PROJECT REPORT

RATIO ANALYSIS

Of

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ACKNOWLEDGEMENT

I am thankful to Ms. Deepti Bhargava (Head of department) of Shrinath Ji Institute Of

Management & my college faculty who provided helping hands and instilled

confidence to complete the project in time.

Also, my gratitude & thanks to my guide & mentor Sh. Dhawal Bhatt, for
being the guiding & encouraging figures all through the duration of this project.
Without his cheering & invaluable insight into this project, the project work would
not have been accomplished. Discussion on subject matter constant feedback on
the effort & needed reference have enriched me & made the project work a
pleasing experience

A project can never exist & thrive in solitude. Project work is never the
work of an individual. It is more a combination of use suggestion, contribution &
work involving many individuals. This project also bears the impact of many
people. Thus one of the most pleasant parts of writing this report is the
opportunity to thank all those who have contributed to it.
I would like to express my innate sense of gratitude to my
parents and friends who encouraged me a lot during the project and without their
assistance and affection this project would not have been completed. It thanks
them for being there.

Thanking you

SANDEEP MAHESHWARI

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PREFACE
Ratio is a figure expressed in term of another. It is an expression of relationship
between one figure and the other figures, which are mutually inter-dependent.
Absolute figure is valuable but not comparable.

But these single become important when studied in relation to other figure either in the
same statement like the amount of profit and total sales are different statement. But,
when compared gives a sensible meaning such relationship of accounting information
given in term of money is commonly referred to as financial/accounting ratio and simple
ratio.

Ratio analysis is essentially concerned with the calculation of relationships which after
proper identification and interpretation may provide information about the operations
and state of affairs of a business enterprise. The analysis is used to provide indicators
of past performance in terms of critical success factors of a business. This assistance
in decision-making reduces reliance on guesswork and intuition and establishes a basis
for sound judgment.

Ratio analysis is a process whereby elements of the financial statements are combined
in simple mathematical equations to determine financial performance and stability of
the company. Banking institutions and private investors can apply 150 or more of these
simple equations to analyze financial statements, historic and projected, to determine
financial performance, stability, and feasibility.

Financial analysis provides information concerning a firm's operating performance and

financial condition. This information is useful for the CFO in evaluating the performance
of the company as a whole, as well as of divisions, products, and subsidiaries. The
CFO must also be aware that financial analysis is also used by analysts and investors
to gauge the financial performance of the company.

In this study, we explain and illustrate financial ratios—one of the tools of financial
analysis. In financial ratio analysis we select the relevant information—primarily the
financial statement data—and evaluate it. We show how to incorporate market data and
economic data in the analysis of financial ratios. Finally, we show how to interpret
financial ratio analysis, identifying the pitfalls that occur when it's not done properly.

CONTENT
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CHAPTER TOPIC PAGE NO.
1. INTRODUCTION 05
ADITYA BIRLA GROUP 06
1.1 VISION, MISSION AND VALUES 09
HINDALCO INDUSTRIES LTD 10
1.2 VISION, MISSION AND VALUES 12
1.3 MANAGEMENT TEAM 13
1.4 PRODUCT OVERVIEW 14
2. RESERCH METHODOLOGY 15
2.1 OBJECTIVE OF RESERCH 15
2.2 DATA COLLECTION 16
2.3 SOURCES OF DATA 17
2.4 LIMITATION 17
3. WORKING 18
3.1 FINANCIAL DATA DEFINATION 19
3.2 OBJECTIVES OF RATIO 22
3.3 CLASSIFICATION OF RATIO 23
3.4 RATIO ANALYSIS OF HINDALCO 37
4. CONCLUSION 52
5. BIBILIOGRAPHY 55

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 Chapter 1

INTRODUCTION

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GROUP PROFILE

Birla Group and the Indian History are intertwined. The freedom struggle inspired the Birlas right at
the inception. Shri Ghanshyam Das Birla, the first of the Birlas was closely associated with
freedom struggle. The nationalistic feelings generated then moved the group towards the noble
cause of nation building right from the initial phases.

Starting up in the 19th century with trading in Cotton, Silver, Sugar and Jute, today the group has
diversified into the core of the core sector of the economy. The Group has dominance in most of
the industrial sectors where it is present. The key industrial areas in which the Group is active at
present include Aluminium, Chemical, Fertilizers, Machinery, Staple Fibers, Textiles, Sponge Iron,
Cement, Financial Services, Software, Export trading etc.

