CHANAKYA NATIONAL LAW

UNIVERSITY, PATNA

PROJECT WORK
ON
ACCOUNTS AND AUDIT

TOPIC :- RATIO ANALYSIS OF FINANCIAL STATEMENT OF

ACCESSING LIQUIDITY , WORKING CAPITAL,
PROFITABILITY, LEVERAGE DURING 2013 -14, 2014 –
15, 2015 – 16 OF ICICI.

SUBMITTED TO :-
MR. KAMESHWAR PANDEY
SUBMITTED BY :-
RAHUL RAJ
ROLL NO : 1845 , 1ST SEMESTER
 ACKNOWLEDGEMENT

The present project on the “ratio analysis of financial statement of icici” has
been able to get its final shape with the support and help of people from various
quarters. My sincere thanks go to all the members without whom the study
could not have come to its present state. I am proud to acknowledge gratitude to
the individuals during my study and without whom the study may not be
completed. I have taken this opportunity to thank those who genuinely helped
me.

With immense pleasure, I express my deepest sense of gratitude to Mr

Kameshwar Pandey , Faculty for accounts and audit , Chanakya National Law
University for helping me in my project. I am also thankful to the whole
Chanakya National Law University family that provided me all the material I
required for the project. Not to forget thanking to my parents without the co-
operation of which completion of this project would not had been possible.

Last but not least I would like to thank Almighty whose blessing helped me to
complete the project.

RAHUL RAJ

ROLL NO. - 1845, 1ST

SEMESTER
 RESEARCH METHODOLOGY

Method of Research:

The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the library at the Chanakya National Law University and also the internet
sources.

Aims and Objectives:

The aim of the project is to present an overview of the case “RATIO ANALYSIS OF ICICI
” through cases, decisions and suggestions and different writings and articles

Sources of Data:

The following secondary sources of data have been used in the project-

1. Cases
2. Books

Method of Writing:

The method of writing followed in the course of this research paper is primarily
analytical.

Mode of Citation:

The researcher has followed a uniform mode of citation throughout the course of this project.
 Accounting and Its concept
Accounting is the systematic and comprehensive recording of financial transactions
pertaining to a business, and it also refers to the process of summarizing, analyzing
and reporting these transactions to oversight agencies and tax collection entities.
Accounting is one of the key functions for almost any business; it may be handled by
a bookkeeper and accountant at small firms or by sizable finance departments with
dozens of employees at large companies. Accounting starts where the book keeping
ends.
It includes the following activities.

1. Summarizing the classified transactions in the form of profit and loss account and balance
sheets etc.

2. Analyzing and interpreting the summarized result .In other words, drawing the meaningful
information from profit and loss account and balance sheet etc.

3. Commuting the information to the interested parties.

Thus, an accountant’s work goes beyond that of a book keeper. However, in actual practice
the accounting process includes the book keeping function also because on the basis of book
keeping records, an accountant draws up such financial statements as profit and loss account
and balance sheets etc. periodically. In a small concern, the accountant performs the work of
bookkeeping also.

Advantages or uses of Accounting

Accounting offers the following advantages:

 Helpful in Management of Business- Management needs a lot of information for the

efficient running of the business. All such information is provided by the accounting
which helps the management in the following-
1. Helpful in Planning- Management would like to know whether the sales are
increasing or decreasing and also the speed of increase in the cost of
production. All such information is provided by the accounting, which help

the management in estimating the future sales and expenses.

 2. Earned Helpful in Decision Making- At time, the Management has to take a
number of decision. What should be the selling price of the product? How
much discount should be offered to the customer? Accounting provides all the
information required for making such decision.
3. Help in Controlling- Management would like to see that the cost incurred is
reasonable and that no department is overspending. Accounting provides
information to the management in this regard.

 Provides complete and systematic record- Business transaction have grown in size
and complexity and it is not possible to remember each and every transaction.
Accounting keeps a prompt and systematic record of all the transactions and
summarize them in order to provide a true picture of the activities of the business
entity.
 Information Regarding Profit and Loss- Accounting reports the net result of
business activities of an accounting period. The Profit and Loss Account prepared at
the end of each accounting period discloses the net profit earned or loss suffered
during that period.
  Ascertainment of financial position of the business- At specific date, company
finds the knowledge of his assets and liabilities from financial statement. Assets
means all sources of business and liabilities means all payable amounts of business.
Business can calculate correct financial position, if businessman records all assets and
liabilities in accounting.
 Assessment of Tax- Nowadays, a businessman has to pay many taxes. For example
income tax, sale tax, property tax , excise duty , import duty and custom duty etc. Its
correct estimation is only possible, if businessman record correctly all his income,
production and sale with the help of accounting. If businessman does not keep his
record properly, then Assessing officer calculates amount of tax with his own
estimation.
 Determination of sale price of business- If businessman wants to sell his active
business to other party , then the total sale value of business can easily determine, if
businessman records all investments in business.
PROCESS OF ACCOUNTING
1. Recording the transactions.

2. Posting the transactions {Including classification}

3. Checking the arithmetical accuracy of posting and balancing by preparing Trial

Balance.

4. Preparation of Profits & Loss A/Cs {receipts and payments account, income and
expenditure account}

4. Preparation of financial statements including balance sheets.

 Accounting Concept

1. BUISNESS ENTITY CONCEPT:

According to this concept, business is treated as a unit, separate and distinct from its owners,
creditors, managers and others. In other words, the owner of a business is always considered
as distinct and separate from the business he owns. Business unit should have a completely
separate set of books and we have to record business transactions from firm’s point of view
of the proprietor/partner .The partner/proprietor is treated as a creditor of the business to the
extent of capital invested by him in the business. Because of the concept of separate entity,
the proprietor‘s house, his personal investment in securities ,personal income and
expenditure are kept separate from the accounts of the business entity .In the absence of
separate entity ,the net profits and financial position of a business entity cannot be known
.The concept of separate entity is applicable to all forms of business organization .Though in
case of proprietorship firms and partnership firms ,the liability of the firm is to meet by the
personal assets of the proprietor and therefore there is no separate existence of the firm as
legal person . However in accounts firm and owners are quite distinct to each other. Though
proprietorship firm and its proprietor are having same legal entity but for the purpose of
accounting they are treated separately.

2. GOING CONCERN CONCEPT:

As per this concept it is assumed that the business will continue to exist for a long period in
the future. The transactions are recorded in the books of business on the assumptions that is a
continuing enterprise. It is on this concept that we record fixed assets at their original cost
and depreciation is charged on these assets without reference to their market value. For
example, if a machinery is purchased which would last, say for 10 years the depreciation will
be charged for these ten years at the time of calculating the net profit or loss of each year.
Because of the concept of going concern the full cost of the machine would not be treated as
an expense in the year of its purchase itself. As the benefit of the acquisition will be available
to the organization in the years to come. It is also because of the going concern concept that
outside parties enter into long term contracts with the enterprise give loans and purchase the
debentures and the shares of the enterprise also. Without this concept ,the classification of
current fixed assets and short and long term liabilities cannot be made and such
classifications would be difficult to justify .At the time of incorporation of company heavy
expenditure is made ,but the same is deferred for years to come and gradually written off
depending on the theory ‘LOAD WHAT THE TRAFFIC CAN BEAR’. There are many
concern who are having more than 100 year’s life e.g. Statesman, Amrit Bazaar Patrika,
Tisco etc.

