Nitika 47 Viii Sem

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A

Training Report

Titled

Financial Statement Analysis

for the training undergone at

Neha Engineering

In Panipat District

for the partial fulfillment of the award of degree of MBA-5 year

Submitted to: Submitted by:Director ,IMS Nitika Raghav

8th Semester

Class Roll no. 47

University Reg. No. 08-UD-1133

Batch- 2008-13

Institute of Management Studies

Kurukshetra University, Kurukshetra


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DECLARATION

I hereby declare that I have completed the project entitled Financial Statement

Analysis assigned to me by Neha Engineering for thetraining report to be submitted

in the partial fulfillment of MBA-5yr. Degree from Kurukshetra University. Further I

declare that this is original work done by me and information provided in the study is

authentic to the best of my knowledge belief my training period was from 15th January,

2012 to 15th February, 2012.

This study has not been submitted to any other Institution or University for the

award of any other degree or for any purpose.

Dated: - NITIKA RAGHAV

8TH Semester

Class Roll no. 47

University Reg. No. 08-UD-1133

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Preface

Someone has rightly said that practical knowledge is far better than classroom

teaching. During this project I fully realized this and I came to know about how a

retailer chooses among a varied range of products available to him.

The subject of my study is Financial Analysis of NEHA ENGINEERING., which

has slowly but steadily evolved from a beginner to a corporate giant earning

laurels and kudos throughout.

The report contains first of all brief introduction about the company. Finally there

comes data presentation and analysis in the end of my project report. I also put

forward some of my suggestion hoping that they will help NEHA

ENGINEERING. Move a step forward to being the very best.

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Acknowledgement

A drop of ink makes million think

Any research work is never an individual effort. It is contributory effort of many hearts &

heads. I take this opportunity to express my appreciation & gratitude to all those, with whom I

worked, interacted and whose insides and thoughts help me in furthering my knowledge and

completion of my project report.

A project of this nature is the product of the ideas and experiences of several persons. So, an

undertaking of a work like this is never the outcome of efforts of a single person, rather it bears

the imprints of a number of persons who are behind the curtain.

First of all, I would like to extend my thanks to MR. Ramcharan Owner., NEHA

ENGINEERING who exceeded to my request and allowed me to work on this project.

At the earliest, I express my gratitude towards staff members of NEHA ENGINEERING for

their help & cooperation.

I would also thanks to respected director sir and other faculty members of my institute.

Last but not least, I would like highly thanks to my father and all of them who help me directlyand indirectly in accomplishment of my training and give highly cooperation in this project.

NITIKA RAGHAV

Content

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Sr. No. Particulars Page No.

1 Company Profile 6

2 Critical review of literature 7

3 Ratio Analysis 124 Comparative Financial Statement 32

5 Findings and Analysis 38

BIBLIOGRAPHY 39

Chapter 1

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Company ProfileNEHA ENGINEERING is well established and fast growing company. We currently deal in

number of aforesaid items on the hire as well as sale basis.

We are happy to announce that we are offering the same services to other companies like

your company. From our office, the heart of low cost and good quality of aforesaid items ready

to use. We can supply your company with whatever kind of shuttering you would like. We

ensure that the quality you need at the best possible price and our staff of quality controller

insures that the products are well made.

The success of any construction project depends on how closely you stick to planned time

schedules and cost estimate. When you buy scaffolding from NEHA ENGINEERING, you are

able to draw on the resources of well-spread service organization and wide manufacturing

base.

Regardless of the specific type of equipment and site location, we will work with you to

ensure your project to run according to plan.

The extensive design and manufacturing resources of NEHA ENGINEERING give us

the ability to develop or adopt products quickly to suit the constantly changing needs of our

customers.

If you would like to take the advantage of the services that NEHA ENGINEERING is

being offered to your company. Please contact us on our telephone numbers mentioned above.

We are authorized vendor of I.O.C.L, Samsung Engg. Ltd., IOTAP, Bridge & Roof Co

(I) Ltd, Larsen & Toubro Ltd at NFL, Panipat etc.

Chapter 2

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Critical Review Of Literature

FINANCIAL STATEMENT ANALYSIS

MEANING: Analysis of financial statements is the systematic numerical calculation

of the relationship between one fact with the other to measure the profitability, operational

efficiency and the growth potential of the business.

OBJECTIVES OF FINANCI AL STATEMENT ANALYSI S:1. Measuring financial standards : The business must know its financial soundness which

can be measured by calculating different ratios like proprietory and f ixed asset ratio. If

it is found adverse, then corrective steps can be taken.