Group Details:

The Aditya Birla Group is one of India's largest business houses. Global in vision, rooted in Indian
values, the Group is driven by a performance ethic pegged on value creation for its multiple
stakeholders.

In the league of fortune 500, an extraordinary force of 1,00,000 employees, belonging to 25

different nationalities, anchors the Aditya Birla Group. In India, the Hewitt-Economic Times and
Wall Street Journal Study 2007 have adjusted the Group “ The Best Employer in India and among
the top 20 in Asia.”

The Group’s operations span in 20 countries; to name a few - India, Thailand, Laos, USA, UK,
Germany, Hungary, Brazil, Italy, France, Luxemberg, Switzerland, Korea, Malaysia, Philippines,
Indonesia, Egypt, Canada, Australia and China. Its net consolidated turnover at Rs 14,095
crores, up by 38%, with a net profit of Rs 1,968 crores reflecting a sharp growth of 89% and is
indeed praiseworthy. To sustain & grow our leadership position in both the VSF & cement sector,
which are your company’s core business, significant strategic step have been taken. “The group
cement business continues to grow from strength. To sustain its leadership and to garner a larger
pie of the growing Markey demand, the company is augmenting capacities by an additional 9.5
million tones per annum through Greenfield amd brown field projects.”

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The Aditya Birla Group is a dominant player in all its areas of operations:

Aluminium, Copper, Cement, Viscose Staple Fibre, Carbon Black, Viscose Filament Yarn,
Fertilizers, Insulators, Sponge Iron, Chemicals, Branded, Apparels, Insurance and Asset
Management, Software, Telecom.

A world leader in Viscose Staple Fibre (VSF).

A non-ferrous metals powerhouse:

One of Asia's largest integrated aluminium producers, and among the most cost-efficient
companies.

Fastest-growing copper company in Asia. Global-sized and globally competitive

World's largest single location producer of palm oil.

Fourth largest producer of insulators.

Fourth largest producer of carbon black

Prospectively, among the 11th largest producers of cement, and the largest in a single geography.

Aditya Birla Group Companies:

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Grasim Industries Ltd: This includes the business of VSF, Rayon Grade Pulp, Rayon Grade
caustic soda, Machinery and equipment, Textile-Fabrics, Textile Yarn, Cement, Sponge Iron,
Software & Consultancy, and Exports.

Indian Rayon & Industries Ltd: Viscous Filament Yarn, Flax Worsted Yarn, HosePipe,
Insulators, Carbon Black, and Exports.

Hindalco Industries Ltd: Aluminium, Copper.

Indo Gulf Corporation Ltd: Fertilizer, Copper Cathodes.

Birla Global Finance Ltd: Finance.

HGI industries Ltd: Steel Files, Iron Castings, and Industrial Gases.

Essel Mining & Industries Ltd: Ferro chemical, HDEP sacks, and Mining.

Eastern Spinning Mills & Kerala Spinners: Drilling Machines, Yarns And Sewing
Threads.

GROUP VALUES

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 Vision
“To be a premium global conglomerate with a clear focus on each business”

Mission
“To deliver superior value to our customers, shareholders, employees and society at large”

Values
Integrity Honesty in every action.

Commitment Deliver on the promise.

Passion Energised action.

Seamlessness Boundary less in letter and spirit.

Speed One step ahead always.

Kumar Mangalam Birla

Chairman the Aditya Birla Group

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 HINDALCO INDUSTRIES LIMITED

(Originally incorporated on December 15, 1958 under the Companies Act, 1956 as Hindustan
Aluminium Corporation Limited and the name was changed to Hindalco Limited with effect from
October 9, 1989)

ABOUT HINDALCO INDUSTRIES LTD.

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Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, is an industry
leader in aluminium and copper. A metals powerhouse with a consolidated turnover in excess of
US$ 14 billion.

Hindalco is the world's largest aluminium rolling company and one of the biggest producers of
primary aluminium in Asia. Its Copper smelter is the world's largest custom smelter at a single
location.

Established in 1958, Hindalco commissioned its aluminium facility at Renukoot in Eastern U.P. in
1962. Later acquisitions and mergers, with Indal, Birla Copper and the Nifty and Mt.Gordon copper
mines in Australia, strengthened the company's position in value-added alumina, aluminium and
copper products, with vertical integration through access to captive copper concentrates.