3. ACCOUNTING YEAR CONCEPT:

Accounting period is necessary for management, for making new policies or amending old
policies after seeing the performance of the business during one year. According to going
concern concept business has an indefinite life so it is a difficult task to know the results of
the business due to indefinite period of business. But to see the trend or to have an idea about
the performance and profitability of business, total life of a business is divided into smaller
periods. This short span of time period consists of 12 months period of 12 months is called as
an accounting period. It may be 1 st Jan to 31st Dec. or 1st April to 31st March, 14th April to 13th
April of succeeding year.

4. MONEY MEASUREMENT CONCEPT-

Only those transactions and events are recorded in account books which are capable of being
expressed in terms of money. An event, even though it may be very important for the
business, will not be recorded in the books of the business unless its effect can be measured
in terms of money with a fair degree of accuracy. For example, accounting does not record a
quarrel between the production manager and sales manager. These facts or happening cannot
be expressed in money terms and thus are not recorded in the books of accounts.

5. REALISATION CONCEPT (REVENUE RECOGNITION)-

Revenue means the amount which are added to reserve or capital as a result of business
operations. Revenue is earned by sales of goods or by providing a service. Concept of
revenue recognition determines the times or a particular period in which revenue is realized.
Revenue is deemed to be realized when the title or the ownership of the goods has been
transferred to the purchaser and when he has legally becomes liable to pay the amount.
Preferably, it is taken into consideration with an eye over the extent of actual realization. For
example , if a firm gets an order of goods on 1 st January ,supplies the goods on 20 th January
and receives the cash on 1st April ,the revenue will on deemed to have been earned on the 20 th
January ,as the ownership of goods was transferred on that day. Revenue in case of income
such as rent, interest, commission etc is recognized on a time basis. For example, rent for the
month of March 2015, even if received in April 2016 will be treated as revenue for the
financial year ending march 31,2015.Similarly if commission for April 2015 is received in
advance in march 2015 ,it will be treated as revenue of the financial year commencing April
2015 .

6. DUAL ASPECT CONCEPT-

According to this concept, every business transactions is recorded as having a dual aspect .In
other words, every transactions affects at least two accounts .If one account is debited ,any
other account must be credited to the same extent .The system of recording transactions based
on this concept is called as ‘double entry system’. It is because of this principle that two sides
of the balance sheets are always equal and following accounting equations will always hold
good at any good point of time :-

ASSESTS = LIABILITIES + CAPITAL

Whenever a transaction is to be recorded, it has to be recorded in two or more accounts to

balance the equations. Equation must remain balanced whenever a transaction takes place.
For example, X commences the business with the Rs 5 Lakhs in cash and takes a loan of Rs 1
lakh from the bank and these Rs 6 lakhs are used in buying in some assets, pay and
machinery .The equation will be as follows:

ASSETS =LIABILITIES + CAPITAL :- Rs 6 lakhs = Rs 1 lakh +Rs 5 lakh

7. COST CONCEPT-

According to this concept, an asset is ordinarily recorded in the books of accounts at the price
at which it was acquired. This cost becomes the basis of all subsequent accounting for the
assets .Since, the acquisition cost relates to the past, it is referred also as historical cost. This
cost is the basis of valuation of the assets in the financial statements.

For example, if a business entity purchases a building for Rs 5, 00, 000it would be recorded
in the books at this figure .Subsequent increase or decrease in the market value of the
building would not be recorded in the books of accounts. If two years later the market value
of the building shoots up to Rs 10, 00,000, the increased value will not be ordinarily recorded
in the books of accounts.

8. ACCRUAL CONCEPT -
In accounting , accrual basis is used for recording of transactions .It provides more
appropriate information about the performance of business enterprise as compared to cash
basis. Accrual concept ascertains true profits or loss for an accounting period and to show the
true financial position of the enterprise at the end of the accounting period.
For example: - If 10 lakhs are deposited as fixed deposit on 01.07.2013
Rate of interest = 12%
Date of maturity =30.06.2014
Amount of interest = Rs 1, 20,000
By accrual concept: - July to march -) 2013-2014 =) Rs 90,000
April to June -) 2014-2015 =) Rs 30,000.

9. MATCHING CONCEPT-
This concept is very important for correct determination of net profits. According to this
concept, in determining the net profits from business operations, all costs which are
applicable / related to revenue for the period should be charged against that revenue.
Accordingly, for matching costs with revenue, first revenue should be recognized and then
costs incurred for recognized. Hence, by matching concept, revenue and expenditure should
match. Example: If we takes sales in the march of a year we will take and the a/c entire
expenditure related to the sales up in the march 2015 irrespective of the fact whether it has
actually been paid or not.
ACCOUNTING CONVENTION

An accounting conventions may be defined as a custom or generally accepted practice which

is adopted either by general agreement or common consent among accountant .It may differ
from one individual to the other. Following are the main accounting conventions:-

1. Conservatism-
According to this convention ,all anticipated losses should be regarded in the books of
accounts ,but all anticipated or unrealized gains should be ignored .Provision is made for
all known liabilities and losses even though the amount cannot be determined with
certainty .Following are the examples of the application of the principles of
conservatism:-

 Provision for doubtful debt is created in anticipation of actual bad debts.

 Provision for a pending law suit against the firm, which may either be decided
in its favor .As per this convention, the stock is valued at market price or cost
price whichever less is.

2. Materialism-
According to this convention ,items having an insignificant effect or being left out or
merged with other items ,otherwise accounting statements will be unnecessarily
overburdened. “Items should be regarded as material if there is reason to believe that
knowledge of it would influence decision of informed investors”. It makes decision
making process. It should be noted that what is material for one concern may be
immaterial for another.

For example: - The cost of small tools may be material for a small repair workshop but
the same figure may be immaterial for escorts limited. One item which is material in a
particular year may not be material in subsequent year. For example: provision for bad
debt was made in previous year but in current year as the sundry debtors significantly
low and most of them pertain to current year, this provision is not red to be made in
current year .As per COMPANIES ACT 1956,expenditure of 1% of turnover or more
should be considered as material one.

3. Consistency-
 This convention state that accounting principles and methods should remain consistent
from one year to another .These should not be changed from year to year. In order to
enable the management to compare the profit and loss account and balance sheet of the
different periods and draw the important conclusions about the working of the enterprise.
If a firm adopts different accounting principles in two accounting periods, the profits of
current period will not be comparable with the profits of the preceding period.

But the convention of consistency should not be taken to mean that it does not allow a firm to
change the accounting methods according to the changed circumstances .Otherwise the
accounting will become non flexible and the improved techniques of accounting will not be
used .Example :- Method of valuation of inventory , method of charging, depreciation
,provision for bad and doubtful debts .There are three types of consistency :Vertical
Consistency, Horizontal Consistency and third Dimension Consistency. Vertical contingency
stipulates that the policies for preparing Profit & Loss Account. And Balance sheet should be
same. The Horizontal contingency stipulates that similar policies should be adopted in an
organization from year to year. Third dimension consistency expects that all organizations
dealing with same products or in same industry should adopt same policies to facilitate inter
firm comparison. If for any reason this decided to change some policy in a particular period.
The effect of change in profitability should be indicated in the financial statements as notes
on accounts. There are three types of consistency: Vertical Consistency, Horizontal
Consistency and third Dimension Consistency.