2. Judging solvency : Creditors ar e always interested in knowing the solvency of

the business to repay their loans. This can be ascertained by looking into the facts such

as:

Whether current assets are sufficient to meet current liabilities.

Proportion of current assets to liquid assets.

Future prospectus of the business.

Whether debentures or other loans are secured or not.

Managerial efficiency of the firm.

3. Measuring profitability: Financial statement shows the gross profit, net profit and other

expenses. The relationship of these items can be established with sales. To ascertain

profitability, gross profit, net profit, expenses and operating ratios may be calculated. In

case of improving or declining profitability ratios, the causes responsible for the

performance can be evaluated.

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4. Judging operational efficiency: It is very significant to know the operational efficiency

of the management. The managerial efficiency of the business can be assessed by

matching the amount of manufacturing, selling, distribution and financial expenses of

the current year with the corresponding expenses of the previous year. This can

also be judged by calculating profitability ratios.

5. Indicating trends of achievements: Financial statements of the previous year can

be compared and the trends regarding various expenses, purchases, sales, gross

profit and net profit can be ascertained. Values of assets and liabilities can be

compared and the futur e prospectus of the business can also be indicated.

6. Assessing the growth potential: The trend and dynamic analysis of the business

provides sufficient information indicating the growth potential of the business. If

the trend predicts gloomy picture, effective measures can be used to correct it. If

cost of production is rising without corresponding increase in the selling price, efforts

should be made to reduce cost of production.

7. Inter-firm and Intra-firm comparison: Analysis of the financial statements can be made

with the previous years performance of the same firm and with the performance of the

other firms in the industry. Intra-firm analysis provides an opportunity of self-appraisal,

whereas, inter-firm analysis presents the operational efficiency of the firm as compared

the other firms. Comparison helps in detecting weaknesses and adopting. corrective

measures.

8. Deciding future line of action: Analysis of financial statements indicates growth

potential of the business. Comparison of actual performance with the standard

performance shows the short comings. The analysis provides sufficient information

regarding the profitability, performance and financial soundness of the business. On the

basis of these information, effective forecasting, budgeting and planning can be made.

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9. Systematic presentation of data: Analysis of financial statements is an effective tool for

simplifying, systematizing, and summarizing the monotonous data. An average person,

who has no knowledge of accounting, can draw conclusions from ratios. The facts can

be made more attractive by graphs and diagrams which can be easily understood.

Types of Financial Analysis.

Financial analysis can be classified into four categories:

According to Modus Operandi

1. Horizontal or dynamic analysis: When financial statements for a certain number

of or different firms are examined analytically, the analysis is called horizontal

or dynamic.

2. Vertical or static analysis: vertical or static analysis is the study of mutual relationship

between differ ent components or their totals of the financial statements for a

definite per iod of time.

According to Materials used

3. Internal Analysis: When analysis of financial statements is made by somebody

internally related to the enterprise such as executives, employees etc. it is saidto be internal analysis.

4. External analysis: An analysis made by a person not internally related to the enterprise

and meant for external users of the financial statements, is called external analysis.such

type of analysis is made by banks, investing agencies, creditors, research scholars and

the government.

Limitations of Financial Analysis.

Despite the significance of analysis and interpretation of financial statements as discussed

above, it has certain limitations which an analyst and the user should kept in mind. These

limitations ar e identified as follows:

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1. Suffers from limitations of financial statements: Financial statements suffer

fromvariety of weaknesses. Assets are disclosed in the balance sheet at historical cost

which is different from current cost. Similarly, financial statements are prepar ed

according to certain conventions at a point of a time, whereas investors are concerned

with the present and futur e of the company. Certain assets and liabilities are not

disclosed. Per sonal judgements also affect the figures of balance sheet. Financial

statements suffer from these weaknesses, hence the analysis based upon these

statements can not be said to be always reliable.

2. Absence of universally accepted standard terminology: Accounting is not an

exact science, so it does not encompass universally accepted terminology. Different

meanings are assigned to a particular term. Depreciation is provided by different

methods and interest is charged at varied rates. In this way, there are sufficient

chances of manipulation. As a result, financial analysis proves to be defective.

3. Ignores qualitative aspects: Financial analysis is the quantitative measurement of

the perfor mance of the fir m. It does not disclose the skill, technical know- how

and the efficiency of its employees and managers. It means that analysis of financial

statementsmeasur es only the one sided per for mance of the business. It also

completely ignores human aspect.