In 2007, the acquisition of Novelis Inc. a world leader in aluminium rolling and can recycling
marked a significant milestone in the history of the aluminium industry in India. With Novelis under
its fold Hindalco ranks among the global top five aluminium majors, as an integrated producer with
low cost alumina and aluminium facilities combined with high-end rolling capabilities and a global
footprint in 12 countries outside India.

Hindalco manufacturing units are: Renukoot, Renusagar (Uttar Pradesh); Belur (Kolkata); Belgaum
(Karnataka); Taloja, Kalwa (Mumbai); Mouda (Nagpur); Alupuram (Kochi); Hirakud (Orissa); Muri
(Jharkhand); Silyassa (Dadra and Nagarhaveli); Kollur (Hyderabad)

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 Vision

“To be a premium Metals major, global in size and reach, with a passion for excellence”

Mission

“To relentlessly purse the creation of superior shareholder value by exceeding customer
expectations profitably, unleashing employee potential and being a responsible corporate
citizen adhering to our values”

Values

Integrity Honesty in every action.

Commitment Doing whatever it takes to deliver, as promised.

Passion Missionary zeal arising out of an emotional engagement with work.

Seamlessness Thinking and working together across functional silos, hierarchy levels,
businesses and geographies.

Speed Responding to stakeholders with a sense of urgency.

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 MANAGEMENT TEAM

Board of Directors
:: Mr. Kumar Mangalam Birla, Chairman
:: Mrs. Rajashree Birla
:: Mr. A.K. Agarwala
:: Mr. E.B. Desai
:: Mr. S.S. Kothari
:: Mr. C.M. Maniar
:: Mr. M.M. Bhagat
:: Mr. K.N. Bhandari
:: Mr. N.J. Jhaveri

Executive Director
:: Mr. D. Bhattacharya (Managing Director)

Corporate
:: Mr. R. Ram, Senior President (Coporate Project)
:: Mr. Pratik Roy (Chief People Officer)

Chief Financial Officer

:: Mr. S. Talukdar (Group Executive President & CFO)

Company Secretary
:: Mr. Anil Malik

PRODUCT OVERVIEW

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Aluminium

• World's largest aluminium rolling company.

• One of the biggest producers of primary aluminium in Asia.

• One of the lowest-cost producers of aluminium in the world.

• Over 58 per cent of sales in value-added products.

• Fully integrated aluminium plant at Renukoot, UP

• Aluminium wheels plant at Silvassa, in Dadra & Nagar Haveli.

• Foil plants at Silvassa and Kalwa. Foil unit of Indal at Kollur.

• ISO 9001:2000 and 14001 certified.

Cooper

• India's leading copper producer.

• India's largest copper smelting and refining plant at Dahej, Gujarat,

with two copper mines in Australia.
• Smelting and refining capacity 500,000 tpa, the largest single location smelter
in the world.
• Captive jetty (Dahej Harbour & Infrastructure Limited, a wholly owned
subsidiary)

• ISO 9001,14001 and OSHAS 18001 certified.

• Registered on London Metal Exchange as Grade A Copper Brand.

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Chapter 2

RESEARCH METHODOLOGY
MEANING OF RESEARCH METHODOLOGY

“A Research is a careful investigation or inquiry, especially through search for new facts in any
branch of knowledge. It is a systemized effort to gain more knowledge.”

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. We study the various
steps that are generally adopted by a researcher in studying his research problem along with
the logic behind them. It is necessary for the researcher to know not only the research
methods or techniques but also the methodology. Researcher always needs to understand the
assumptions underline various technique and they need to know the criteria by which they can
decide that certain technique and procedures will be applicable to certain problems and other
will not.

Research is an organized enquiry designed and carried out to provide information for solving a
problem.
Research methodology is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done scientifically.

OBJECTIVES OF RESEARCH

1. Research extends knowledge of human beings, social life and environment. Scientists and
researchers search answers for various types of questions: what, where, when, how and
why.
2. Research unravels the mysteries of nature, brings to light hidden information that might
never be discovered fully during the ordinary course of life.
3. Research verifies and tests existing facts and theory and these help improving our
knowledge and ability to handle situation and events.
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 4. Research aims to analyze inter-relationships between variables and to derive causal
explanations and thus enables us to have a better understanding of the world in which we
live.
5. Research also aims at developing new tools, concepts and theories for a better study of
unknown phenomena.

DATA COLLECTION

The task of data collection begins after a research problem has been defined. While
deciding about the method of data collection to be used for the study, the researcher should
keep in mind two types of data vise, primary and secondary.

