ACCOUNTS

PROJECT 1
RATIO ANALYSIS

NAME – RITIKA KEDIA

CLASS – XII
SEC – ‘D’
REF. NO. – 3591
 INDEX

S. No. Topics
1. Meaning of Ratio Analysis
2. Advantages of Ratio Analysis
3. Limitations of Ratio Analysis
4. Financial Statements of ITC Limited for two
years
5. Calculation of the Accounting Ratios
6. The chart of all the Accounting Ratios of two
years
7. The comparison of the Accounting Ratios of
the two years through bar diagrams
8. Conclusion
9. Acknowledgement
Meaning of Ratio Analysis
Ratio analysis means establishment of meaningful relationship between
components of financial statements. “Ratio analysis is a study of relationship
among various financial factors in a business”. – Myen
Ratio analysis is a technique of analysing the financial statements. It is a
process of determining and interpreting relationships between the related or
interdependent items of financial statements to have a meaningful
understanding of the performance and financial position of an enterprise.
Ratio analysis is also an accounting tool to present accounting variables in a
simple, concise, explainable and understandable form.

Advantages of Ratio Analysis

The advantages of ratio analysis are:
1. Useful in Analysis: Accounting ratios are useful for understanding the
financial position of the enterprise. Bankers, investors, creditors, etc., all
analyse Balance Sheet and Statement of Profit and Loss by means of
ratios.
2. Useful in simplifying Accounting Information: Accounting ratio
simplifies, summaries and systematises a long array of accounting
information to make them understandable. Its main contribution lies in
communicating precisely the interrelationships which exists between
various elements of financial statements.
3. Useful in Assessing the Operating Efficiency of Business: The
management can determine the operating efficiency of business with
the help of Activity Ratios such as Inventory Turnover Ratio, Trade
Receivables Turnover Ratio and Working Capital Turnover Ratio etc.
4. Useful in Determining Profitability: Management and investors can
determine the profitability with respect to Revenue from Operations and
Capital Employed with the help of Profitability Ratios such as Gross Profit
Ratio, Net Profit Ratio, Operating Ratio, Return on Investment, etc.
5. Useful for Forecasting: Ratios are helpful in business planning and
forecasting. The trend of ratios is analysed and used as a guide to future
planning. What should be the future course of action is decided, many a
times, on the basis of trend of ratios, i.e. ratios are calculated for a
number of years.
6. Useful in Identifying the weak areas: Ratio analysis assists in identifying
weak areas in the business even though the overall performance may be
satisfactory. Management can pay attention to the weaknesses and take
remedial action.