4. Ignores price level changes: The results disclosed by financial statements may

be misleading, if the pr ice level changes are not taken into consideration. The gross

profit ratio may improve with the increase in price, wher eas actual efficiency may not

improve. If prices of commodities differ, the ratios of two years will not be

meaningful for comparison. Change in price affects cost of production, sales and value

of assets, thereby the compar ability of ratios suffers.

5. It spottes the symptoms but not diagnose: Financial analysis shows the trends of the

affairs of the business. It may spot symptoms of financial weakness and

operational efficiency which can not be accepted. A final decision in this regard will

require further investigation and thorough diagnosis.

TECHNIQUES OF FINANCIAL ANALYSIS

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Chapter 3

Ratio AnalysisLIQUIDITY OR SHORT TERM SOLVENCY RATIOS

These ratios play a key role in the analysis of the short term financial position of a

business. Liquidity refers to a firms ability to meet its current financial obligation as they

arise.

1. Current ratio or working capital ratio

Meaning: Current ratio may be defined as the relationship between current assets and

current liabilities.

Current Assets

Current Ratio = -----------------------

Current Liabilities

For 2010,

Current assets=22,75,088

Current liabilities=8,44,553

22,75,088Current Ratio = --------------=2.69

8,44,553

For 2009,

Current assets= 23,46,876

Current Liabilities=7,62,599

23,46,876

Current Ratio = --------------=3.07

7,62,599

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For 2008,

Current assets = 25,72,977

Current liabilities = 8,52,410

25,72,977Current Ratio = --------------=3.01

8,52,410

Interpretation: Current r atio of a firm measures its short term solvency and reflects its

ability to meet short term obligation when they are due. The higher the current ratio, the

larger the amount of rupees available per rupee of current liabilities, the more the firms

ability to meet current obligations and the greater the safety of funds to short term

creditors. A current ratio of 2:1 is considered satisfactory.

ACTIVITY OR EFFICIENCY RATIOThe funds of creditors and owners are invested in various assets to generate sales and profit.

The better the management of these assets, the larger the amount of sales. Activity ratio enable

the firm to know how efficiently these assets are employed by it. Therefore, an activity ratio

may be defined as a test of relationship between sales or cost of goods sold and various assets

of the firm.

1. Total assets turnover ratio

Meaning: This ratio expresses the relationship between cost of goods sold / net sales and

total assets / investments of a firm. It is also called Total investment turnoverratio.

Net Sales

Total Assets Turnover Ratio = ----------------Total Assets

For 2010,

Net sales = 30,45,853

Total assets = 72,82,237

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30,45,853

Total Assets Turnover Ratio = ---------------- =0.41 times

72,82,237

For 2009,

Net sales = 35,79,889


35,79,889

Total Assets Turnover Ratio = ----------------=0.61 times

58,21,598

For 2008,

Net sales = 31,57,881


31,57,881

Total Assets Turnover Ratio = ----------------=0.55 times

57,13,679

Interpretation: This ratio indicates the number of times the assets are turned over in ayear

in relation to sales. A higher total assets turnover ratio is the indicator of effective

utilization of investment in assets, whereas lower assets turnover ratio indicates that

assets are not properly utilized in comparison to sales. Thus, there is an over investmentin

assets. Extremely high ratio means over-trading in the business.

2. Fixed assets turnover ratio

Meaning: This ratio expresses the relationship between fixed assets (less depreciation) and net

sales or cost of goods sold.

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Cost of Sales (or Net Sales)

Fixed Assets Turnover Ratio = --------------------------------------

Fixed Assets (less Depreciation)

For 2010,Net sales = 30,45,853

Fixed assets = 3,88,132

30,45,853

Fixed Assets Turnover Ratio = -----------------7.84 times

3,88,132

For 2009,

Net sales = 35,79,889


35,79,889

Fixed Assets Turnover Ratio = -----------------= 11.43 times

3,13,037

For 2008,

Net sales = 31,57,881


31,57,881

Fixed Assets Turnover Ratio = -----------------= 10.89 times

2,89,758

Interpretation: This ratio measures the efficiency and profit earning capacity of the fir m. The

higher the ratio, the greater is the intensive utilization of fixed assets. Lower ratio means under

utilization of fixed assets and excessive investment in these assets. Asvolume of sales

depend on variety of factors such as price, quality of goods,salesmanship, marketing

etc. It is argued that no direct relationship can be establishedbetween sales and fixed assets.

