funds and whether the

ultimate repayment of their debt appears reasonably certain.

The following are the important profitability ratios:


2/19

Over All Profitability Ratio

It is also called as return on investment(ROI) or return on capital employed(ROCE). It

indicates the percentage of return on the total capital employed in the business. It is calculated in

the basis of the following formula:

YEARS 2007-2008 2008-2009 2009-2010

Operating Profit 41260.41 81480.2 71092.64

Capital Employed 179641.02 284704.04 335278.2

Over All Profitability Ratio 22.97 % 28.62 % 21.20 %

Capital employed = capital + reserves and surplus + secured loans + unsecured loans

Interpretation

From the above table, it indicates that the percentage of return on the total capital

employed gets highly deviated from year to year. In 2008, 22.97% of return on the total capital

employed while in 2009 and 2010 ,28.62% and 21.20 % respectively. Over all profitability is

mainly affected by capital employed in the business due to the consistent increase in capital as a

result of increase in accumulating the reserves from 2008-2010.

Return On Shareholders Funds

Operating Profit

Overall Profitability Ratio = X 100

Capital Employed


3/19

It is calculated to work out the profitability of the company from the shareholders point

of view, it should be computed as follows

Interpretation

Net Profit After Int & Tax

Return On Shareholders Funds = X 100

Shareholders Funds

YEARS 2007 - 2008 2008 - 2009 2009- 2010

Net Profit After Int & Tax 20976 49637.8 46819.89

Shareholders Funds 79443.5 112714.05 143498.81

Return On Shareholders Funds 26.40% 44.04% 32.63%


4/19

It is stated above that return on shareholders funds has increased from 26.4% in 2007-

2008 to 44.04% in 2008-2009 and again decreased to 32.63% in 2009-2010 due to the consistent

increase in shareholders funds but inturn sales have decreased in 2010 when compared to 2009

which result in decrease in net profit.

Return On Total Assets

This ratio is computed to know the productivity of the total assets.

YEARS 2007 - 2008 2008 - 2009 2009- 2010

Net Profit After Int + Tax 45707.62 111997.8 94867.89

Total Assets 271449.52 468153.26 439059.95

Return On Total Assets 16.89% 23.92% 21.61%

Net Profit After Int +Tax

Return On Total Assets = X 100

Total Assets


5/19

Interpretation

It is shown that return on total assets has been increased from 16.89% in 2008 to 23.92%

in 2009 and decreased to 21.61% in 2010 as total assets have decreased from 2009 to 2010.This

is mainly due to increase in inventory as well in cash and bank balances which leads to increase

in current assets inturn productivity of assets gets increased.

Gross Profit Ratio

This ratio expresses the relationship between gross profit and net sales.

YEARS 2007 - 2008 2008 - 2009 2009- 2010

Gross Profit 94429.78 245421 206764.19

Net Sales 216845.35 215528.78 283052.6

Gross Profit Ratio 43.55 % 113.87 % 73.05 %

Gross profit

Gross profit ratio = X 100

Net sales


6/19

Interpretation

It is noted that gross profit ratio has increased from 43.55% in 2008 to 113.87% in 2009.

This may be due to government subsidies are given during the period of 2008-2009. During the

year 2010 , it has come down to 73.05% as increase in the cost of goods sold.

Net Profit Ratio

This ratio indicated net margin earned on a sale of rs.100. It helps in determining the

efficiency with which affairs of the business are being managed.It is calculated as follows:

Years 2007 - 2008 2008 - 2009 2009- 2010

Net Operating Profit 41260.41 81480.2 71092.64

Net Sales 216845.35 215528.78 283052.6

Net Profit Ratio 19.03% 37.80 % 25.12 %

Net Operating Profit

Net Profit Ratio = X 100

Net Sales


7/19

Interpretation

It is indicated that there is a improvement in the operational efficiency in the business as

an increase in the ratio from 2008 to 2009. But it has slowly came down to 25.12 % in 2010

denotes operating profit has been come down when compare to 2009 operating profit.

Turnover ratios:

The turnover ratios are also known as activity or efficiency ratios. They indicate the

efficiency with which the capital employed is rotated in the business.

The following are the important turnover ratios:


8/19

Fixed Assets Turnover Ratio

This ratio indicates the extent to which the investments in fixed assets contribute towards

sales. If compared with a previous periods, it indicated whether the investment infixed assets has

judicious or not. The ratio is calculated as follows:

Net sales

Fixed Assets Turnover Ratio =

Fixed assets

YEARS 2007 - 2008 2008 - 2009 2009- 2010

Net Sales 216845.35 215528.78 283052.6

Fixed Assets 73538.9 79183.6 81731.46

Fixed Assets Turnover

Ratio

2 times 2.26 times 2.75times


9/19

Interpretation

There has been increased in the fixed assets turnover ratio throughout the year as theinvestment in fixed assets has brought about commensurate gain.

Working Capital Turnover Ratio

This is also known as working capital leverage ratio. This ratio indicates whether or not

working capital has been effectively utilized in making sales. In case a company can achieve

higher volume of sales with relatively small amount of working capital ,it is an indication of the

operating efficiency of the company. This ratio is calculated as follows:

Net sales

Working Capital Turnover Ratio = X 100

Fixed assets


10/19

Interpretation

It is inferred that there has been increased in working capital turnover ratio throughout the year

indicates working capital has been effectively utilised in making sales.