Primary data may be described as those data that have been observed and recorded by the
researchers for the first time to their knowledge.

Primary data can be classified into two types:

• Data classified by their nature.

• Data classified according to function.

Primary data can be collected through several methods. Some of the

important ones are:

1. Observation method
2. Interview method
3. Questionnaires
4. Schedules
5. Other methods

Secondary data are statistics not gathered for the immediate study at hand but for some other
purposes.

Secondary data can be classified into two types:

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 • Internal data which include sales analysis.

• External data which include libraries, literature etc.

OBJECTIVES OF THIS STUDY

1 To study the meaning of Ratio analysis

2 To study the use and need for Ratio analysis.
3 To do ratio analysis of Hindalco Industries ltd..
4 To calculate the Ratios.

TECHNIQUES USED IN THIS STUDY

1 Consultation and personal observation.

2 Collection classification, compilation, tabulation analysis and figure relevant to Ratio
analysis of the company.
3 Calculation of various ratios and their analysis for measuring the liquidity position of the
company.
4 Drawing conclusion through various ratio analysis.

SOURCES OF DATA
The analysis was based on following document and related Information.

1 The annual financial statement of the concern i.e. balances sheet, profit & loss account,
annual report.
2 The company publication includes booklets, news, bulletins, etc
3 Reference book & journals related to ratio analysis.

LIMITATION OF THIS STUDY

• There is general paucity of adequate database.

• The study is limited to only two-year performance of the company.

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 • Deliberate biasing of the financial statements.

Chapter 3

WORKING:
OBJECTIVE:
To understand the information contained in financial statements with a view to know
the strength or weaknesses of the firm and to make forecast about the future prospects of
the firm and thereby enabling the financial analyst to take different decisions regarding
the operations of the firm.

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.

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 FINANCIAL DATA DEFINITIONS

Income Statement

Revenue - Revenue equals total sales from operations.

Cost of Goods Sold - Cost of Goods Sold includes all expenses directly associated with the
production of goods or services the company sells (such as material, labor, overhead). It does not
include SG&A or depreciation.

Gross Profit - Gross Profit equals Revenue minus Cost of Goods Sold. It identifies the amount
available to cover other operating expenses.

Gross Profit Margin - Gross Profit Margin equals Gross Profit divided by Revenue, expressed as
a percentage. The percentage represents the amount of each dollar of Revenue that results in
Gross Profit.

SG&A Expense - Selling, General, and Administrative Expenses include all salaries, indirect
production, marketing, and general corporate expenses.

Depreciation & Amortization - Depreciation & Amortization is a non-cash charge that represents
a reduction in the value of fixed assets due to wear, age, or obsolescence. This figure also
includes amortization of leased property, intangibles, goodwill, and depletion.

Operating Income - Operating Income equals Gross Profit minus SG&A Expenses. It is the
income from current operations.

Non-operating Income – Non-operating Income is a residual category into which miscellaneous

non-operating revenues and expenses are netted.

Non-operating Expenses – Non-operating Expenses is the combination of "Other Taxes" and

"Interest Expense." For most companies, "Other Taxes," also known as other operating expenses,
includes taxes other than income taxes (except excise taxes, which the company does not actually
pay, but only collects on behalf of the government). For financial companies, all expenses other

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than interest expense and income taxes are included in Other Taxes. "Interest Expense" is all fixed
interest expenses net of capitalized interest. This category also includes dividends on preferred
stock of unconsolidated subsidiaries.

Income Before Taxes - Income before Taxes is the income from total operations (continuing +
discontinued operations).

Income Taxes - Income Taxes include any taxes on income, net of any investment tax credits.

Net Income After Taxes - Net Income after Taxes includes income taken after taxes and before
the following: Preferred Dividends, Extraordinary Gains and Losses, Income from Accumulative
Effects of Accounting Change, Non-Recurring Items, Income from Tax Loss Carry forward, and
Other Gains/Losses.

Total Net Income - Total Net Income is the income after accounting for all corporate actions:
Income from Continuing Operations + Income from Discontinued Operations + Income from
Extraordinary Items + Income from

Accumulative Effect of Accounting Changes + Income from Tax Loss Carry forward + Income from
Other Gains/Losses.

Net Profit Margin - Net Profit Margin equals the Total Net Income divided by Revenue, expressed
as a percentage. The percentage represents the amount of each dollar of Revenue that results in
Total Net Income.

Dividends per Share - The cash payment, per share, made by the company to its shareholders.
Payment is usually made quarterly, but can be paid biannually (ADRs).

