RATIO ANALYSIS OF GOKALDAS EXPORTS LTD

8/10/2019 RATIO ANALYSIS OF GOKALDAS EXPORTS LTD

1/21

1 | P a g e

GOKALDAS EXPORTS LTD.

INTRODUCTION TO THE COMPANY

VISION

To be a globally reputed apparel manufacturer, evoking distinctive recognition for

Product, Performance, Processes and People.

MISSION

Achieve profitable growth through Innovation, Quality, Consistency and Commitment.

BACKGROUND: GOKALDAS EXPORTS LTD.

Gokaldas Exports was founded by the late Jhamandas Hinduja in Bangalore in 1979.

Hinduja had moved to Bangalore from Pakistan prior to the 1947 partition of India and

established a business that manufactured silk scarves and stoles. On a trip to Copenhagen

in 1971, he had his flash of inspiration that started his success story. One of his business

contacts asked him to copy two shirts, a request, it turned out that was incredibly

fortuitous as the market for silk scarves was increasingly saturated.

GEX, the Company was incorporated on March 1, 2004 by converting the erstwhile

partnership firm Gokaldas India under Part IX of the Companies Act, 1956. Pursuant to


2/21

2 | P a g e

the order of the Honble High Court of Karnataka dated November 20, 2004, Gokaldas

Exports Private Limited and The Unique Creations (Bangalore) Private Limited have been

amalgamated with the Company, with April 1, 2004 being the appointed date.

The Company is engaged in the business of design, manufacture, and sale of a wide range

of garments for men, women, and children and caters to the needs of several leading

international fashion brands and retailers. The principal source of revenue for the

Company is from export of garments and related products. The company targeted export

markets- primarily The US and Europe and began to expand through partnership

arrangements.

Today, Gokaldas Exports Limited (GEX) is one of the leading apparel exporters of India

serving large global retailers since its inception in the year 1978.GEX, an ISO 9001:2008

certified company, operates from 32 units spread across states of Karnataka, Tamil Nadu

and Andhra Pradesh and has installed capacity to produce more than 2.5 million garments

per month. GEX provides employment to 33,000 people.

GEX blends its manufacturing expertise with state of the art design capabilities to provide

multiproduct offerings; sustained reliability weaved with consistent quality to meet

changing demands from customers at right cost: from design to delivery. GEX has a

diversified product portfolio across various categories of garments for men, women and

children.

Various categories catered to by GEX: The factories are dedicated by buyers and by

products, specializing in creating Outerwear, Blazers and Pants (Formal and Casuals),

Shorts, Shirts, Blouses, Denim Wear, Swim Wear, Active and Sports Wear. Keeping pace

with the requirements of famous labels in 39 countries.

- Product strengths - outerwear, bottoms, sportswear, formal suits, trousers, skirts,

and denim wear across all genders.

- Global customer base, covering USA, Europe, Latin America, Middle East and

India, servicing almost all major brands.


3/21

3 | P a g e

RATIO ANALYSIS

INTRODUCTION

A sustainable business and mission requires effective planning and financial management.

Ratio analysis is a useful management tool that will improve your understanding of

financial results and trends over time, and provide key indicators of organizational

performance.

Objective of Ratio Analysis:

The main objective of analysing financial statement with the help of ratios are:

1. The analysis would enable the calculation of not only the present earning capacity of

the business but would also help in the estimation of the future earning capacity.

2. The analysis would help the management to find out the overall as well as the

department wise efficiency of the firm on the basis of the available financial

information.

3. The short term as well as the long term solvency of the firm can be determined with

the help of ration analysis.

4. Interfirm comparison becomes easy with the help of ratios.

Advantages of Ration Analysis:

Financial statement prepared at the end of the year do not always convey to the reader the

real profitability and financial health of the business. They contain various facts and

figures and it is for the reader to conclude what these figures indicated. Ratio Analysis is

an important tool for analysing these financial statements .Some important advantage

derived by the firm by the use of accounting ratios are:

1. Help in Financial statement analysis


4/21

4 | P a g e

It is easy to understand the financial position of a business enterprise in respect of short

term solvency, liquidity and profitability with the help of ratio. It tells us the changes

taking place in the financial condition of the business.