Financial ratios :

Financial ratios indicate about the financial position of the company. A company is deemed to be

financially sound if it is in a position to carry on its business smoothly and meet its

obligations,both short-term as well as long term,without the strain. It is a sound principle of

finance that the short term requirements of funds should be met out of short term funds and long

term requirements should be met out of long term funds.

Financial ratios can be divided into two broad categories:

Years 2007 - 2008 2008 - 2009 2009- 2010

Net Sales 216845.35 215528.78 283052.6

Current Assets (A) 162776.91 372638.62 336223.88

Current Liabilities (B) 83561.79 175502.51 95235.04

Working Capital (A-B) 79215.12 197136.11 240988.84Working Capital Turnover Ratio 2.73 Times 1.09 Times 1.17 Times


11/19

1) liquidity ratio

2) stability ratio

liquidity ratio:

these ratios are also termed as working capital or short term solvency ratios.an

enterprise must have adequate working capital to run its day to day operations.the important

liquidity ratios are as follows:

Current Ratio

This ratio is an indicator of the firms commitment to meet its short-term liabilities.An

ideal ratio is 2. It is expressed as follows:

Current Assets

Current Ratio =

Current Liabilities


12/19

Interpretation

It is to be noted that current ratio is 1.9 ,2.1 and 3.5 in 2008,2009 and 2010 respectively.

It is considered as a safe margin to solvency as an ideal ratio is 2 .in the year 2010, ratio has been

increased may be due to excessive dependence on long term sources of raising funds which may

lead to lower the profit in future.

Quick ratio

This ratio is also termed as acid test ratio or liquidity ratio.this ratio os ascertained by

comparing the liquid assets to current liabilities. Prepaid expenses and stock are not taken as

liquid assets.the ideal ratio is 1.It is an indicator of short-term solvency of the company.

Years 2007 - 2008 2008 - 2009 2009- 2010

Current Assets 162776.91 372638.62 336223.88

Current Liabilities 83561.79 175502.51 95235.04

Current Ratio 1.9 :1 2.1:1 3.5:1

Liquid Assets

Quick Ratio =

Current Liabilities


13/19

Interpretation

It is shown above that the company is able to meet out the short term solvency in 2010

when compared to previous year as the ratio was below the ideal ratio 1.

Super Quick Ratio

This is a variation of quick ratio. The ratio is calculated as follows:

YEAR 2007-2008 2008-2009 2009-2010

Liquid Assets 16890.59 132611.4 181252.9

Current Liabilities 83561.79 175502.5 95235.04

Liquidity Ratio 0.20 0.76 1.90

Cash and bank balances

super quick Ratio =

Current Liabilities


14/19

Interpretation

It is observed that though the cash and bank balances has been increased throughout the

year ,it may meet the short term solvency as a part but not the whole due to cash and bank

balances are lower than the current liabilities .

Stability ratios

These ratios help in ascertaining the long term solvency of a firm.

year 2007-2008 2008-2009 2009-2010

cash and bank balances 6631.64 34149.28 80985.86

current liabilities 83561.79 175502.5 95235.04super quick ratio 0.1 0.19 0.85


15/19

Fixed Assets Ratio


16/19

This ratio explains whether the firm has raised adequate long term funds to meet its fixed

assets requirements. The ideal ratio is 1 and should not be more than 1.It is expressed as follows:

Interpretation

Fixed assets

Fixed assets Ratio =

Long term funds

Year 2007-2008 2008-2009 2009-2010

Fixed Assets 73538.9 79183.6 81731.5

Long Term Funds 79443.5 112714.1 143498.8

Fixed Assets Ratio 0.93 0.70 0.57


17/19

It is seen above that fixed asset ratio has brought down throughout the year.It shows that

a part of the working capital has been financed through long term funds as the ratio is less than

1.Thus,the company has adequate long term funds to meet its fixed assets requirements.

Debt Equity Ratio

The debt equity ratio is determined to ascertain the soundnessof the long term financial

policies of the company.it isalso known as external internal equity equity ratio.it may be

calculated as follows:

Total long term debt

Debt equity ratio =

Shareholders funds

Year 2007-2008 2008-2009 2009-2010

Total Long Term Debt 100197.5 171990 191779.4

Shareholders Funds 79443.5 112714.1 143498.8

Debt Equity Ratio 1.26 1.53 1.37


18/19

Interpretation

It is referred that debt equity ratio for 3 years said to be unsatisfactory as shareholders

funds are not equal to borrowed funds.

Proprietary ratio

It is a varient of debt equity ratio. It establishes relationship between the proprietors funds

and the total tangible assets. It may be expressed as:

Shareholders funds

Proprietary ratio =

Total tangible assets

Year 2007-2008 2008-2009 2009-2010

Share Holders Funds 79443.5 112714.1 143498.8Total Tangible Assets 271449.5 468153.3 439060

Proprietory Ratio 0.29 0.24 0.33


19/19

Interpretation

As the proprietory ratio is below the 50% incase of all the 3 years, it may be the risk for

the creditors of the company. So the company is advised to raise funds in order to prevent the

creditors from risk.

Ratios Origina

Documents

Transcript of Ratios Origina