4. Disclosure-
This principle requires that all significant information relating to the economic affairs
of the enterprise should be completely disclosed. In other words, there should be a
sufficient disclosure of information which is of material interest to the users of the
financial statements. Disclosure of material facts does not mean leaking out the
secrets of the business but disclosing sufficient information which is of material
interest to the users of the financial statements. Since, the purpose of financial
statements is to provide meaningful information to various parties it is important that
adequate disclosure be made so that they have firm opinion at the time of taking
decisions. All sort of weakness are required to be shown .The strength may be shown
weaker than what it is but the weakness are required to be indicated. Under this option
contingent liability is important ones. A contingent liability is the likely liabilities of
an organization which they take in future provide a particular incident takes place
 .Otherwise the things would remain as it is. E.g. the organization has given guarantee
in favor of party at the time of applying for loan .If that party for legal, valid reasons
fails to keep its promise which results in non-deposit of loan installments then the
company will have to pay the loan along with interest for the guaranteed amount .This
item should be disclosed as a note on accounts.

BOOK KEEPING
Bookkeeping is the recording of financial transactions, and is part of the process
of accounting in business.1 Transactions include purchases, sales, receipts, and payments by
an individual person or an organization/corporation. There are several standard methods of
bookkeeping, such as the single-entry bookkeeping system and the double-entry
bookkeeping system, but, while they may be thought of as “real” bookkeeping, any process
that involves the recording of financial transactions is a bookkeeping process.

It is mainly concerned with record keeping or maintenance of books of accounts. The

maintenance of books of accounts includes the following four activities:

1. Identifying the transactions of financial nature from amongst the various transactions.

2. Measuring the identified transactions in terms of money.

3. Recording the identified transactions in the books of PRIME ENTRY.

4. Posting them into ledger.

The book keeping functions is routine and clerical in nature and can be performed even by
persons having limited knowledge of accounting. Book keeping is the primary nature.

1
Weygandt, Kieso, Kimmel (2003). Financial Accounting. Susan Elbe. p. 6. 
 SYSTEM OF BOOK KEEPING-

1. Single entry system-

Single-entry systems, which are most commonly used in small business where the entity does
not have many transactions, is a very informal type of system. The system will record the
cash disbursements, sales, purchases and also cash receipts on accounts receivables. Anything
else, like equipment investments or stocks, will be recorded only in the notes section of the
program.

2. Double entry system-

A double-entry system is a far more advanced type of bookkeeping system that is used by
most companies, bookkeepers and also by accountants with their own firms. With a double-
entry system, there are fields for debits and credits so that every time that a transaction is
recorded on one statement it is recorded on the corresponding account. With these systems,
there are fields for everything from basics like cash receipts and sales to other transactions
like the purchase of stock or buildings. It also includes tools that help with constructing the
most detailed financial statements. This will help any company get fair valuation, file taxes,
or secure funding for more cash flow.2

3. Triple entry system (or integrated system of accounting)-

The digitally signed receipt, with the entire ertilizer on for a transaction, represents a
dramatic challenge to double entry bookkeeping at least at the conceptual level. The
cryptographic invention of the digital signature gives powerful evidentiary force to the
receipt, and in practice reduces the accounting problem to one of the receipt’s presence or its
absence. This problem is solved by sharing the records – each of the agents has a good copy.

In some strict sense of relational database theory, double entry book keeping is now
redundant; it is ertilizer away by the fourth normal form. Yet this is more a statement of
theory than practice, and in the software systems that we have built, the two remain together,
2
www.topaccountingdegrees.org/faq/what-is-a-bookkeeping-system/
working mostly hand in hand. Which leads to the pairs of double entries connected by the
central list of receipts; three entries for each transaction. Not only is each accounting agent
led to keep three entries, the natural roles of a transaction are of three parties, leading to three
by three entries.

We term this triple entry bookkeeping. Although the digitally signed receipt dominates in
information terms, in processing terms it falls short. Double entry book keeping fills in the
processing gap, and thus the two will work better together than apart. In this sense, our term
of triple entry bookkeeping recommends an advance in accounting, rather than a revolution.3

3
http://iang.org/papers/triple_entry
Trail Balance
Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first
step towards the preparation of financial statements. It is usually prepared at the end of an
accounting period to assist in the drafting of financial statements. Ledger balances are
segregated into debit balances and credit balances. Asset and expense accounts appear on the
debit side of the trial balance whereas liabilities, capital and income accounts appear on the
credit side. If all accounting entries are recorded correctly and all the ledger balances are
accurately extracted, the total of all debit balances appearing in the trial balance must equal to
the sum of all credit balances.

Purpose of a Trial Balance

 Trial Balance acts as the first step in the preparation of financial statements. It is a
working paper that accountants use as a basis while preparing financial statements.
 Trial balance ensures that for every debit entry recorded, a corresponding credit entry
has been recorded in the books in accordance with the double entry concept of
accounting. If the totals of the trial balance do not agree, the differences may be
investigated and resolved before financial statements are prepared. Rectifying basic
accounting errors can be a much lengthy task after the financial statements have been
prepared because of the changes that would be required to correct the financial
statements.
 Trial balance ensures that the account balances are accurately extracted from
accounting ledgers.
 Trail balance assists in the identification and rectification of errors

Limitations of a trial balance

Trial Balance only confirms that the total of all debit balances match the total of all credit
balances. Trial balance totals may agree in spite of errors. An example would be an incorrect
debit entry being offset by an equal credit entry. Likewise, a trial balance gives no proof that
certain transactions have not been recorded at all because in such case, both debit and credit
sides of a transaction would be omitted causing the trial balance totals to still agree. Types of
accounting errors and their effect on trial balance are more fully discussed in the section on
Suspense Accounts.4

4
www.accounting-simplified.com
Balance Sheet

A balance sheet lays out the ending balances in a company’s asset, liability, and equity
accounts as of the date stated on the report.  The most common use of the balance sheet is as
the basis for ratio analysis, to determine the liquidity of a business. Liquidity is essentially the
ability to pay one’s debts in a timely manner. The information listed on the report must match
the following formula:

Total assets = Total liabilities + Equity

The balance sheet is one of the key elements in the financial statements, of which the other
documents are the income statement and the statement of cash flows. A statement of retained
earnings may sometimes be attached.

The format of the balance sheet is not mandated by accounting standards, but rather by
customary usage. The two most common formats are the vertical balance sheet (where all line
items are presented down the left side of the page) and the horizontal balance sheet (where
asset line items are listed down the first column and liabilities and equity line items are listed
in a later column). The vertical format is easier to use when information is being presented
for multiple periods.5

The balance sheet presents a company’s financial position at the end of a specified date.
Some describe the balance sheet as a “snapshot” of the company’s financial position at a
point (a moment or an instant) in time. For example, the amounts reported on a balance sheet
dated December 31, 2015 reflect that instant when all the transactions through December
31 have been recorded.
Because the balance sheet informs the reader of a company’s financial position as of one
moment in time, it allows someone—like a creditor—to see what a company owns as well as
what it owes to other parties as of the date indicated in the heading. This is valuable
information to the banker who wants to determine whether or not a company qualifies for
additional credit or loans. Others who would be interested in the balance sheet include current
investors, potential investors, company management, suppliers, some customers, competitors,
government agencies, and labor unions.6

Financial Ratio Analysis

5
www.accountingcoach.com/balance-sheet/explanation
6
http://www.accountingcoach.com/balance-sheet/explanation
 The traditional financial statements comprising the balance sheet and the profit and
loss account are proving the information related to the financial operation of the firm. They
provide some extremely useful information that mirrors the financial position on a particular
date in terms of the structure of assets, liabilities and owner’s equity and so on. The profit
and loss account show the results of operations during a certain period of time in terms of the
revenues obtained and the cost incurred during the year. Therefore, much can be learnt about
a firm from a careful examination of its financial statements. Users of financial statements
can get further insight about financial strengths and weaknesses of the firm if they properly
analyze information reported in these statements. Management should be particularly
interested in knowing financial weakness of the firm to take suitable corrective actions. The
future plans of the firm should be laid down in view of the firm’s financial strengths and
weaknesses. Thus, financial analysis is the starting point for making plans, before using any
sophisticated forecasting and planning procedures. Understanding the past is a pre-requisite
for anticipating the future.