Balance Sheet

Cash - Cash consists of cash and may include cash-like items such as short-term investments that
can be quickly converted to cash.

Net Receivables - Net Receivables are amounts owed to the company, net of any provisions for
bad debts.
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Inventories - Inventories is merchandise bought for resale or supplies and raw materials
purchased for use in revenue producing operations.

Other Current Assets - Other Current Assets includes prepayments, deferred charges, and
amounts (other than trade accounts) due from parents and subsidiaries. It also includes any other
current assets that are not assigned to cash and cash equivalents, receivables, or inventories.

Total Current Assets - Total Current Assets equals Cash and Equivalents + Receivables +
Inventories + Other Current Assets. Total Current Assets is the total amount of assets that are
considered to be convertible into cash within a relatively short period of time, usually a year.

Net Fixed Assets - Net Fixed Assets are the assets of a company that are of a relatively
permanent nature and are not intended for resale, such as property, plants, and equipment. The
figure is stated as cost minus accumulated depreciation and amortization.

Other Non-current Assets - Assets that are not assigned to Net Fixed Assets or intangibles.

Total Assets - Total Assets equals Total Current Assets + Total Non-current Assets.

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

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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.

OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organization- A)
Solvency-
1) Long term

2) Short term

3) Immediate

B) Stability
C) Profitability
D) Operational efficiency
E) Credit standing
F) Structural analysis
G) Effective utilization of resources
H) Leverage or external financing

FORMS OF RATIO:
Since a ratio is a mathematical relationship between to or more variables/
accounting figures, such relationship can be expressed in different ways as follows
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

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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. sothe 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]
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 LTC
BASED ON USER:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:

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 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.

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

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CURRENT RATIO

This ratio compares the current assets with the current liabilities. It is also known as

‘working capital ratio’ or ‘ solvency ratio’. It is expressed in the form of pure ratio.
E.g. 2:1
Formula:

Current Asset
Current ratio =
Current Liabilities

The current assets 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-
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 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 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.
Formula:

Liquid Asset
Quick ratio =
Current Liabilities

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.
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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.

INVESTMENT/SHAREHOLDER

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
dividing net profit by the number of equity shares.
EPS measures the profits available to the equity shareholders on each share held.

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 Formula:

NPAT
EPS =
No. of equity share

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
DPS =
No. of Share

GEARING

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CAPITAL EARING 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+
Capital gearing secured loan
Ratio =
Equity capital & reserve &
surplus

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

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PROFITABILITY

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.

*100
Gross Profit
GP Ratio =
Net Sales

30
NET PROFIT RATIO:-
Net Profit ratio indicates the relationship between the net profit & the sales it is usually
expressed in the form of a percentage.

Formula:

*100
NPAT
NP Ratio =
Net Sales

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
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.

*100
NPAT
ROCE =
Capital Employed

31
FINANCIAL

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:

32
 DEBTORS TURNOVER RATIO (DTO)
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

INVENTORY OR STOCK TURNOVER RATIO (ITR)

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

Formula:

ITR reflects the efficiency of

COGS
Stock Turnover Ratio =
Average Stock

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).

33
FIXED ASSETS TURNOVER (FAT)

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

Formula:

Net Sales
FAT =
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 inefficient
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:
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:

Shareholders Fund
Proprietors Ratio = FA+CL

34
 DEBT EQUITY RATIO:
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

D/E Ratio =
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.

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

Creditors Turnover Net Credit Purchase

Ratio = Average Creditors

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.

35
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
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 organization
& take the suitable decision.

36
HINDALCO INDUSTRIES LIMITED THROUGH RATIO

1. CURRENT RATIO

The relationship of current assets to current liabilities is known as current ratio. Current
assets means the assets are either in the form of cash or cash equivalent or can be
converted into cash or cash equivalents in short time (say, within a year’s time) and current
liabilities means liabilities repayable in short time (within a year’s time). The ratios are
calculated as follows:

Current Asset
Current ratio =
Current Liabilities

• Current assets include cash & bank balances, inventories, sundry debtors, Marketable
securities, prepaid expenses and loans & advances.

• Current liabilities include sundry creditors, bills payable and provision.