Limitations of Ratio Analysis

The limitations of accounting ratios are:
1. Misleading if based on Incorrect Information: Ratios are calculated from
the financial statements, thus, the reliability of ratios and their analysis
is dependent upon the correctness of the financial statements. If the
Financial Statements are misleading, the analysis will also show false
picture.
2. Definitions of Terms not Standardised: Elements and sub-elements of
financial statements are not defined in a unique manner. An enterprise
may compute ratios on the basis of profit after interest and income tax;
another enterprise may consider profit after interest but before tax; yet
a third enterprise may take profit before interest and tax.
3. Not Comparable if Different Firms follow Different Accounting Policies:
When results of two enterprises are being compared, it should be kept
in mind that the enterprise may follow different accounting policies. For
example, one enterprise may charge depreciation on the straight-line
basis and the other on diminishing value basis. Such differences will
adversely affect the comparison of the financial statements.
4. Effect of Price Level Changes: Change in price level affects the
comparability of ratios. But price level changes are not considered in the
accounting variables from which ratios are computes. This handicaps the
utility of accounting ratios.
5. Ignores Qualitative Factors: Ratio analysis is a technique of quantitative
analysis not qualitative analysis, which is important in decision-making.
For example, average collection period may be equal to standard credit
period, but debtors may be in the list of doubtful debtors, which is not
disclosed by ratio analysis.
6. Limitation of a Single Ratio: A single ratio cannot be explained and no
decision can be taken on its basis. For example, X Limited has a Current
Ratio of 2 : 1.5 can only tell that when current assets are 2, current
liabilities are 1.5. Hence, a single ratio is of less use.
 Financial Statements,
i.e., Statement of Profit
and Loss and Balance
Sheet of ITC Limited of
the years 2018-2019 and
2019-2020.
 ITC LIMITED
STATEMENT OF PROFIT AND LOSS
For the years ending 31st March, 2020 and 31st March,2019
Particulars Note Figures for Figures for
No. 31st March 31st March
2020 (in 2019 (in
Crores) Crores)
1. Revenue from Operations
a. Net Sale/Income from Operations 39921.02 38937.95
(Net of Excise Duty)
b. Other Operating Income 5863.37 5391.82
Total Revenue from Operations (Net) 45784.39 44329.77
2. Other Income 2484.54 2129.84
3. Total 48268.93 46459.61
4. Expenses
a. Cost of Material Consumed 13184.97 11756.21
b. Purchase of Stock-in-Trade 4300.32 2991.98
c. Change in inventories of Finished (180.14) 1041.85
Goods, Work-in-Process and Stock-
in-Trade
d. Employee Benefit Expenses 3517.18 6189.69
e. Depreciation and Amortisation 1311.70 1145.37
Expenses
f. Finance Costs 340.19 860.65
g. Other Expenses 7656.55 6809.06
Total 30130.77 30794.81
5. Profit Before Tax 18138.16 15664.80
6. Less: Tax 5979.84 5628.45
7. Profit After Tax 12158.32 10036.35
 BALANCE SHEET OF ITC LIMITED
as at 31st March, 2020 and 31st March, 2019
Particulars Note Figures Figures
No. for 31st for 31st
March, March,
2020 2019
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital 1225.86 1220.43
b. Reserves and Surplus 36723.93 30179.64
2. Non-Current Liabilities
a. Long-term Borrowings 9781.26 8699.71
b. Long-term Provisions 845.31 924.93
3. Current Liabilities
a. Short-term Borrowings 344.70 426.37
b. Trade Payables 4910.40 4656.78
c. Other Current Liabilities 4341022 3734.21
d. Short-term Provisions 25.24 39.24
Total 58197.92 49881.31
II. ASSETS
1. Non-Current Assets
a. Fixed Assets 21887.76 20591.57
b. Non-current Investments 16458.15 15242.45
c. Long-term Loans and 1883.05 2044.29
Advances
2. Current Assets
a. Current Investments 10506.55 9903.45
b. Inventories 7587.24 7237.15
c. Trade Receivables 3646.22 2357.01
d. Cash and Cash Equivalents 2768.73 2594.88
e. Short-term Loans and 1365.31 1152.10
Advances
f. Other Current Assets 694.91 1258.41
Total 66797.92 62381.31

Additional Information:
1. Opening Inventories for the year 2019 is ₹ 7426.39 crores.
2. Opening Trade Receivables for 2019 is ₹ 2113.69 crores.
 3. Opening Trade Payables for 2019 is ₹ 3185.48 crores.
4. Credit Sale for 2020 is ₹ 8980.25 crores and for 2019 is ₹ 8734.49 crores.
5. Credit Purchase for 2020 is ₹ 12877.40 crores and for 2019 is ₹ 8975.94
crores.
6. Market value of shares is ₹ 45.50 for 2020 and ₹ 60.00 for 2019.

Notes to Accounts
Particulars Figures Figures
for 31st for 31st
March, March,
2020 2019
1. Revenue from Operations
a. Sale of Products 26736.43 23636.46
b. Sale of Services 15954.29 17648.27
c. Other Operating Revenues 5863.37 5391.82
48554.09 46676.55
Less: Excise Duty and Service Tax 2769.70 2346.78
45784.39 44329.77
2. Purchases of Stock-in-Trade
a. Spare Parts 3159.23 2031.68
b. Engine Oil 1141.09 960.30
4300.32 2991.98
3. Other Income:
a. Interest Income 364.21 241.37
b. Preference Dividend 1002.09 883.12
c. Gain on Sale of Fixed Assets 524.97 326.54
d. Other Non-operating Income 139.40 172.42
e. Discount Received 453.87 506.39
2484.54 2129.84
4. Other Expenses:
a. Advertisement Expenses and General 1382.97 1834.95
Expenses
b. Travelling Expenses 2581.23 1931.23
c. Selling Expenses 1034.68 634.21
d. Distribution Expenses 597.91 430.66
e. Discount 1279.53 1132.58
f. Interest on Short-term Loans 780.23 845.43
7656.55 6809.06
 Calculation of the
Accounting Ratios from
the Statement of Profit
and Loss and Balance
Sheet of ITC Limited for
the years 31 March,
st