Ratio Analysis - Introduction:

Ration analysis is a widely – used tool of financial analysis. It is used to interpret the
financial statements so that the strengths and weaknesses of the firm as well as its historical
performance and current financial condition can be determined. A ratio is defined as “the
indicated quotient of two mathematical expressions” and as the “the relationship between two
or more things”.

It is a benchmark for evaluating the financial position and performance of a firm.

The term ratio refers to the numerical or quantitative relationship between two
items/variables. This relationship can be expressed as:
1. Percentages, say, Net Profits are 25% of Sales (assuming Net Profit of Rs. 25,000 and

Sales of Rs.1,00,000),

2. Fraction (Net profit is 1/4th of Sales) and

3. Proportion of numbers (the relationship between Net profits and Sales is 1:4).
 These alternative methods of expressing items, which are related to each other, are, for
purpose of financial analysis, referred to as ratio analysis. It should be noted that computing
the ratios does not add any information already inherent in the above figures of profits and
sales. What the ratios do is that they reveal the relationship in a more meaningful way so as
to enable us to draw conclusions from them. The rationale of ratio analysis lies in the fact
that it makes related information comparable. A single figure by itself has no meaning but
when expressed in terms of a related figure, it yields significant inferences. For instance, the
fact that the Net profits of a firm amount to, say Rs. Ten Lakhs throws no light on its
adequacy or otherwise. The figure of Net profit has to be considered in relation to other
variables. How does it stand in relation to sales? If, therefore, Net profits are shown in terms
of their relationship with items such as Sales, Assets, Capital employed, Equity capital and so
on, meaningful conclusions can be drawn regarding their adequacy.

To carry the above example further, assuming the capital employed to be Rs.50 lakh and
Rs.100 lakh, the Net profit are 20% and 10% each respectively. Ratio analysis, thus, as a
quantitative tool, enables analysts to draw quantitative answers to questions such as; are the
Net profits adequate? Are the assets being used efficiently? Is the firm solvent? Can the firm
meet its current obligations and so on?
Ratio Analysis - Importance:

As a tool of financial management, ratios are of crucial significance. The importance

of ratio analysis lies in the fact that presents facts on a comparative basis and enables the
drawing inference regarding the performance of a firm. Ratio analysis is relevant in
assessing the performance of a firm in respect to the following aspects.
1. Liquidity position

2. Long-term solvency

3. Operational efficiency

4. Overall profitability

5. Inter-firm comparison, and

6. Trend analysis

1. Liquidity position: -
With the help of ratio analysis conclusions can be drawn regarding the liquidity
position of a firm. The liquidity position of a firm would be satisfactory if it is able to
meet its current obligations when they become due. A firm can be said to have the
ability to meet its short-term liabilities if it has sufficient liquid funds to pay the
interest on its short-maturing debt usually within a year as well as to repay the
principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratios
are particularly useful in credit analysis by banks and other suppliers of short-term
loans. Common liquidity ratios include The Current ratio, Quick ratio and The
operating Cash flow ratio.

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

3. Operating Efficiency: -
Another dimension of the usefulness of the ratio analysis, relevant from the view
point of management, is that it throws light on the degree of efficiency in the
management and utilization of its assets. The various activity ratios measure this kind
of operational efficiency.

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

5. Inter-firm Comparison: -
Ratio analysis not only throws light on the financial position of a firm but also serves
as a stepping stone to remedial measures. This is made possible due to inter-firm
comparison and comparison with industry averages. A single figure of a particular
ratio is meaningless unless it is related to some standard or norm. One of the popular
techniques is to compare the ratios of a firm with the industry average. An inter-firm
comparison would demonstrate the firm’s position vis-à-vis its competitors.

6. Trend Analysis: -
Ratio analysis enables a firm to take the time dimension into account. In other words,
whether the financial position of a firm is improving or deteriorating over the years.
This is made possible by the use of trend analysis. The significance of a trend
analysis of ratios lies in the fact that the analysis can know the direction of movement,
i.e., whether the movement is favorable or unfavorable. For example, the ratio may
be low as compared to the norm but the trend may be upward. On the other hand,
though the present level may be satisfactory but the trend may be a declining one.
Ratio Analysis-Limitations:
Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers from various
limitations. The operational implication of this is that while using ratios, the conclusions
should not be taken on their face value. Some of the limitations, which characterize ratio
analysis, are

i. Difficulty in comparison.

ii. Impact of Inflation, and

iii. Conceptual Diversity

i. Difficulty in comparison: -
One serious limitation of ratio analysis arises out of the difficulty associated with this
comparability. One technique that is employed is inter-firm comparison. But such
comparison is vitiated by different procedures adopted by various firms.
 Differences in basis of inventory valuation (e.g.: - last in first out, average

cost and cost);

 Different depreciation methods (i.e. straight line Vs. written down basis);

 Estimated working life of assets, particularly of plant and equipment;

 Amortization of deferred revenue expenditure such as preliminary expenditure

and discount on issue of shares;

 Capitalization of lease;

 Treatment of extraordinary items of income and expenditure; and so on.

Secondly, apart from different accounting procedures, companies may have different
accounting procedures, implying differences in the composition of assets, particularly current
assets. For these reasons, the ratios of two firms may not be strictly comparable.

ii. Impact of Inflation: -

The second major limitation of the ratio analysis is associated with price level
changes. This is a weakness of the traditional financial statements, which are based
 on historical cost. An implication of this feature of the financial statements as regards
ratio analysis is that assets acquired at different periods are, in effect, shown at
different prices in the balance sheet, as they are not adjusted for changes in the price
level. As a result, ratio analysis will not be strictly comparable.

iii. Conceptual Diversity: -

The factor that influences the usefulness of ratios is that there is difference of opinion
regarding the various concepts used to compute the ratios. There is always room for
diversity of opinion as to what constitutes shareholder`s equity, debt, assets, profit and
so on.

Finally, ratios are only a post-mortem analysis of what has happened between
two balance sheet dates. For one thing the position in the interim period is not
revealed by ratio analysis. Moreover, they give no clue about the future.

In brief, ratio analysis suffers from some serious limitations. The analysis
should not be carried away by its over simplified nature, easy computation with high
degree of precision. The reliability and significance attached to ratios will largely
depend upon the quality of data on which they are based. They are as good as the
data itself, nevertheless, they are an important tool of financial analysis.

Ratio Analysis-Guidelines to use:

The calculation of ratios may not be a difficult task but their use is not easy. The
information on which these are based, the constraints of financial statements, objectives for
using them, the caliber of the analyst, etc., are important factors, which influence the use of
ratios.