(Rs. In Million)

Year Current Current Ratio

assets liabilities
2006-2007 137918.07 52211.51 2.64

2007-2008 177041.27 51990.49 3.41

37
 Current Ratio

4
3.5
3
2.5
2 Ratio
1.5
1
0.5
0
2006-2007 2007-2008

Significance

Current ratio of a firm measures its short term solvency i.e. its ability to meet its short term
obligation, the higher the current ratio, the larger is the amount of rupees available per rupee of
current liability, the more is the firm’s ability to meet the current obligations and the greater is
the safety of the funds of the short term creditors.

Although there is no hard and fast tool conventionally the current ratio of 2:1 is considered
satisfactory.

Interpretation:

In the year 2007 it decrease & reaches 2.64 & it is increase in 2008 by 3.41. The
current ratio of 2007 is lower than 2008 .This due to company short term liability. This are the
liability which company has to renew after every year, if company doesn’t renew then company
has to repay this liability, so these are included in current liabilities.

As a conventional rule, a current ratio of 2:1 or more is considered satisfactory. The

company has a C.R in 20076-2008 is 3.41:1; therefore it may be interpreted to sufficient liquid
i.e. able to meet its obligation (i.e. liability)

The higher C.R the greater margin of safety the low C.R lows margin of safety.

38
2. QUICK RATIO

Quick ratio also called acid test ratio, establishes a relationship between quick or liquid
assets and current liabilities. An assets is liquid it can be converted into cash immediately
or reasonably soon without a loss of value. Cash is the most liquid assets.

The quick ratio is found out by dividing quick assets by current liability

The ratios are calculated as follows:

Liquid Asset
Quick ratio =
Current Liabilities

• Liquid assets includes cash, debtors, marketable securities, bills receivable, (excluding
bad & doubtful debts)

(Rs. In Million)

Year Liquid Assets Current Ratio

Liabilities
2006-2007 94764.93 52211.51 1.81
2007-2008 126062.21 51990.49 2.42

39
 Quick Ratio

2.5

1.5 Ratio

0.5

0
2006-2007 2007-2008

Significance

Acid test ratio is a stringent measure of short-term solvency of the firm. It is a measurement
of the firm’s ability to convert its current assets quickly into cash in order to meet its current
liability. It is based on those current assets which are highly liquid I illiquid portion of current
assets are eliminated. It excludes stock & prepaid expenses.

Acid test ratio of 1:1 is considered ideal. Higher the ratio better is the short-term financial
position of the firm.

Interpretation

The quick ratio in 2007 was 1.815 and in 2008 it is 2.424. This shows that quick ratio has
increase from 1.815 to 2.424, therefore the company’s short term financial position is good.

40
3. INVENTORY TURNOVER RATIO

Inventory turnover indicates the efficiency of the firm in producing and selling its products. It
calculates by dividing the cost of goods sold by the average inventory.

Cost of goods sold

Inventory turnover ratio =
Average inventory

Cost of goods sold is calculated as follows:

Cost of good sold = Opening stock + Purchase + Direct expenses - Closing stock

Or

Cost of good sold = Sales- Gross profit

Average inventory = (Opening Inventory + Closing Inventory) / 2

The cost of goods sold figure may not be available to an outside analyst from the published
annual accounts. He/she may therefore compute inventory turnover as sales divided by the
average inventory or the year-end inventory.

(Rs. In Million)

Year Cost Of Good Inventory Ratio

Sold
2006-2007 143021.66 43153.14 3.31
2007-2008 158486.24 50979.06 3.11

41
 Inventory tournover Ratio

3.35

3.3

3.25

3.2
Ratio
3.15

3.1
3.05

3
2006-2007 2007-2008

Significance

The inventory turnover ratio measures how fast the stock is moving through the firm and
generating sales It indicates whether stock has been efficiently used or not. The purpose of the
ratio is to check up whether only the required minimum amount has been invested in stock.

Higher the ratio, better it is, since it indicates that more sales are been produced by a
rupee of investment in stocks. A low stock turnover may reflect dull business and cover
investment in stock. Thus only a proper inventory ratio enables a business to earn a reasonable
margin of profits.

However, a minimum amount of stock must be invested in stock to avoid out of stock
situation

Interpretation

The inventory turnover ratio of the company under study for the year 2007-08
reveals that thought the two-year is low

In the year 2007-08 the ratio of inventory turnover is 3.11 that show the company has
bad inventory management.
42
 4. DEBTORS TURNOVER RATIO

This ratio establishes relationship between net credit sales and average debtors of the year.
Debtor’s turnover indicates the number of times debtor’s turnover each year. This ratio is
calculated as follows:

Net credit sales

Debtors turnover ratio =
Average debtors & B/R.