Accordingly, it is not recommended for general use.

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3. Current assets turnover ratio

Meaning: This ratio expresses relationship between current assets and net sales or cost of

cost sold.

Cost of Sales (or Net Sales)

Current Assets Turnover Ratio = ------------------------------------

Current Assets

For 2010,

Net sales = 30,45,853


30,45,853

Current Assets Turnover Ratio = ----------------------=1.33 times

22,75,088

For 2009,

Net sales = 35,79,889


35,79,889


23,46,876

For 2008,

Net sales = 31,57,881


31,57,881


25,72,977

Interpretation: This ratio reflects the efficiency and capacity of working capital. It is a very

useful technique for non-manufacturing units requiring lesser working capital. On the basis of

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this ratio, efficiency or inefficiency of current assets and over or under investment in the

firm is examined.

4. Working capital turnover ratio

Meaning: This ratio establishes the relationship between net working capital and net

sales or cost of goods sold.

Sales

Working Capital Turnover Ratio = ------------------------------

Net Working Capital

For 2010,

Net sales = 30,45,853

Net working capital = 14,30,535

30,45,853

Working Capital Turnover Ratio = ---------------------=2.13 times14,30,535

For 2009,

Net sales = 35,79,889Net working capital = 15,84,277

35,79,889

Working Capital Turnover Ratio = ---------------------=2.26 times 15,84,277

For 2008,

Net sales = 31,57,881

Net working capital = 17,20,567

31,57,881

Working Capital Turnover Ratio = ---------------------= 1.83 times

17,20,567

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Interpretation: This ratio is used to assess the efficiency with which the working capital is

being used in the business. A high working capital ratio indicates efficient management of

working capital or over-trading i.e. low investment in working capital and more profits. On the

contrary, a low working capital turnover ratio implies under trading i.e. funds are not being

utilised efficiently. Higher sales in comparison to working capital means over-trading and

lower sales in comparison to working capital means under-trading.

5. Capital turnover ratio

Meaning: This ratio establishes the relationship between net sales or cost of goods sold and

capital employed.

Sales

Capital Turnover Ratio = ----------------------------------------------------

Capital Employed

(i.e. shareholders fund + Long term liabilities)

For 2010,

Net sales = 30,45,853

Capital employed = 24,15,707

30,45,853

Capital Turnover Ratio = ------------------------ =1.26: 1

24,15,707

For 2009,

Net sales = 35,79,889


35,79,889


26,11,106

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For 2008,

Net sales = 31,57,881


31,57,881


23,07,403

Interpretation: The efficiency and effectiveness of the operations are judged bycomparing

the sales or cost of sales with amount of capital employed in the business and not with assets

held in the business. Therefore, this ratio is a better measurement ofefficient use of capital

employed. Efficient use of capital symbolizes profit earningcapacity and managerial efficiency

of the firm.

PROFITABILITY RATIOS

Profitability ratios based on sales

1. Gross Profit Ratio

Meaning: This ratio expresses the relationship of gross profit on sales to net sales in terms of

percentage. Expressed as a formula, the gross profit ratio is:

Gross Profit

Gross Profit Ratio = ------------------- X 100

Net Sales

For 2010,

Gross profit = 27,49,121

Net Sales = 30,45,853

27,49,121

Gross Profit Ratio = ------------------- X 100 =90.25%

30,45,853

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For 2009,

Gross profit = 32,17,259

Net Sales = 35,79,889

32,17,259


35,79,889

For 2008,

Gross Profit = 28,03,187

Net Sales = 31,57,881

28,03,187


31,57,881

Interpretation: In the above calculation, the gross profit ratio is increasing from year to year.

In the year 2009, there is a change ( increase) in gross profit ratio of about 1.11 % from

88.76 % to 89.87 %. In the year 2010, there is a change (increase) in gross profit ratio

of about .38 % from 89.87 % to 90.25 %. In the year 2010, the decrease in gross profit ratio as

compare to the year 2008 is due to the declining in profit in comparison to Sales or due to

increasing in cost.

2. Operating Ratio

Meaning: This ratio expresses the relationship between operating cost and net sales. Operating

cost means cost of goods sold plus operating expenses.