Following guidelines/factors may be kept in mind in interpreting various ratios.

 The reliability of ratio is linked to the accuracy of information in financial statements.

Before calculating ratios, one should see whether proper concepts and conventions are

used for preparing financial statements of not.

 The purpose of the user is also important for the analysis of ratios. A creditor, a

banker, an investor, a shareholder, all has different objects for studying ratios. The

purpose (or) object for which ratios are required to be studied should always be kept

in mind for studying various ratios. Different objects may require the study of

different ratios.

 Another precaution in ratio analysis is the proper selection of appropriate ratios. The

ratios should match the purpose for which these are required.
Ratio Analysis-Conclusions:

Calculating a large number of ratios without determining their need in the present context
may confuse the things instead of solving them. Only those ratios should be selected which
can throw proper light on the matter to be discussed.

 Unless otherwise the ratios calculated are compared with certain standards one will

not be reach at conclusions. These standards may be a rule of thumb as in current

ratio (2:1), may be industry standards, may be projected ratios etc. The comparison of

calculated ratios with the standards will help the analyst in forming his opinion about

financial situation of the concern.

 The ratios are only the tools of analysis but their interpretation will depend upon the

caliber and competence of the analyst. He should be familiar with various financial

statements and the significance of changes etc.

 A wrong interpretation may create havoc for the concern since wrong conclusions

may lead to wrong decisions. The utility of ratios is linked with expertise of the

analyst.

 The ratios are only guidelines for the analyst; he should not base his decisions entirely

on them. He should study any other relevant information, situation in the concern,

general economic environment etc., before reaching final conclusions.

The study of ratios in isolation may not always prove useful. The interpretation
should use the ratios as guide and may try to solicit any other relevant information which
helps is reaching a correct decision.
Ratio Analysis-Types:
Several ratios, calculated from the accounting data, can be grouped into various
classes according to financial activity or function to be evaluated. As stated earlier, the
parties interested in financial analysis are short-term and long-term creditors, owners and
management. Short-term creditors` main interest is in the liquidity position or the short-term
solvency of the firm. Long-term creditors`, on the other hand, are more interested in the
long-term solvency and profitability of the firm. Similarly, owners concentrate on the firm’s
profitability and financial condition. Management is interested in evaluating every aspect of
the firm’s performance. They have to protect the interests of all parties and see that the firm
grows profitably. In view of the requirements of the various users of ratios, we may classify
them into the following four important categories:

 LIQUIDITY RATIOS

 LEVERAGE RATIOS

 ACTIVITY RATIOS

 PROFITABILITY RATIOS
LIQUIDITY RATIOS:
It is extremely essential for a firm to be able to meet its obligations as they become
due. Liquidity ratios measure the firm’s ability to meet current obligations.

In fact, analysis of liquidity needs the preparation of cash budgets and cash and Fund
Flow statements; but liquidity ratios, by establishing a relationship between cash and other
current assets to current obligations provided a quick measure of liquidity. A firm should
ensure that it does not suffer from lack of liquidity, and also that it does not have excess
liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity,
will result in a poor creditworthiness, loss of creditors` confidence, or even in legal tangles
resulting in the closure of the company. A very high degree of liquidity is also bad; idle
assets earn nothing. The firm’s funds will be unnecessarily tied up in current assets.
Therefore, it is necessary to strike a proper balance between high liquidity and lack of
liquidity. The most common ratios, which indicate the extent of liquidity or lack of it, are:

1. CURRENT RATIO

2. QUICK RATIO

3. CASH RATIO
1. CURRENT RATIO:

The current ratio is calculated by dividing current assets by current liabilities.

Current assets
Current Ratio =
Current liabilities

Current assets include cash and those assets, which can be converted into cash within
a year, such as Marketable Securities, Debtors and Inventories. Prepaid expenses are also
include in current assets as they represent the payments that will not be made by the firm in
future. Current Liabilities include Creditors, Bill payable, Accrued expenses, Short-term
bank loan, and Income Tax Liability and Long-term debt maturing in the current year.

The current ratio is a measure of the firms` short-term solvency. The higher the
current ratio, the larger is the amount of rupees available per Rupee of current liability, the
more is the firms` ability to meet current obligations and the greater is the safety of funds of
short-term creditors.
2. QUICK RATIO:

The Quick ratio is calculated by dividing quick assets by quick liabilities.

Quick assets
Quick Ratio =
Quick liabilities
Quick assets or Liquid assets mean those assets which are immediately convertible
into cash without much loss. All current assets except prepaid expenses and inventories are
categorized in liquid assets. Quick liabilities means those liabilities, which are payable
within a short period. Normally, Bank overdraft and Cash credit facility, if they become
permanent mode of financing are in quick liabilities.

As this ratio concentrates on cash, marketable securities and receivables in relation to

current obligation, it provides a more penetrating measure of liquidity than current ratio.

3. CASH RATIO:

The cash ratio is calculated by dividing cash + marketable securities by current

liabilities

Cash Ratio = Cash + Marketable Securities

Current liabilities
Since cash is most liquid asset, a financial analyst may examine cash ratio and its
equivalent to current liabilities. Trade investment or marketable securities are equivalent of
cash; therefore, they may be included in the computation of cash ratio.
LEVERAGE RATIOS:

The short-term creditors like bankers and suppliers of raw material are more
concerned with the firms` current debt-paying ability. On the other hand, long-term creditors
like debenture holders, financial institutions etc., are more concerned with the firms` long-
term financial strength. In fact, a firm should have strong short-as well as long-term financial
position. To judge the long-term financial position of the firm, financial leverage, or Capital
structure, ratios are calculated. These ratios indicate mix of funds provided by owners and
lenders. As a general rule, there should be an approximate mix of debt and owner’s equity in
financing the firms` assets.
The manner in which assets are financed has a number of implications. First, between
debt and equity, debt is riskier from the firms` point of view. The firm has a legal obligation
to pay interest on debt holders, irrespective of the profits made or losses incurred by the firm.
If the firm fails to debt holders in time, they can take legal action against it to get payment
and in extreme cases, can force the firm into liquidation.

Secondly, use of debt is advantageous for shareholders in two ways:

a. They can retain control of the firm with a limited stake and

b. Their earnings will be magnified, when the firm earns a rate of return on the total

capital employed higher than the interest rate on the borrowing funds. The process of

magnifying the shareholders return through the use of debt is called “financial

leverage” or “financial gearing” or “trading on equity”.