• A net sale has been taken in place of net credit sales.

• Average debtors are calculated by dividing the sum of debtors in the beginning and at
the end by

to out side analyst, information about credit sales and opening and closing balance of debtor
may not available. Therefore, debtor turnover can be calculated by dividing total sales by
the year-end balance of debtor.

Year Credit sales/ Average Ratio

sales debtors
2006-2007 180576.98 15650.22 11.54
2007-2008 189043.07 15045.02 12.57

43
 Debtor tournover Ratio

12.8
12.6
12.4
12.2
12
Ratio
11.8
11.6
11.4
11.2
11
2006-2007 2007-2008

Significance

The debtor’s turnover ratio indicates economy and efficiency in the collection of
amount due from debtors. The higher the ratio, the better it is, since it would indicate that debts
are being collected more quickly. Prompt collection of books debts will increase funds, which
may then be put for some other use.

It is not however, very prudent for a firm to have either a very low are a high debtor’s
turnover ratio. A very low debtor’s turnover would imply either poor credit selection or an
inadequate collection effort. The delay in the collection of debtors would mean that, apart from
the interest cost involved in maintaining a higher level of debtors, the liquidity position o f the
firm is adversely affected. Moreover, there is the like hood of a large number of debtors
becoming bad debts.

Similarly, too high a turnover ratio is not necessarily good. It may have adverse effect
on the volume of the sales of the firm. Sales may be confined to only such customers as make
prompt payments

Thus a firm should have neither a very low nor a high debtor’s turnover ratio, it should
maintain it at a reasonable level.

44
Interpretation

Sales and debtors had been increased every year. In the year 2006-2007 the ratio is
11.54 & again it increased in the 2007-08 12.57.

In the year 2007-2008 the ratio 12.57 reveals that the company current debtors’
turnover is good as compared to previous year.

5. NET WORKING CAPITAL TURNOVER RATIO

This ratio indicates the number of times a unit invested in the working capital produces
sales. In others words, the ratio indicates whether the working capital has been effectively
utilized or not in making sales. The ratio is calculated as follows:

Working capital means the excess of current assets over current liabilities i.e., current
assets- current liabilities.

Working Capital turnover Net Sales

Ratio =
Net Working Capital

Year Net Sales NWC Ratio

2006-2007 180576.98 85706.56 2.11
2007-2008 189043.07 125050.78 1.51

45
 Working Capital Turnover Ratio

2.5

1.5
Ratio
1

0.5

0
2006-2007 2007-2008

Significance:

The working capital turnover ratio indicates number of times unit invested in
working capital produces sales. This ratio indicates whether working capital has been effectively
utilized or not in making sales. In other words, it measures the rate of working capital utilization.

Higher the ratio, the better it is however, a very high ratio may indicates over
trading, the working capital means very little for the scale of operations.

Interpretation

Net working capital turnover ratio has increased to -25.05 in 2008 from -31.43 in 2007. this
indicate that the working capital has been utilized properly by the company in comparison to the
previous year.

46
 6. TOTAL ASSETS TURNOVER RATIO

This ratio shows the firm’s ability in generating sales from all financial resources committed to
total assets

Total Assets turnover Net Sales

Ratio =
Total Assets

• Total assets (TA) include net fixed assets (NFA) and current assets
(CA)

• (TA = NFA+CA)

Year Net Sales Total Assets Ratio

2006-2007 180576.98 249710.41 0.72
2007-2008 189043.07 309359.92 0.61

47
 Total Assets Turnover Ratio

0.74
0.72
0.7
0.68
0.66
0.64 Ratio
0.62
0.6
0.58
0.56
0.54
2006-2007 2007-2008

Significance

The total assets turnover ratio measures the efficiency with which the firm has been using its
total assets to generate sales.

Interpretation

In the year 2007 total assets turnover ratio was 0.72 which has declined to 0.61 in the year
2008. This shows the inefficient utilization of the fixed assets of the company.

7. FIXED ASSETS TURNOVER RATIO

The fixed assets turnover ratio measures the efficiency with which the firm has been using its
fixed assets to generate sales.
It is calculated by dividing the firm’s sales by its net fixed assets as follows:

Fixed Assets turnover Net Sales

Ratio =
Net Fixed Assets

48
 Year Net Sales Fixed Assets Ratio
2006-2007 180576.98 69739.29 2.59
2007-2008 189043.07 77818.81 2.43

Fixed Assets Turnover Ratio

2.65

2.6

2.55

2.5 Ratio

2.45

2.4

2.35
2006-2007 2007-2008

Significance

Generally, high fixed assets turnovers are preferred since they indicate a better efficiency in
fixed assets utilization.

