COMPARATIVE RATIO ANALYSIS OF TWO

COMPANIESBBM 504

SUBMITTED BY: SHIKHA AGARWALBBM 5TH SEM.SEC – B ICG/2009/ 9334

SUBMITTED TO: AASHISH SIR

WHAT IS RATIO ?

Ratio can be define as between relationship between two figures expressed in arithmetical terms called ratio.

ACCORDING TO R.N ANTHONY:“A Ratio is simply one number

expressed in terms of another .It is found by dividing one number into another”.

ADVANTAGES OF RATIO

Helpful in analysis of financial statements.

Simplification of accounting data. Helpful in comparative study. Helpful in forecasting. Effective control Study of financial soundness

LIMITATIONS OF RATIO False accounting data gives false ratio. Comparison not possible if different

firms adopt different accounting policies.

Limited use of single ratio. Lack of proper standards. Ratio alone are not adequate for

proper conclusions.

The following income statement and balance sheets relate to PANASONIC and VOLTAS.

Income statement

PANASONIC VOLTAS

SALES 40,00,000 48,00,000

Less: Cost of Sales 32,00,000 37,44,000

GROSS PROFIT 8,00,000 10,56,000

Less: Operating exp.(administrative and selling exp.) 2,50,000 3,00,000

OPERATING INCOME (A) 5,50,000 7,56,000

Less: other exp.: depreciation on plant and machinery interest on debentures preliminary Exp. Written off

2,20,00075,6004,000

2,76,00090,0004,000

TOTAL OTHER EXP. (B) 2,99,600 3,70,000

Net income before tax (A-B) 2,50,400 3,86,000

Less: provision for tax 36,000 56,000

NET INCOME AFTER TAX 2,14,400 3,30,000

BALANCE SHEETS

Liabilities Panasonic Voltas ASSTES Panasonic Voltas

Equity share capitalshares of rs.10 each 15,00,000 19,20,000

Fixed assets:landPlant & machinery

5,00,00019,16,000

6,00,00018,50,000

Reserves & surplus 8,00,000 10,00,000

Secured loans:9% debentures 8,40,000 10,00,000

investments 1,00,000 3,00,000

Current assets, loans & advances:(A)Current assetsStockDebenturesCash and bank(B) Loans & advances

7,20,0008,00,00080,000

-

11,00,00012,00,0001,00,000

-

Unsecured loans - -

Current liabilities & provisions: (a)Current liabilitiescreditors(b)provisionsIncome tax provision

9,64,000

36,000

10,64,000

56,000 Miscell. expenditurePreliminary exp.

24,000 20,000

41,40,000 51,70,000 41,40,000 51,70,000

Question

You are required to prepare a project report commenting upon the performance and financial position of the firm on the basis of ration analysis.

Liquidity ratios

Current ratio : current ratio / current liabilitiesPanasonic: 16,00,000/ 10,00,000 = 1.6 : 1

Voltas: 24,00,000/ 11,20,000 = 2.14 : 1

Quick ratio: liquid assets / current liabilitiesPanasonic: 8,80,000/ 10,00,000 = 0.88 : 1

Voltas: 13,00,000/ 11,20,000= 1.16 : 1

COMMENT: short term financial position of the company is quite satisfactory because the current ratio of the company is 2.14 : 1, which is more then the ideal ratio of 2: 1. the fact is also supported by quick ratio, which more then the ideal ratio of 1: 1.

Solvency ratios: Debt equity ratio : long term debts/

shareholder's fundPanasonic: 8,40,000/ 15,00,000 + 8,00,000 –

24,000 = 0.37 : 1Voltas : 10,00,000 / 19,20,000 + 11,30,000 –

20,000 = 0.33 : 1

Total assets to debt ratio : total assets/ long term debts

Panasonic : 41,40,000 – 24,000 / 8,40,000 = 4.9 times

Voltas : 51,70,000 – 20,000 = 5.15 times

COMMENT: debt equity ratio indicates that proportion of funds provided by long – term lenders in comparison to the owners is only .37 in the Panasonic company . This proportion has further come down to .33 in Voltas company. It shows that the long term solvency position of the companies is very sound.

The fact is also supported by total assets to debt ratio. It indicates that long term debts are covered 4.9 times by assets in the Panasonic and this margin of safety has increased to 5.15 times in the Voltas.

Activity ratio

Fixed assets turnover ratio : net sales / fixed assets

Panasonic :40,00,000 / 24,16,000 = 1.66 times

Voltas : 48,00,00 / 224,50,000 = 1.96 times

COMMENTS : fixed assets turnover ratio has improved. It indicates better utilization of fixed assets generating sales.

Profitability ratios Gross profit ratio : gross profit / sales * 100

Panasonic : 8,00,000/ 40,00,000 * 100 = 20 %Voltas : 10,56,000 / 48,00,000 * 100 = 22%

Operating ratio: cost of sales + operating exp. / sales * 100Panasonic = 32,00,000 + 2,50,000 / 40,00,000 *

100= 86.25 %Voltas = 37,44,000 + 3,00,000 / 48,00,000 * 100 =

84.25 %

Net profit ratio : net profit / sales * 100Panasonic : 2,14,400 / 40,00,000 * 1oo = 5.36 %

Voltas : 3,30,000 / 48,00,000 * 100 = 6.88 %

Return on equity : net profit after tax / shareholder ‘s funds

Shareholder’s funds = equity share capital + reserves & surplus – preliminary expensesPanasonic : 15,00,000 + 8,00, 000 – 24,0000 =

22,76,000Voltas : 19,20,000 + 11,30,000 – 20,000 =

30,30,000R.O.E. for Panasonic = 2,14,4000/ 22,76,000 * 100 =

9.42 %R.O.E. for Voltas = 3,30,000 / 30,30,000 * 100 =

10.89 %

Earning per share (E.P.S.): net profit after tax / no. of equity shares

Panasonic : 2,14,400 / 1,50,000 = 1.43 per sharesVoltas : 3,30,000 / 1,92,000 = 1.72 per shares

COMMENT: Gross profit ratio has improved by 2 % which reflects an increase in the sales price of goods sold without corresponding increase in the cost of sales.

Operating ratio has also come down by 2 %. Lowering of operating ratio has resulted in higher margin of profit on sales.

Net profit ratio has gone up from 5.36 % to 6.88 % which is an indication of improvement in the overall efficiency and profitability of the firm.

Return on equity has also gone up from 9.42 % to 10.89 % which indicates that shareholder’s funds are being utilized more efficiently. There are better prospects of declaration and creation of reserves.

Earning per share has also gone up from 1.43 to 1.72 which indicates that overall profitability of the company is improving . This ratio also indicates that market price of these companies share is likely to go up.

Conclusion : overall profitability and financial position of Voltas has improved in comparison of Panasonic.

THANK YOU