Leverage ratios may be calculated from the balance sheet to determine the proportion
of debt in total financing. Many variations of these ratios exist; but all these ratios indicate
the same thing-the extent to which the firm has relied on debt in financing assets. Leverage
ratios are also computed from the profit and loss items by determining the extent to which
operating profits are sufficient to cover the fixed charges.
DEBT – EQUITY RATIO:

The relationship describing the lender contribution for each rupee of the owner’s
contribution is called DEBT-EQUITY RATIO. DEBT – EQUITY RATIO is directly
computed by the following formula.
DEBT
Debt-Equity Ratio =
EQUITY

PROPRIETARY RATIO:

This ratio states relationship between share capital and total assets.
Proprietor’s equity represents equity share capital, preference share capital and reserves and
surplus. The latter ratio is also called capital employed to total assets.
EQUITY SHARE CAPITAL
Proprietary Ratio =
TOTAL TANGIBLE ASSETS

PROPRIETORS EQUITY
(OR)
TOTAL TANGIBLE ASSETS
INTEREST COVERAGE RATIO:

This ratio indicates the extent to which earnings can decline without resultant
financial hardship to the firm because of its inability to meet annual interest cost. For
example, coverage of 5 times means that a fall in earnings unto (1/5 th ) level would be
tolerable, as earnings to service interest on debt capital would be sufficiently available. This
ratio is measured ad follows:
EBIT
Interest Coverage Ratio = ---------------------------------
INTEREST CHARGES

FIXED ASSETS TO NET WORTH:

This ratio indicates the extent to which Equity capital is invested in the net fixed
assets. It is expressed as follows:

FIXED ASSETS
Fixed Assets To Net Worth =
NET WORTH
Net Worth is represented by Equity Share Capital plus Reserves and Surpluses. If the fixed
assets are more than the Net Worth, difficulties may arise, as the depreciation will reduce
profit. This also means that creditors have contributed to fixed assets. The higher this ratio,
the less will be the protection to creditors. If this ratio is too high, the firm may find itself
handicapped, as too much capital is tied up in fixed assets but not circulating.
ACTIVITY RATIOS:

Funds creditors and owners are invested in various assets to generate sales and profits.
The better the management of assets, the larger the amount of sales. Activity ratios are
employed to evaluate the efficiency with which the firm managers and utilizes its assets.
These ratios are also called Turnover Ratios because they indicate the speed with which
assets are being converted or turned over into sales. Activity ratios, thus, involve a
relationship between sales and assets. A proper balance between sales and assets generally
reflects that assets are managed well. Several activity ratios can be calculated to judge the
effectiveness of asset utilization.

INVENTORY TURNOVER RATIO:

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

The average inventory is the average of opening and closing balance of inventory.

In a manufacturing company inventory of finished goods is used to calculate

inventory turnover.

Cost of goods sold

Inventory Turnover Ratio =
Average inventory
DEBTORS TURNOVER RATIO:

A firm sells goods for cash and credit. Credit is used marketing tool by a number of
companies. When the firm extends credits to its customers, debtors (accounts receivables)
are created in the firms` accounts. The debtors are expected to be converted into cash over a
short period and, therefore, are included in current assets. The liquidity position of the firm
depends on the quality of debtors to a greater extent. Debtors turnover ratio indicates the
velocity of debt collection of a firm. Un simple wards it indicates the number of times
average debtors are turned over during a year.
Credit Sales

Debtors Turnover Ratio = --------------------------------

Avg. Accounts Receivable

FIXED ASSETS TURNOVER RATIO:

The fixed assets turnover ratio measures the efficiency with which the firm is utilizing
its investments in fixed assets, such as land, building, plant and machinery, furniture, etc. It
also indicates the adequacy of sales in relation to the investment in fixed assets. The fixed
assets turnover ratio is sales divided by net fixed assets. The firm assets turnover ratio should
be compared with past and future ratios and also with ratio of similar firms and the industry
average. The high fixed assets turnover ratio indicates efficient utilization of fixed assets in
generating sales, while low ratio indicates inefficient management and utilization of fixed
assets.

This ratio indicates the extent to which the debts have been collected in time. The
debt collection period indicates the average debt collection period. This ratio is a good
indicator to the lenders of the firm, because it explains to them whether their borrower is
collecting from its debt in time. An increase in this period indicates blockage of funds in
debtors.
 Sales
Fixed Assets Turnover Ratio =
Net fixed assets

WORKING CAPITAL TURNOVER RATIO:

Working capital turnover ratio indicates the velocity of the utilization of net working
capital. This ratio indicates the number of times the working capital is turned over in the
course of a year. This ratio measures the efficiency with which the working capital is being
used by a firm. A higher ratio indicates efficient utilization of working capital and low ratio
indicates otherwise. But a very high working capital turnover ratio is not a good situation for
any firm and hence care must be taken while interpreting the ratio. Making of comparative
and Trend Analysis can at best use this ratio for different firms in the same industry and for
various periods. This can be calculated as follows:
Sales
Working Capital Turnover Ratio =

Net Working Capital

Net Working Capital = Current Assets - Current Liabilities

(Excluding short-term bank
Borrowings)
PROFITABILITY RATIOS:

A company should earn profits to Survive and Grow over a long period of time.
Profits are essential, but it would be wrong to assume that every action initiated by
management of a company should be aimed at maximizing profits, irrespective of social
consequences.

Profit is the difference between revenues and expenses over a period of time (usually a year).
Profit is the ultimate “Output” of a company, and it will have no future if it fails to make
sufficient profits. Therefore, the financial manager should continuously evaluate to the
efficiency of the company in term of profits. The profitability ratios are calculated to
measure the operating efficiency of the company. Besides management of the company,
creditors and owners are also interested in the profitability of the firm. Creditors want to get
interest and repayment of principle regularly. Owners want to get a required rate of return on
their investment. This is possible only when the company earns enough profits.

Generally, two major types of profitability ratios are calculated.

 PROFITABILITY IN RELATION TO SALES

 PROFITABILITY IN RELATION TO INVESTMENT

PROFITABILITY RATIOS IN RELATION TO SALES
1. GROSS PROFIT MARGIN

2. CASH MARGIN

3. OPERATING MARGIN

4. NET PROFIT RATIO

1. GROSS PROFIT MARGIN:

Gross profit margin reflects the efficiency with which the management produces each
unit of product. This ratio indicates the average spread between the cost of goods sold
and the sales revenue.

This shows profits relative to sales after the deduction of production costs,
and indicates the relation between Production costs and selling price. A high gross
profit margin relative to the industry average implies that the firm is able to produce
at relatively lower cost.

A high gross profit margin ratio is a sign of good management. A gross margin ratio
may increase due to any of the following factors.

i. Higher sales prices, cost of goods sold remaining constant,

ii. Lower cost of goods sold, sales prices remaining constant,

iii. A combination of variations in sales prices and costs, the margin widening, and

iv. Increases in the proportionate volume of higher margin items.

The analysis of these factors will reveal to the management that how a depressed
gross profit margin can be improved.
 A low gross profit margin may reflect higher cost of goods sold due to the firms`
inability to purchase raw materials at favorable terms, inefficient utilization of plant and
machinery, resulting in higher cost of production. The ratio will also be low due to fall in
prices in the market, or market reduction in selling price by the firm in an attempt to obtain
large sales volume, the cost of goods sold remaining unchanged. The financial manager must
be able to detect the causes of a falling gross margin and initiate action to improve the
situation.
Sales – Cost of goods sold
(Or)
Gross profit
Gross Profit Margin Ratio =
Sales

Net Profit Margin Ratio:

Net profit is obtained when operation expenses, interest and taxes are subtracted from
the gross profit.

If the non-operating income figure is substantial, it may be excluded from PAT to see
profitability arising directly from sales. Net profit margin ratio establishes a relationship
between net profit and sales and indicated management’s efficiency in manufacturing,
administering and selling the products. This ratio is the overall measure of the firms` ability
to turn each rupee sales into net profit. If the net margin is inadequate, the firm will fail to
achieve satisfactory return on shareholder`s funds.