2020 and 31st March,

2019.
 1. CURRENT RATIO
Particulars 31stMarch,2020 31stMarch,2019

₹26568.96 ₹ .
Current Ratio = = ₹9621.56 = ₹ .
= 2.76:1 = 2.77:1

2. QUICK RATIO
Particulars 31stMarch,2020 31st March,2019

( ) ₹18981.72 ₹17265.85
Quick Ratio = = = ₹8856.60
₹9621.56
= 1.97:1 = 1.95:1

3. DEBT TO EQUITY RATIO

Particulars 31stMarch,2020 31st March,2019

Debt to Equity Ratio =

₹ . ₹ .
=₹ =₹
. .
Debt = Long-term Borrowings + Long-term = 0.28:1 = 0.31:1
Provisions

4. DEBT TO TOTAL ASSETS RATIO

Particulars 31stMarch,2020 31stMarch,2019

₹ . ₹ .
Debt to Total Assets Ratio = =₹ .
=₹ .
= 0.16:1 = 0.15:1
 5. PROPRIETARY RATIO
Particulars 31stMarch,2020 31stMarch,2019

₹ . ₹ .
Proprietary Ratio = = =
₹ . ₹ .

Proprietors’ Funds = Share Capital + Reserve and = 0.57 times = 0.50 times
Surplus

6. INTEREST COVERAGE RATIO

Particulars 31stMarch,2020 31stMarch,2019

Interest Coverage Ratio

₹ . ₹ .
= = ₹ . = ₹ .
= 54.32 times = 19.20 times

7. TRADE RECEIVABLES TURNOVER RATIO

Particulars 31stMarch,2020 31stMarch,2019

Trade Receivables Turnover Ratio

₹ . ₹ .
= =₹ .
=₹ .

Average Trade Receivables = = 2.99 times = 3.91 times

8. TRADE PAYABLES TURNOVER RATIO

Particulars 31stMarch,2020 31stMarch,2019

Trade Payables Turnover Ratio

₹ . ₹ .
= = ₹ .
=₹ .

Average Trade Payables = 2.69 times = 2.29 times

=
 9. WORKING CAPITAL TURNOVER RATIO
Particulars 31stMarch,2020 31stMarch, 2019

Working Capital Turnover Ratio

₹ . ₹ .
= =₹ .
=₹ .
= 2.70 times = 2.83 times

10.INVENTORY TURNOVER RATIO

Particulars 31stMarch,2020 31stMarch,2019

Inventory Turnover Ratio

₹ . ₹ .
= = ₹ .
= ₹ .

Average Inventory = 2.33 times = 2.15 times

=

11.GROSS PROFIT RATIO

Particulars 31stMarch,2020 31stMarch,2019

₹ . ₹ .
Gross Profit Ratio = × 100 =₹ .
× 100 = ₹ .
× 100

Gross Profit = Revenue from Operations – Cost = 62.20% = 64.38%

of Revenue from Operations

12.NET PROFIT RATIO

Particulars 31stMarch,2020 31stMarch,2019

₹ . ₹ .
Net Profit Ratio = × 100 =₹ .
× 100 = ₹ .
× 100

Net Profit = Gross Profit – Indirect Expenses and = 29.72% = 26.01%

Losses + Other Incomes - Tax
 13.OPERATING RATIO
Particulars 31stMarch,2020 31stMarch,2019

₹ . ₹ .
Operating Ratio = × 100 = × 100 = × 100
₹ . ₹ .

Operating Cost = Cost of Revenue from = 43.60% = 46.87%

Operations + Operating Expenses – Operating
Income

14.OPERATING PROFIT RATIO

Particulars 31stMarch,2020 31st March,2019

Operating Profit Ratio ₹ . ₹ .

=₹ .
× 100 = ₹ .
× 100
= × 100
= 33.81% = 24.09%
Operating Profit = Gross Profit – Operating
Expenses + Operating Incomes

15.EARNING PER SHARE

Particulars 31stMarch,2020 31stMarch,2019

₹ . ₹ .
Earning Per Share = ₹ =₹
, . .
= ₹ 9.10/share = ₹ 7.50/share
=

16.PRICE EARNING RATIO

Particulars 31stMarch,2020 31stMarch,2019

Price Earning Ratio ₹ . ₹ .