Expressed as a formula:Operating Costs

Operating ratio: -------------------------X100

Net Sales

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For 2010,

Operating cost = Cost of goods sold + Operating expenses = 2, 96,732 + 19,58,608

= 22, 55,340

Net Sales= 30,45,853

22,55,340

Operating ratio: -------------------------X100=74.05%

30,45,853

For 2009,

Operating cost = Cost of goods sold + Operating expenses= 3, 62,630 + 21,88,988= 25, 51,618

Net Sale = 35,79,889

25,51,618

Operating ratio: -------------------------X100=71.28%

35,79,889

For 2008,Operating Cost = Cost of goods sold + Operating expenses

= 3,54,694 + 19,45,602

= 23, 00,296

Net sales= 31,57,881

23,00,296

Operating ratio: -------------------------X100= 72.84 %

31,57,881

Interpretation: Operating ratio shows the percentage of net sales that is absorbed by cost of

goods sold and operating expenses. Hence, the lower the operating ratio, the higher the

operating profit to recover non-operating expenses such as interest, dividend etc and vice-

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versa. In the year 2009 the operating ratio is low as compare to the year 2010 & 2008 that is

why operating profit in the year 2009 is more as compare to the year 2010 & 2008. So we have

to decrease the operating ratio to increase the operating profit by decreasing the cost of goods

sold as well as operating expenses and increase in sales.

3. Operating Profit Ratio

Meaning: This ratio is also called Operating profit margin. It establishes the relationship

between operating profit and net sales. It is also defined as the ratio of profit before

depreciation, interest and tax. It is calculated as follows:

Operating profit

Operating Profit Ratio = -----------------------x 100

Net Sales

For 2010,

Operating profit = 7,90,513

Net sales = 30,45,853

7,90,513

Operating Profit Ratio = ----------------- x 100 =25.95%

30,45,853

For 2009,


Net sales = 35,79,889

10,28,271

Operating Profit Ratio = ----------------- x 100= 28.72 %

35,79,889

For 2008,


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Net sales = 31,57,881

8,57,585

Operating Profit Ratio = ----------------- x 100=27.16%

31,57,881

Interpretation: This ratio indicates the net profitability of the main business i.e.operating

efficiency of a firm. The higher the operating profit ratio, the better would be the operational

efficiency of the firm. A higher operating profit ratio means that a firm hasbeen able not only

to increase its sales but also been able to cut down its operatingexpenses. In the year 2009

operating profit is highest in comparison to the year 2010 and 2008 and it is due to the low

operating expenses as well as low cost of goods sold. So theoperating efficiency of the firm in

the year 2009 is good as compare to that of 2010 &2008.

4. Expenses Ratio

Meaning: Expenses ratio shows the relationship of different expenses to net sales.

a) Research & Development Expenses Ratio

Research & Development Expenses

=-----------------------------------------------X 100

Net Sales

For 2010,

Research & Development expenses = 565,141

Net sales = 30,45,853

5,65,141R & D Expenses Ratio=------------------X 100=18.55%

30,45,853

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For 2009,

Research & Development expenses = 6,62,057

Net sales = 35,79,889

6,62,057

R & D Expenses Ratio=------------------X 100=18.49%

35,79,889

For 2008,

Research & Development expenses = 6,13,242

Net Sales = 31,57,881

6,13,242

R & D Expenses Ratio=------------------X 100=19.41%

31,57,881

Interpretation: Research & development expenses ratio should be low. Low R&Dexpenses

ratio leads to an increase in operating profit ratio. In the year 2009 theResearch &

Development expenses ratio is low as compare to the year 2010 & 2008. Due to the low

Research and development expenses in the year 2009, theoperating profit ratio is high in the

same year.

b) Selling, general & administrative exp ratio

Selling, general & admin exp

= -------------------------------------------X100

Net sales

For 2010,

Selling, general & admin expenses = 12,80,652

Net Sales = 30,45,853

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12,80,652

Selling, general & admin expenses ratio =------------------------- x 100=42.05%

30,45,853

For 2009,


Net sales = 3,579,889

14,26,632

Selling, general & admin expenses ratio = ----------------x 100= 39.85 %

35,79,889

For 2008,


Net sales = 3,157,881

12,59,370

Selling, general & admin expenses ratio =----------------- x 100= 39.88 %

31,57,881

Interpretation: Selling, general & administrative expenses ratio should be low. LowSelling, general & administrative expenses ratio leads to an increase in operatingprofit

ratio. In the year 2008 the Selling, general & administrative expenses ratio islow as

compare to the year 2009 & 2007. Due to the low Selling, general &administrative

expenses in the year 2008, the operating profit ratio is high in the sameyear.

