“A PROJECT REPORT ON FINANCIAL RATIO

ANALYSIS OF MAHINDRA N MAHINDRA LTD.”

BACHELOR OF MANAGEMENT STUDIES

SEMESTER V

SUBMITTED

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS

FOR THE AWARD OF DEGREE OF BACHELOR OF
MANAGEMENT STUDIES

BY

MISS. MAMTA SURESH KOLSUMKAR

ROLL NO. 26

SATHAYE COLLEGE OF COMMERCE

DIXIT ROAD, VILE PARLE (EAST)
MUMBAI – 400 057
 DECLARATION
I, MISS. MAMTA SURESH KOLSUMKAR, the student of T.Y.B.M.S.

Semester V (2016 – 2017) hereby declare that I have completed the project on

“A PROJECT REPORT ON FINANCIAL RATIO ANALYSIS OF MAHINDRA

N MAHINDRA LTD” . The information submitted is true and original to the best

of my knowledge.

_____________
Miss. Mamta Kolsumkar

Roll No. 26

Sathaye College Of Commerce

Dixit Road, Vile Parle (East),

Mumbai – 400 057

 CERTIFICATE
This to certify that MISS. MAMTA KOLSUMKAR, roll no. 26 of third

year B.M.S., Semester V (2016 – 2017) has successfully completed the project on

“RATIO ANALYSIS OF MAHINDRA N MAHINDRA LTD.” under the guidance

of Prof. Akash Desai.

Course Co-ordinator Principal

Prof. Shashank Pai Dr. Kavita Rege

Project Guide:

Prof. Akash Desai

External Examiner:
 ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are numerous and

the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and

fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.

I would like to thank my Principal, Dr. Kavita Rege for providing the

necessary facilities required for completion of this project.

I take this opportunity to thank our Co-ordinator, Prof. Shashank Pai and

Assistant Co-ordinator, Prof. Shruti Naik for their moral support and guidance.

I would also like to express my sincere gratitude towards my Project

Guide, Prof. Akash Desai whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various

reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or

directly helped me in the completion of the project especially my Parents and

Peers who supported me throughout my project.

TABLE OF CONTENTS
EXECUTIVE SUMMARY
 CHAPTER 1 - INTRODUCTION
1.1 : Meaning of Ratio Analysis :
Ratio analysis is the process of determining and interpreting numerical

relationships based on financial statements. A ratio is a statistical yardstick that

provides a measure of the relationship between two variables or figures.

This relationship can be expressed as a percent or as a quotient. Ratios are

simple to calculate and easy to understand. The persons interested in the analysis

of financial statements can be grouped under three heads :

a) Owners or investors

b) Creditors

c) Financial executives.

1.2 : Importance and Advantages of Ratio Analysis :

Ratio analysis is an important tool for analyzing the company’s financial

performance. The following are the important advantages of the accounting ratios :

a) Analyzing financial statements :

Ratio analysis is an important technique of financial statement analysis.

Accounting ratios helps in understanding the financial position of the company.

Different users use ratios to analyze the financial situation of the company for

their decision making process.

b) Judging efficiency :

Accounting ratios are important for judging the company’s efficiency in terms

of its operations and management.

 c) Locating weakness :

Accounting ratios can also be used in locating weakness of the company’s

operations even though its overall performance may be quite good.

Management can then pay attention to the weakness and take remedial

measures to overcome them.

d) Formulating plans :

Accountiong ratios can also be used to establish future trends of its financial

performance. As a result, they help in formulating the company’s future

plans.

e) Comparing performance :

It is essential for a company to know how well it is performing over the

years and as compared to other firms of the similar nature. Besides, it is

also important to know well its different divisions are performing among

themselves in different years. Ratio analysis facilitates such comparison.

1.3 : Classification of Ratios :

a) Liquidity Ratios :

Liquidity ratios measures a company’s ability to pay debt obligations and its

margin of safety through calculation of the ratios. Liquidity ratios are an

indicator of whether a company’s assets will be sufficient to meet the

company’s obligations when they become due.

I. Current ratio :

The current ratio is a liquidity ratio that measures a company’s ability to

pay short – term and long – term obligations. The current ratio considers
 the current total assets of a company relative to that company’s current

total liabilities.

The formula for calculating a company’s current ratio is :

Current ratio = Current assets / Current liabilities

A higher current ratio is always more favorable than a lower current ratio

because it shows the company can more easily make current debt

payments.

II. Quick ratio :

The quick ratio is an indicator of a company’s short – term liquidity. The

quick ratio measures a company’s ability to meet its short – term obligations

with its most liquid assets.

The formula for calculating a company’s quick ratio is :

Quick ratio = Liquid assets / Current liabilities

Higher quick ratios are more favorable for companies because it shows

there are more quick assets than current liabilities.

b) Long Term Solvency Ratios :

The solvency ratios indicates whether a company’s cash flow is sufficient

to meet its short – term and long – term liabilities. The lower a company’s

solvency ratio, the greater the probability that it will default on its debt

obligations.

I. Debt – equity ratio :

Debt – equity ratio is a debt ratio used to measure a company’s financial

 leverage, calculated by dividing a company’s total liabilities by its
stockholder’s equity.