=₹ . = ₹ .
= = 5 times = 8 times
 17.RETURN ON INVESTMENT
Particulars 31stMarch,2020 31stMarch,2019

₹ . ₹ .
Return on Investment = × 100 = × 100
( , ₹ . ₹ .
)
= × 100 = 37.34% = 38.18%

Working Notes
Particulars Figures for Figures for
31st 31st
March,2020 March,2019
(in Crores) (in Crores)
1. Quick Assets
Current Assets 26568.96 24503.00
Less: Inventories 7587.24 7237.15
Quick Assets 18981.72 17265.85

2. Long-term Debt
Long-term Borrowings 9781.26 8699.71
Long-term Provisions 845.31 924.93
Long-term Debt 10626.57 9624.64

3. Shareholders’ Funds
Share Capital 1225.86 1220.43
Reserves and Surplus 36723.93 30179.64
Shareholders’ Funds 37949.79 31400.07

4. Profit before Interest and Taxes

Profit before Tax 18138.16 15664.80
Add: Interest 340.19 860.65
Profit before Interest and Taxes 18478.35 16525.45

5. Working Capital
Current Assets 26568.96 24503.00
Less: Current Liabilities 9621.56 8856.60
Working Capital 16947.40 15646.40
6. Cost of Revenue from Operations
Cost of Materials Consumed 13184.97 11756.21
Add: Purchase of Stock-in-Trade 4300.32 2991.98
Add: Change in Inventories (180.14) 1041.85
Cost of Revenue from Operations 17305.15 15790.04

7. Gross Profit
Revenue from Operations 45784.39 44329.77
Less: Cost of Revenue from Operations 17305.15 15790.04
Gross Profit 28479.24 28539.73

8. Net Profit
Gross Profit 18138.16 15664.80
Less: Selling Expenses 1034.68 634.21
Add: Other Income 2484.54 2129.84
Less: Tax 5979.84 5628.45
Net Profit 13608.18 11531.98

9. Operating Expenses
Employee Benefit Expenses 3517.18 6189.69
Depreciation and Amortisation Expenses 1311.70 1145.37
Selling Expenses 1034.68 634.21
Distribution Expenses 597.91 430.66
Discount 1279.53 1132.58
Interest on Short-term Loans 780.23 845.43
Operating Expenses 8521.23 10377.94

10.Operating Cost
Cost of Revenue from Operations 17305.15 15790.04
Add: Operating Expenses 8521.23 10377.94
Less: Operating Income 5863.37 5391.82
Operating Cost 19963.01 20776.16

11.Operating Profit
Gross Profit 18138.16 15664.80
Less: Operating Expenses 8521.23 10377.94
Add: Operating Income 5863.37 5391.82
Operating Profit 15480.30 10678.68
 12.Net Profit after Interest, Tax and Dividend
Net Profit after Interest and Tax 12158.32 10036.35
Less: Dividend on Preference Shares 1002.99 883.12
Net Profit after Interest, Tax and Dividend 11155.33 9153.23

13. Capital Employed

Shareholders’ Fund 37949.79 31400.07
Add: Non-Current Liabilities 10626.57 9624.64
Capital Employed 48576.36 41024.71

The Chart Showing all the Accounting Ratios for ITC Limited for the
years ending 31st March, 2020 and 31st March, 2019
S. No. Accounting Ratios 31st March,2020 31st March,2019
1. Current Ratio 2.76:1 2.77:1
2. Quick Ratio 1.97:1 1.95:1
3. Debt to Equity Ratio 0.28:1 0.31:1
4. Debt to Total Assets Ratio 0.16:1 0.15:1
5. Proprietary Ratio 0.57 times 0.50 times
6. Interest Coverage Ratio 54.32 times 19.20 times
7. Trade Receivables Turnover Ratio 2.99 times 3.91 times
8. Trade Payables Turnover Ratio 2.69 times 2.29 times
9. Working Capital Turnover Ratio 2.70 times 2.83 times
10. Inventory Turnover Ratio 2.33 times 2.15 times
11. Gross Profit Ratio 62.20% 64.38%
12. Net Profit Ratio 29.72% 26.01%
13. Operating Ratio 43.60% 46.87%
14. Operating Profit Ratio 33.81% 24.09%
15. Earning Per Share ₹9.10/share ₹7.50/share
16. Price Earning Ratio 5 times 8 times
17. Return on Investment 37.34% 38.18%
 Comparison of
the Accounting Ratios
of two years
(31 March, 2020 and
st

31 March, 2019)
st

through Bar Diagrams.