c) Non-Recurring Expenses Ratio

Non-recurring expenses

= --------------------------------x 100

Net Sales

For 2010,

Non-recurr ing expenses = 41,260

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Net sales = 30,45,853

41,260

Non-recurr ing expenses ratio =--------------- x 100=1.35%

30,45,853

For 2009,

Non-recurr ing expenses = 32,053

Net sales = 3,579,889

32,053

Non-recurr ing expenses ratio =------------- x 100= .89 %

3,579,889

For 2008,

Non-recurr ing expenses = 555

Net sales = 3,157,881

555

Non-recurr ing expenses ratio = ----------------- x 100= .017 %

3,157,881

Interpretation: The above calculation shows that there is an increase in Non-recurring

expenses from year to year. An increase in this non-recurring expenses leads to decline in

operating profit ratio as operating profit declines. There is a continuing rise in the non-

recurring expense from year 2008 to year 2010. This expense needs to be control to

increase the operating profit that further leads to increase in net profit of the company.

d) Other Expenses Ratio

Other expenses

= -------------------------x 100

Net sales

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For 2010,

Other expenses = 71,555

Net sales = 30,45,853

71,555

Other expenses ratio =-------------x 100=2.34%

30,45,853

For 2009,


Net sales = 35,79,889

68,246

Other expenses ratio = -------------x 100=1.90%

35,79,889

For 2008,


Net sales = 3,157,881

72,435

Other expenses ratio = -----------------x 100= 2.29 %

31,57,881

Interpretation: As the above calculation says that the other expenses ratio is lowestin the

year 2009, which results in high operating profit ratio in the same year. There is a change

(decline) of about 0.39 % in other expenses ratio from year 2008 to year2009. In the

year 2010, there is a change (increase) of about 0.44 % as compare to theyear 2009. These

entire expenses ratio should be low, which further leads to increasein operating profit ratioof a firm.

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5. Net Profit Ratio:

Meaning: This ratio measures the relationship between net profit and sales of a firm. Net

profit is the excess of revenue over expenses during a particular accounting period. The

formula used is as follows:

Net Profit

Net Profit Ratio = ------------------x 100

Net Sales

For 2010,

Net profit (before tax) =8,01,520 Net profit ( after tax) = 4,86,508

Net sales = 30,45,853 Net sales = 30,45,853

8,01,520 4,86,508

Net Profit Ratio = -------------x 100 Net Profit Ratio = ------------x 100

30,45,853 30,45,853

= 26.31 % = 15.97 %

For 2009,

Net profit (before tax) = 10,78,508 Net profit (after tax) = 8,71,814


10,78,508 8,71,814

Net Profit Ratio = ---------------x 100 Net Profit Ratio = --------------x 100

35,79,889 35,79,889

= 30.12 % = 24.35 %

For 2008,

Net profit (before tax) = 9,47,190 Net profit (after tax) = 7,23,807


9,47,190 7,23,807

Net Profit Ratio = ------------x 100 Net Profit Ratio =-----------x 100

31,57,881 31,57,881

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= 29.99 % = 22.92 %

Interpretation: In the above calculation the net profit ratio (before tax) is highest in the

year2009 as compare to that of the year 2010 & 2008. It shows that in the year 2009 owner

gotadequate returns. A high net profit ratio is preferable as it is the indication of overall

profitabilityand efficiency of the business. In the year 2010 net profit ratio (before tax) is

26.31 %, which isvery low as compare to previous year.In the above calculation the net

profit ratio (after tax) is highest in the year 2009 as compare to that of the year 2010 &

2008. It shows that in the year 2008 owner got adequate returns. A high net profit ratio is

preferable as it is the indication of overall profitability and efficiency of the business. In the

year 2010 net profit ratio (after tax) is 12.68 %, which is very low as compare to previous

year.

Profitability Ratios based on capital /investments:

6. Return on Capital Employed

Meaning: This ratio expresses the relationship between profits and capital employed and is

calculated in percentage by dividing the net profit by capital employed. The formula used is

as follows:

Net Profit (before interest and tax)

Return on Capital employed = ---------------------------------------------x 100

Net Capital employed

Net Capital employed = FA(less depreciation) + current assets current liabilities.