This ratio also indicates the firms` capacity to withstand in adverse economic
conditions. A firm with a high net margin ratio would be in an advantageous position to
survive in the case of falling selling prices, rising costs of production or declining demand for
the product. It would really be difficult for a low net margin firm to withstand these
adversities. Similarly, a firm higher net profit margin can make better use of favorable
condition, such as rising selling prices; fall in costs of production or increasing demand for
the product. Such a firm will be able to accelerate its profits at a faster rate than a firm with a
low net profit margin will.
 An analyst will be able to interpret the firm’s profitability more meaningfully if
he/she evaluates both the ratios-gross margin and net margin-jointly. To illustrate, if the
gross profit margin has increased over years, but the net profit margin has either remained
constant or declined, or has not increased as fast as the gross margin, this implies that the
operating expenses relative to sales have been increasing. The increasing expenses should be
identified and controlled. Gross profit margin may decline due to fall in sales price or
increase in the cost of production.
Profit after Tax

Net Profit Margin Ratio =

Sales

CASH MARGIN RATIO:

Cash profit excludes depreciation. It means Net profit after interests and taxes but
before depreciation. This ratio indicates the relationship between the profit, which accrues in
cash and sales. Greater percentage indicates better position and Vice-Versa as it shows the
correct profit earned by the firm.

This ratio is expressed as cash profit to sales.

Cash profit
Cash Margin Ratio = X 100
Sales

OPERATING MARGIN RATIO:

Operating margin ratio is also known as Operating Net profit ratio. It is the ratio of
operating profit to sales. This ratio establishes the relationship between the total cost
incurred and sales. Operating profit is the Net profit after depreciation but Before Interests
and Taxes. The purpose of computing this ratio is to find out the overall operational
efficiency of the business concern. It measures the cost of operations per rupee of sales.

This ratio is expressed as operating profit to sales.

OPERATING MARGIN RATIO = Operating profit X100
Sales

PROFITABILITY RATIOS IN RELATION TO INVESTMENT:

1. RETURN ON INVESTMENT

2. RETURN ON NET WORTH

3. RETURN ON CAPITAL

4. RETURN ON GROSS BLOCK

RETURN ON INVESTMENT:
The term investment refers to Total Assets. The funds employed in Net assets are
known as Capital Employed. Net assets equal net fixed assets plus current assets minus
Current liabilities excluding Bank loans. Alternatively, Capital employed in equal to Net
worth plus total debt.

The conventional approach of calculating return on investment (ROI) is to divide PAT

by Investment. Investment represents pool of funds supplied by shareholders and lenders,
while PAT represents residual income of shareholders; therefore, it is conceptually unsound
to use PAT in the calculation of ROI. Also, as discussed earlier, PAT is affected by capital
structure. It is, therefore more appropriate to use one of the following measures of ROI for
comparing the operating efficiency of firms.

EBIT (1-T)
ROI (or) ROTA =
Total Assets

EBIT (1-T)
ROI (or) RONA =
NET Assets
 Where ROTA and RONA respectively Return on Total assets and Return on Net
assets.

RONA is equivalent of Return on Capital Employed.

RETURN ON NET WORTH:

NET Worth is also known proprietors Net Capital Employed. The Return should be
calculated with reference to profits belonging to shareholders, and therefore, profit shall be
Net profit after interest and tax. The profit for this purpose will include even non-trading
profit. This is given as follows:

Net profit after interest & tax

RETURN ON NET WORTH = ---------------------------------------*100
Shareholders’ funds

RETURN ON CAPITAL:

The ROCE is the second type of ROI. The term capital employed refers to long-term
funds supplied by the creditors and owners of the fund. It can be computed in two ways.
First, it is equal to non-current liabilities (long-term liabilities) plus owner’s equity.
Alternatively, it is equivalent to Net Working Capital plus Fixed Assets. Thus, the Capital
Employed provides a basis to test the profitability related to the sources of long-term funds.
A comparison of this ratio with similar firms, with the industry average and overtime would
provide sufficient insight into how efficiency the long-term funds of owners and creditors are
being used. The higher the ratio, the more efficient is the use of Capital Employed.

NET PROFIT AFTER TAX/EBIT

ROCE = X 100
Average Total Capital Employed
RETURN ON GROSS BLOCK:

This ratio establishes a relationship between net profit and gross fixed assets. This
ratio emphasizes the profit on investment in Fixed Assets. This ratio is expressed as follows:

Net profit
RETURN ON GROSS BLOCK = X 100
Gross Block

NET PROFIT is profit before Tax. Gross Block means Gross fixed assets i.e., Fixed assets
before deducting depreciation.
Balance sheet
(Rs crore)

Mar ' 17 Mar ' 16 Mar ' 15 Mar ' 14 Mar ' 13

Sources of funds

Owner's fund

Equity share capital 1,165.11 1,163.17 1,159.66 1,155.04 1,153.64

Share application money 6.26 6.70 7.44 6.57 4.48

Preference share capital - - - - -

Reserves & surplus 95,737.57 85,748.24 79,262.26 72,051.71 65,547.84

Loan funds

Secured loans - - - - -

4,21,425.7 3,61,562.7 3,31,913.6

Unsecured loans 4,90,039.06 1 3 6 2,92,613.63

5,08,343.8 4,41,992.0 4,05,126.9

Total 5,86,947.99 2 9 8 3,59,319.58

Uses of funds

Fixed assets

Gross block 7,805.21 7,576.92 4,725.52 4,678.14 4,647.06

Less: revaluation reserve 3,042.14 2,817.47 - - -

Less: accumulated depreciation - - - - -

Net block 4,763.07 4,759.45 4,725.52 4,678.14 4,647.06

Capital work-in-progress - - - - -

1,60,411.8 1,86,580.0 1,77,021.8

Investments 1,61,506.55 0 3 2 1,71,393.60

Net current assets

Current assets, loans & advances 62,534.55 57,573.70 24,997.05 32,709.39 29,087.07

Less: current liabilities & provisions 34,245.16 34,726.44 31,719.86 34,755.55 32,133.60

Total net current assets 28,289.39 22,847.27 -6,722.81 -2,046.16 -3,046.53

Miscellaneous expenses not written - - - - -

1,88,018.5 1,84,582.7 1,79,653.7

Total 1,94,559.00 1 5 9 1,72,994.13

Notes:

Book value of unquoted investments - - - - -

Market value of quoted investments - - - - -

9,22,453.5 8,68,190.5 7,94,965.3

Contingent liabilities ############ 1 8 5 8,02,383.84

Number of equity shares 58244.76 58147.68 57972.45 11535.82 11527.14

 Mar ' 17 Mar ' 16 Mar ' 15 Mar ' 14 Mar ' 13

outstanding (Lacs)

balance sheet profit and loss account

(` in 000’s) (US$ in 000’s)
Note March

Profit loss account

(Rs crore)