Interpretation

In the year 2007 fixed assets turnover ratio was 2.59 which has declined to 2.43 in the year
2008. This shows the inefficient utilization of the fixed assets of the company.

49
 8. NET PROFIT RATIO

A ratio of net profit to sales is called net profit ratio. Generally, this ratio is taken in percentage.
Deducting operating expenses, finance charges and making adjustment for non- operating
expenses and income from gross profit, derive net profit. The ratio can be calculated by the
formula:

Profit after Tax

Net Profit ratio =
Net Sales

Year Net Sales Net Profit Ratio

2006-2007 180576.98 25643.25 14.20%
2007-2008 189043.07 28609.39 15.13%

50
 Net Profit Ratio

15.20%
15.00%
14.80%
14.60%
14.40% Ratio
14.20%
14.00%
13.80%
13.60%
2006-2007 2007-2008

Significance

The net profit margin is indicative of management’s ability to operate the business with
sufficient success not only to recover from revenue of period the cost of merchandise or
service, the expenses of operating the business (including depreciation) and the cost of
borrowed funds, but also to eave a margin of reasonable compensation to the owner for
providing their capital at risk.

The objective of working capital net profit ratio is to determine the overall efficiency of the
business the higher the ratio, better it is.

Interpretation

The net profit in the year 2007 was 14.20% which have increased to 15.13%. This shows the
company is efficiently operating its business.

51
 Chapter 4

CONCLUSION

COMPARATIVE STATEMENT SHOWING RATIO

RATIO UNITS 2006-2007 2007-2008

Current ratio Times 2.64 3.41

Quick ratio Times 1.81 2.42

N/P ratio % 70.4 66.1

Inventory turnover Times 4.18 3.71

ratio

NWC turnover ratio Times 2.11 1.51

Total assets Times 0.72 0.61

turnover ratio

Fixed assets Time 2.59 2.43

turnover ratio

Debtors turnover Time 11.54 12.57

ratio

52
 PROBLEMS

As the comparative statement shows that the Current Ratio and Quick Ratio has declined
from previous year .This shows the bad liquidity position of the company or the company is not
able to meet its short term obligations.

Inventory Turnover Ratio and Fixed Assets Turnover ratio

has also declined but these shows the inefficient utilization of the inventory and assets.

Total Assets Turnover Ratio has decreased from the year

2007. This indicate that the is able to generate its sales efficiently.

Net Working Turnover Ratio has decreased so it reveals

that the company has utilized its working capital in a insufficient manner.

The Debtor’s Turnover Ratio has increased which indicates that

the company is able in the collecting the amount due from the debtors. Since it indicate that
debts are being collected more quickly.

The Net Profit Ratio has decreased from previous

which show that company is operating not successfully. It cannot recover its expenditures.

At last it can be said that the besides having bad liquidity position the
company is earning less profit than previous and is running successfully.

53
 SUGGESTION

INVENTORY TURNOVER RATIO is decline it proves the poor sales

performance. Strategic marketing policies and efficient store function may improve this
ratio.

Net Profit Ratio is decrease. By increasing sales promotion programs and

reducing the manufacturing and operating cost as well as financial cost may improve this
ratio.
Sales are increase in 2008 but Net Working Capital Ratio decrease
because current assets are decline and current liabilities are increase, by increase in
current assets and decrease in current liabilities may be improve this ratio.

Decline in the Fixed Assets Turnover Ratio may be improved by the effective
and efficient use of the fixed assets.

54
 Chapter 5

BIBLIOGRAPHY

To obtain more information regarding the present study and to substantiate it

with theoretical proof, the following reference was made:

1 KHAN & JAIN, FINANCIAL MANAGEMENT.

2 CR KOTHARI, RESEARCH METHODOLOGY.
3 VIJAYPATH ANNUAL BOOK OF ABG.
4 ANNUAL REPORT OF ABG.
5 HAND BOOK OF ABG GROUP.
6 JAIN NIRMAL, MANAGEMENT ACCOUNTING.

FINANCIAL REPORTS OF MANUFACTURING & MARKETING OF VIKRAM CEMENT

1 2006-2007
2 2007-2008

WEBSITES:

1 www. adityabirla .com

2 www.futureaccountant.com

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