 Current Ratio
2.772
2.77
2.768
2.766
2.764
2.762
2.76
2.758
2.756
2.754
31.3.20 31.3.19

Quick Ratio
1.975
1.97
1.965
1.96
1.955
1.95
1.945
1.94
31.3.20 31.3.19

Debt to Equity Ratio

0.315
0.31
0.305
0.3
0.295
0.29
0.285
0.28
0.275
0.27
0.265
31.3.20 31.3.19
 Debt to Total Assets Ratio
0.162
0.16
0.158
0.156
0.154
0.152
0.15
0.148
0.146
0.144
31.3.20 31.3.19

Proprietary Ratio
0.58

0.56

0.54

0.52

0.5

0.48

0.46
31.3.20 31.3.19

Interest Coverage Ratio

60

50

40

30

20

10

0
31.3.20 31.3.19
 Trade Receivables Turnover Ratio
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
31.3.20 31.3.19

Trade Payables Turnover Ratio

2.8
2.7
2.6
2.5
2.4
2.3
2.2
2.1
2
31.3.20 31.3.19

Working Capital Turnover Ratio

2.85

2.8

2.75

2.7

2.65

2.6
31.3.20 31.3.19
 Inventory Turnover Ratio
2.35

2.3

2.25

2.2

2.15

2.1

2.05
31.3.20 31.3.19

Gross Profit Ratio

65
64.5
64
63.5
63
62.5
62
61.5
61
31.3.20 31.3.19

Net Profit Ratio

30

29

28

27

26

25

24
31.3.20 31.3.19
 Operating Ratio
48

47

46

45

44

43

42

41
31.3.20 31.3.19

Operating Profit Ratio

40

35

30

25

20

15

10

0
31.3.20 31.3.19

Earning Per Share

10
9
8
7
6
5
4
3
2
1
0
31.3.20 31.3.19
 Price Earning Ratio
9
8
7
6
5
4
3
2
1
0
31.3.20 31.3.19

Return on Investment
38.4
38.2
38
37.8
37.6
37.4
37.2
37
36.8
31.3.20 31.3.19
 CONCLUSION
From the project, it can be concluded that the company is pursuing long-term
financial management. The Current Ratio is more than 2:1 which shows that
the current assets of the company are more than twice of its current liabilities
which is beneficial for the company. The Quick Ratio is more than 1:1 which
represents a sound financial position.
There is a decrease in Debt to Equity Ratio and increase in Debt to Total Assets
Ratio which shows that there is a greater margin of safety to long-term
lenders. There is an increase in Proprietary Ratio and Interest Coverage Ratio
which shows that the company is securing itself and the long-term lenders
from the risk of losing the money.
There is a decrease in Trade Receivables Turnover Ratio which shows that the
amount from trade receivables is not being collected quickly and the credit
sales policy of the management is inefficient. There is an increase in Trade
Payable Turnover Ratio which shows that there is an increase in the credit
worthiness of the company. There is a decrease in Working Capital Turnover
Ratio which shows under-utilisation of the working capital. There is an increase
in the Inventory Turnover Ratio which shows that the inventory is selling
quickly.
There is a decrease in Gross Profit Ratio and increase in Net Profit Ratio which
shows that the profit margin has decreased. There is a decrease in Operating
Ratio and increase in Operating Profit Ratio which shows that the company is
working on the increasing its efficiency and profitability. There is an increase in
Earning Per Share which shows that there is an increase in the capacity of the
company to declare dividends from investors. There is a decrease in Price
Earning Ratio which shows that there is an increase in earning of the company
and thus indicates better future prospects. The decrease in Return on
Investments shows that the company is not utilizing its resources efficiently
and thus the earnings from the resources are decreasing.
 ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and
assistance from many people and I am extremely privileged to have got this all
along the completion of my project. All that I have done is only due to such
supervision and assistance and I would not forget to thank them.
This project helped me to practically learn how ratio analysis works and helps
us to analyse the financial position of any firm or enterprise and compare it
with financial report of some other year or any other firm.
I would like to thank our Accounts teacher for providing me an opportunity to
do the project work on Ratio Analysis and giving us support and guidance
which made me complete my project duly. I would also like to thank my
parents and friends who helped me a lot in completing the project.