Mar ' 17 Mar ' 16 Mar ' 15 Mar ' 14 Mar ' 13

Income

Operating income 54,156.28 52,739.43 49,091.14 44,178.15 40,075.60

Expenses

Material consumed - - - - -

Manufacturing expenses - - - - -

Personnel expenses 5,733.71 3,012.69 4,749.88 4,220.11 3,893.29

Selling expenses 288.06 210.97 - - -

Administrative expenses 7,975.64 8,761.38 6,087.01 5,512.79 4,629.44

Expenses capitalised - - - - -

Cost of sales 13,997.41 11,985.05 10,836.88 9,732.90 8,522.72

Operating profit 7,739.91 9,238.99 8,202.73 6,742.67 5,343.69

Other recurring income 19,504.48 15,323.05 12,176.13 10,427.87 8,345.70

Adjusted PBDIT 27,244.40 24,562.04 20,378.86 17,170.54 13,689.39

Financial expenses 32,418.96 31,515.39 30,051.53 27,702.59 26,209.18

Depreciation 757.65 698.51 658.95 575.97 490.16

Other write offs - - - - -

Adjusted PBT 26,486.75 23,863.53 19,719.91 16,594.57 13,199.23

Tax charges 2,882.72 2,469.43 4,644.57 4,157.69 3,071.22

Adjusted PAT 42,220.05 41,241.68 41,226.88 9,810.48 8,325.47

Nonrecurring items - - - - -

Other non-cash adjustments - - - - -

Reported net profit 42,220.05 41,241.68 41,226.88 9,810.48 8,325.47

Earnings before appropriation 59,352.24 58,503.10 54,545.47 19,712.76 15,379.71

Equity dividend - 2,628.14 2,627.66 2,425.04 2,015.07

Preference dividend - - - - -

Dividend tax - 279.37 271.15 231.25 292.16

 Mar ' 17 Mar ' 16 Mar ' 15 Mar ' 14 Mar ' 13

Retained earnings 59,352.24 55,595.58 51,646.66 17,056.48 13,072.47

balance sheet profit and loss account

(` in 000’s) (US$ in 000’s)
Note March 31,
2014
March 31,
2013
March 31,
2014

balance sheet profit and loss

TIRatios
ote March 31,
2014 (Rs crore)
Mar ' 17 Mar ' 16 Mar ' 15 Mar ' 14 Mar ' 13

Per share ratios

Adjusted EPS (Rs) 72.49 70.93 71.11 85.04 72.22

Adjusted cash EPS (Rs) 73.79 72.13 72.25 90.04 76.48

Reported EPS (Rs) 16.83 16.73 19.28 85.04 72.22

Reported cash EPS (Rs) 18.13 17.93 20.41 90.04 76.48

Dividend per share 2.50 5.00 5.00 23.00 20.00

Operating profit per share (Rs) 13.29 15.89 14.15 58.45 46.36

Book value (excl rev res) per share EPS (Rs) 166.37 149.47 138.72 634.60 578.65

Book value (incl rev res) per share EPS (Rs) 171.59 154.31 138.72 634.60 578.65

Net operating income per share EPS (Rs) 92.98 90.70 84.68 382.96 347.66

Free reserves per share EPS (Rs) - - - - -

Profitability ratios

Operating margin (%) 14.29 17.51 16.70 15.26 13.33

Gross profit margin (%) 12.89 16.19 15.36 13.95 12.11

Net profit margin (%) 18.09 18.44 22.76 22.20 20.77

Adjusted cash margin (%) 58.34 61.62 68.36 19.02 18.20

Adjusted return on net worth (%) 43.56 47.45 51.26 13.40 12.48

Reported return on net worth (%) 10.11 11.19 13.89 13.40 12.48

Return on long term funds (%) 79.99 86.55 94.40 56.92 56.37

Leverage ratios

Long term debt / Equity - - - - -

Total debt/equity 6.58 6.86 6.64 6.65 6.57

Owners fund as % of total source 16.50 17.09 18.19 18.07 18.56

Fixed assets turnover ratio 0.07 0.08 0.08 0.08 0.08

 Mar ' 17 Mar ' 16 Mar ' 15 Mar ' 14 Mar ' 13

Liquidity ratios

Current ratio 1.83 1.66 0.78 0.94 0.90

Current ratio (inc. st loans) 0.11 0.12 0.06 0.08 0.08

Quick ratio 16.31 14.97 13.81 11.31 10.53

Inventory turnover ratio - - - - -

Pay-out ratios

Dividend pay-out ratio (net profit) - 29.89 25.93 27.07 27.71

Dividend pay-out ratio (cash profit) - 27.89 24.49 25.57 26.17

Earning retention ratio 100.00 92.96 92.97 72.93 72.29

Cash earnings retention ratio 100.00 93.07 93.08 74.43 73.83

Coverage ratios

Adjusted cash flow time total debt 11.40 10.05 8.63 31.96 33.19

Financial charges coverage ratio 1.84 1.78 1.68 1.62 1.52

Fin. charges co. Ratio (post tax) 1.33 1.33 1.39 1.37 1.34

Component ratios

Material cost component (% earnings) - - - - -

Selling cost Component 0.53 0.40 - - -

Exports as percent of total sales - - - - -

Import comp. in raw mat. Consumed - - - - -

Long term assets / total Assets 0.72 0.74 0.88 0.84 0.85

Bonus component in equity capital (%) - - - - -

2013
March 31,
2014
March 31
conclusions
iculars
The traditional financial statements comprising the balance sheet and the profit and
loss account are proving the information related to the financial operation of the firm. They
provide some extremely useful information that mirrors the financial position on a particular
date in terms of the structure of assets, liabilities and owner’s equity and so on. The profit
and loss account show the results of operations during a certain period of time in terms of the
revenues obtained and the cost incurred during the year. Therefore, much can be learnt about
a firm from a careful examination of its financial statements. Users of financial statements
can get further insight about financial strengths and weaknesses of the firm if they properly
analyze information reported in these statements. Management should be particularly
interested in knowing financial weakness of the firm to take suitable corrective actions. The
future plans of the firm should be laid down in view of the firm’s financial strengths and
weaknesses. Thus, financial analysis is the starting point for making plans, before using any
sophisticated forecasting and planning procedures. Understanding the past is a pre-requisite
for anticipating the future.
Ration analysis is a widely – used tool of financial analysis. It is used to interpret the
financial statements so that the strengths and weaknesses of the firm as well as its historical
performance and current financial condition can be determined. A ratio is defined as “the
indicated quotient of two mathematical expressions” and as the “the relationship between two
or more things”.

It is a benchmark for evaluating the financial position and performance of a firm.

These alternative methods of expressing items, which are related to each other, are, for
purpose of financial analysis, referred to as ratio analysis. It should be noted that computing
the ratios does not add any information already inherent in the above figures of profits and
sales. What the ratios do is that they reveal the relationship in a more meaningful way so as
to enable us to draw conclusions from them. The rationale of ratio analysis lies in the fact
that it makes related information comparable. A single figure by itself has no meaning but
when expressed in terms of a related figure, it yields significant inferences. For instance, the
fact that the Net profits of a firm amount to, say Rs. Ten Lakhs throws no light on its
adequacy or otherwise. The figure of Net profit has to be considered in relation to other
variables. How does it stand in relation to sales? If, therefore, Net profits are shown in terms
of their relationship with items such as Sales, Assets, Capital employed, Equity capital and so
on, meaningful conclusions can be drawn regarding their adequacy.

To carry the above example further, assuming the capital employed to be Rs.50 lakh and
Rs.100 lakh, the Net profit are 20% and 10% each respectively. Ratio analysis, thus, as a
quantitative tool, enables analysts to draw quantitative answers to questions such as; are the
Net profits adequate? Are the assets being used efficiently? Is the firm solvent? Can the firm
meet its current obligations and so on?
BIBLIOGRAPHY

WEBSITE:
1.www.investopedia.com
2. www.zenwealth.com
3.www.cliffsnotes.com

BOOKS:
1.Financial ratio by Jagadish raiyani
2. Financial statement analysis by K.R. Subramanyam