For 2010,Net Profit (before interest and tax) = 8,04,927

Net Capital employed = 2,415,707

8,04,927

Return on capital employed = ---------------x 100= 33.32%

24,15,707

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For 2009,

Net Profit (before interest and tax) = 10,88,527

Net capital employed = 26,11,10610,88,527

Return on capital employed = ------------------------x 100= 41.68 %

26,11,106

For 2008,

Net Profit (before interest and tax) = 9,47,443

Net capital employed = 23,07,403

9,47,443

Return on capital employed =------------------x 100= 41.06 %

2,307,403

Interpretation: The return on capital employed provides a test of profitability related to

the long term funds. The higher the ratio, the more effective and efficient would be the

utilization of capital and vice-versa. In the year 2009 the return on capital employed ishigh

as compare to the year 2010 & 2008. This shows the effective utilization of capitalin the

year 2008 as compare to that of the year 2010 & 2008

.

7. Return on Total Assets

Meaning: Profitability can also be measured by establishing relationship between net

profits and total assets. This ratio is computed by dividing the net profits after tax by total

funds invested or total assets.

Net Profit after tax + Interest

Return on total assets = --------------------------------------x 100

Total Tangible assets

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For 2010,

Net profit after tax + interest = 4, 89,915

Total tangible assets = 32,60,260

4,89,915

Return on Total assets = --------------------------x 100=15.02%

32,60,260

For 2009,

Net Profit after tax + interest = 8, 81,833


8, 81,833

Return on Total assets = -----------------------x 100= 26.07 %

33,81,265

For 2008,

Net Profit after tax + interest = 7, 24,060


7, 24,060

Return on Total assets = ---------------------------x 100= 22.89 %

31,62,958

Interpretation: High return on total assets is considered as the satisfactory ratio. In the

year 2009 the return on total assets is high as compare to that of the year 2010 and

2008.There is a change (increase) of about 3.2 % from year 2008 to the year 2009. Thereis

a change (decrease) of about 11.05 % from the year 2009 to the year 2010. The basic

objective of this ratio is to measure the effectiveness of the use of these funds. The resultofthe year 2009 shows that the funds invested in total assets are not properly utilized.

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Chapter 4

Comparative Financial

Statement

COMPARATIVE FINANCIAL STATEMENTS

Comparative financial statements are those statements which summarise and present

related accounting data for a number of years incorporating therein the changes (absolute

or relative or both) in individual items.

Comparative balance sheet

As on 30 Dec 2010

Particulars 2010 2009 Amount

Change

% Change

ASSETS

Cash & Cash Equivalent 8,19,487 9,04,986 (85,499) 9.44%

Short Term Investment 8,86,450 7,25,989 1,60,461 22.10%

Net Receivables 4,88,296 5,77,947 (89657) 15.51%

Other Current Assets 80,885 1,37,954 (57,099) 41.38%

Long term investments 2,07,239 2,83,828 (76,589) 26.98%

Property, plant & equipment 3,88,132 3,13,037 75,095 23.98%

Goodwill 34,94,589 21,34,730 13,59,859 63.70%

Intangible assets 5,27,388 3,05,603 2,21,785 72.57 %

TOTAL 68,93,466 53,83,984 15,09,482 28.03%

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LIABILITIES

Accounts payable 5,25,184 5,18,635 6,549 1.26 %

Other current liabilities 3,19,369 2,43,964 75,495 30.94 %

Long-term debt 10,00,000 3,50,000 6,50,000 185.71 %

Other Liabilities 2,57,913 1,49,961 1,07,952 71.98 %Deferred long term liabilities 2,89,203 1,48,684 1,40,519 94.50 %

TOTAL 23,91,669 14,11,244 9,80,425 69.47 %

Comparative Income Statement

As on 30 Dec, 2010

Particulars Increase or Decrease

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(change)

2010 2009 Amount %

Total Revenue 30,45,853 35,79,889 (5,34,036) 14.91

Less :Cost of revenue 2,96,732 3,62,630 (65,898) 18.17

Gross profit 27,49,121 32,17,259 (4,68,138) 14.55

Less :Operating

expenses

Resear ch development 5,65,141 6,62,057 (96,916) 14.63

Selling, gen, adminis 12,80,652 14,26,632 (1,45,980) 10.23

Non recurring 41,260 32,053 9,207 28.72

Others 71,555 68,246 3,309 4.84

Operating income or

loss

7,90,513 10,28,271 (2,37,758) 23.12

Add: other income 14,414 60,256 (45,842) 76.07

Income before interest&tax

8,04,927 10,88,527 (2,83,600) 26.05

Less: interest 3,407 10,019 (6,612) 65.99

Income before tax34.95

8,01,520 10,78,508 (2,76,988) 25.68

Less: income tax 3,15,012 2,06,694 1,08,313 52.40

Net income or income

after tax

4,86,508 8,71,814 (3,85,306) 44.19

COMMON-SIZE FINANCIAL STATEMENTSFinancial statements that depicts financial data in the shape of vertical percentages are known

as common size statements. In such statements, all figures are converted into a common

unit by expressing them as a percentage of a key figure in the statement. The total of financial

statement is reduced to 100 and each item is shown as a component to the whole.