The formula for calculating debt – equity ratio can be presented in the

following way:

Debt – equity ratio = Total liabilities / Stockholder’s equity

A lower debt to equity ratio usually implies a more financially stable

business. Companies with a higher debt to equity ratio are considered as

more risky to creditors and investors than companies with a lower ratio.

II. Proprietary ratio :

The proprietary ratio measures the amount of funds that investors have

contributed towards the capital of a firm in relation to the total capital that

is required by the firm to conduct operations.

The formula for calculating a firm’s proprietary ratio is :

Proprietary ratio = Shareholder’s funds / Total assets

Higher proprietary ratio indicates that the company has enough capital to

repay its creditors and lower ratio indicates that the company is not in a

position to pay all of its creditors.

III. Interest coverage ratio :

The interest coverage ratio is debt ratio and profitability ratio used to

determine how easily a company can pay interest on outstanding debt.

The formula for calculating interest coverage ratio is :

Interest coverage ratio = EBIT / Interest expenses

 c) Activity / Efficiency or Current Assets Movement Ratios :

Activity ratios measure a firm’s ability to convert different accounts within

its balance sheets into cash or sales. Activity ratios measures the relative

efficiency of a firm based on its use of its assets, leverage or other such

balance sheet items.

I. Inventory turnover ratio :

Inventory turnover ratio shows how many times a company’s inventory is

sold and replaced over a period of time.

The formula for calculating inventory turnover ratio is :

Inventory turnover ratio = Cost of goods sold / Avg. inventory

cost
II. Debtors turnover ratio :

Debtors turnover ratio is an accounting measure used to quantify a firm’s

effectiveness in extending credit and in collecting debts on that credit.

Debtors turnover ratio is an activity ratio measuring how efficiently a firm

uses its assets.

The formula for calculating debtors turnover ratio is :

Debtors turnover ratio = Net credit sales /

Average accounts receivables

Higher ratios mean that companies are collecting their receivables more

Frequently throughout the year.

III. Creditors turnover ratio :

 Creditors turnover ratio is a short – term liquidity measure used to quantify

the rate at which a company pays off its suppliers.

The formula for calculating creditors turnover ratio is :

Creditors turnover ratio = Net annual credit purchase /

Average trade creditors

A higher ratio shows suppliers and creditors that the company pays its

bills frequently and regularly.

IV. Working capital turnover ratio :

The working capital turnover ratio measures how well a company is

utilizing

its working capital to support a given level of sales.

The formula for calculating working capital turnover ratio is :

Working capital turnover ratio = Sales or Cost of sales /

Net working capital

A higher turnover ratio indicates that management is being extremely

efficient in using a firm’s short – term assets and liabilities to support sales.

d) Profitability Ratios :
 Profitability ratios measures how well a firm is performing in terms of its

ability to generate profit. These ratios assess the ability of a company to

generate earnings, profits and cash flows relative to some metric, often the

amount of money invested.

I. Gross profit ratio :

Gross profit ratio is a profitability ratio that shows the relationship between

gross profit and total net sales revenue. It is a popular tool to evaluate

the operational performance of the business.

The formula for calculating the gross profit ratio is :

Gross profit ratio = Gross profit / Net sales * 100

Gross profit ratio indicates to what extent the selling price of goods per

unit may be reduced without incurring losses on operations.

II. Net profit ratio :

Net profit ratio is the popular profitability ratio that shows relationship

between net profit after tax and net sales.

The formula for calculating net profit ratio is :

Net profit ratio = Net profit after tax / Net sales * 100

A high net profit ratio indicates the efficient management of the affairs of

the business.
III. Operating profit ratio :

Operating profit ratio helps in determining the ability of the management

in running the business. Operating profit ratio is the percentage of

operating profit relative to the revenue earned during a period.

The formula for calculating operating profit ratio is :

Operating profit ratio = Operating profit / Net sales * 100

Generally, a higher operating profit ratio is desirable as it suggests greater

potential to derive profits and more cushion against any increase in

competiton or costs.

IV. Operating expenses ratio :

The operating expenses ratio is a measure of what it costs to operate a

piece of property compared to the income that the property brings in.

The formula for calculating operating expenses ratio is :

Operating expenses ratio = Operating expenses / Gross income * 100

A lower operating expenses ratio indicates a greater profit for the investors

and higher operating expenses ratio indicates a lower profit for the

investors.

e) Earnings Ratios / Overall Profitability Ratios :

Overall profitability ratios indicates the relationship between the profits of a

 firm and investment in the firm. In overall profitability ratios, profit is

used as yardstick to measure the profitability of any business concern.

I. Return on assets :

Return on assets is an indicator of how profitable a company is relative to

its total assets. It gives an idea as to how efficient management is at

using its assets to generate earnings.

The formula for calculating return on assets is :

Return on assets = Net profit after tax / Total assets * 100

A higher ratio is more favorable to investors because it shows that the

company is more effectively managing its assets to produce greater amount

of net profit.

II. Return on capital employed :

Return on capital employed is a financial ratio that measures a company’s

profitability and the efficiency with which its capital is employed.

The formula for calculating return on capital employed is :

Return on capital employed = Net profit / Capital employed * 100

A higher ratio indicates more efficient use of capital. Return on capital

employed should be higher than the company’s capital cost, otherwise it

indicates that the company is not employing its capital effectively and is

not generating shareholder value.