Common-size balance sheet

As at 30 Dec 2009Particulars Amount Percent

ASSETS

Cash & Cash Equivalent 8,19,487 11.88

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Short Term Investment 8,86,450 12.85

Net Receivables 4,88,296 7.52

Other Current Assets 80,885 1.17

Long term investments 2,07,239 3

Property, plant & equipment 3,88,132 5.63

Goodwill 34,94,589 50.30

Intangible assets 5,27,388 7.65

TOTAL 68,93,466 100

LIABILITIES

Accounts payable 5,25,184 21.95

Other current liabilities 3,19,369 13.35Long-term debt 10,00,000 41.81

Other Liabilities 2,57,913 10.79

Deferred long term liabilities 2,89,203 12.10

TOTAL 23,91,669 100

Common-size Income statement

As on 30 Dec 20102010 Percent

Total Revenue 30,45,853 100Less :Cost of revenue 2,96,732 9.74Gross profit 27,49,121 90.25Less :Operating expenses

Resear ch development 5,65,141 18.55Selling, gen, adminis 12,80,652

42.04Non recurring 41,260 1.35Others 71,555 2.34Operating income or loss 7,90,513 25.95

Add: other income 14,414 0.47Income before interest 8,04,927 26.42

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&tax

Less: interest 3,407 0.11Income before tax34.95

8,01,520 26.31

Less: income tax 3,15,012 10.34

Net income or income

after tax

4,86,508 15.97

Statement of changes in working capital

Particulars 2010 2009 Effect on workingcapital

Increase or DecreaseCURRENT ASSETS

Cash & Cash Equivalent 8,19,487 9,04,986 85,499

Short Term Investment 8,86,450 7,25,989 1,60,461

Net Receivables 4,88,296 5,77,947 89,651

Other Current Assets 80,885 1,37,954 57,099

Long term investments 2,07,239 2,83,828 1,60,461 2,32,249

Total 22,75,088 23,46,876 1,60,461 2,32,249

CURRENT

LIABILITIES

Accounts payable 5,25,184 5,18,635 6,549

Other current liabilities 3,19,369 2,43,964

Total 8,44,553 7,62,599 81,954

Net working capital 14,30,535 15,84,277 1,60,461 3,14,203

Net increase in working

capital

1,53,742 1,53,742

15,84,277 15,84,277 3,14,203 3,14,203

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Chapter 5

Findings and Analysis

1. Current ratio for the year 2010 is 2.69: 1, which is considered satisfactory as

compare to that of previous year ratio.

2. Total assets turnover r atio for the 2010 is .41 times which is not satisfactory

as compare to that of 2009 i.e. .61 times.

3. Fixed assets turnover ratio is 7.84 times which is low as compare to that of 2009

i.e. 11.43 times and hence not satisfactory.

4. Current assets turnover ratio for the 2010 is 1.33 times which is better as compare

to that of 2009 i.e. 1.30 times.

5. Working capital turnover ratio for the 2010 is 2.13 times which is high as compare

to that of 2009 i.e. 1.81 times.

6. Capital turnover ratio for the 2010 is 1.26 times which is low as compare to that of

2009 i.e. 1.37 times.

7. Gross profit ratio is increasing from 89.87 % in the 2009 to 90.25 % in the

2010.

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8. Operating ratio is increasing from 71.28 % in the 2009 to 74.05 % in the 2010.

9. Non-recurring expenses ratio is increasing from 0.89 % in the2009 to 1.35 % in

the 2010.

10. Other expenses ratio is increasing from 1.90% in 2009 to 2.34 % in 2010.

11. Net profit ratio (before tax) is declining from 30.12 % in 2009 to 26.31% in 2010.

Bibliography:-

1. Financial statement of company

2. http://www.managementparadise.fin.co.in

3. http://wikipedia.com

Documents

Nitika 47 Viii Sem