2. Simplified accounting figures

Absolute figures are not of mush use. They become important when relationships are

established say between gross profit and sales.

3. Helps in calculating operation efficiency of the business enterprise

Ratio enable the user of financial information to determine operating efficiency of a firm

by relating the profit figure to the capital employed for a given period.

4. Facilities interfirm comparison

Ratio analysis provides data for interfirm comparison. It revels strong and weak firms,

overvalues and undervalues firms as well as successful and unsuccessful firms.

5. Makes inter- firms comparison possible

Ratio Analysis helps the firm to compare its own performance over a period of time as

well as the performance of different divisions of the firm. It helps in deciding which

division are more efficient than other.

6. Helps in forecasting

Ratio Analysis helps in planning and forecasting. Ratios provides clues on trends and

futures problems. e.g. if the sales of a firm during the year are Rs. 10 lakhs and he averagestock kept during the year Rs. 2 lakhs, it must be ready to keep a stock of Rs. 3 lakhs

which is 20 % of the Rs. 15 lakhs.

Ratios can be divided into four major categories:

Profitability Sustainability

Operational Efficiency

Liquidity
http://www.demonstratingvalue.org/resources/financial-ratio-analysis#Profitabilityhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Liquidityhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Liquidityhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Profitability


5/21

5 | P a g e

Leverage (FundingDebt, Equity, Grants)

Limitations of Ratio Analysis

Ratio Analysis is a useful technique to evaluate the performance and financial position of

any business unit but it does suffer from a number of limitations. These must be kept in

mind while analysing financial statements.

1. Historical Analysis

Ratio Analysis is historical in nature a financial statement on the basis of which

ratios are calculated are historical in nature.

2. Price Level Change

Changes in price level often make comparison of figures of the previous years

difficult. E.g ratio of sales to fixed assets in 2006 would be much higher than in 2000

due to rising prices, fixed assets being expressed on cost.

3. Not Free from biasIn many situations, the accountant has to make a choice out of the various

alternatives available. E.g. choice of the method depreciation, choice in the method of

inventory valuation etc. Since there is a subjectivity inherent in the choice, ratio

analysis cannot be said to be free from bias.

4. Window dressing

Window dressing is slowly the position better than what it is. Some companies, in

order to cover up their bad financial position resort to window dressing. By hiding

important facts, they try to depict a better financial position.

5. Qualitative factors ignoredRatio Analysis is a quantitative analysis. It ignores qualitative factors like debtors

character, honesty, past record etc.

6. Different accounting practices render ratios incomparable
http://www.demonstratingvalue.org/resources/financial-ratio-analysis#Leveragehttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Leveragehttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Leveragehttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Leverage


6/21

6 | P a g e

The result of two firms are comparable with the help of accounting ratios only if they

follow the same accounting methods. E.g. if one firm changes depreciation on straight

line method while another is charging on diminishing balance method, accounting

ratios will not be strictly comparable.

RATIO ANALYSIS OF GOKALDAS EXPORTS LTD FROM

2010 TO 2014

1. CURRENT RATIOS

Does the enterprise have enough cash on an ongoing basis to meet its operational

obligations? This is an important indication of financial health

1. Definition

Current ratio, also known as liquidity ratio and working capital ratio, shows the

proportion of current assets of a business in relation to its current liabilities.

2. Formula

Current Ratio =Current Assets

Current Liabilities

3. Explanation

Current ratio expresses the extent to which the current liabilities of a business (i.e.

liabilities due to be settled within 12 months) are covered by its current assets (i.e. assets

expected to be realized within 12 months). A current ratio of 2 would mean that current

assets are sufficient to cover for twice the amount of a company's short term liabilities

Current assets include cash and those assets which can be converted into cash within a

year. Current assets will therefore include cash, bank, stick (raw materials, work in

progress and finished goods), debtors(less provision), bills receivable, marketable

securities, prepaid expenses, short term loans and advances and accrued incomes.


7/21

7 | P a g e

Current liability include all those liabilities maturing within one year. Current liabilities

include creditors, bills payable, outstanding expenses, income received in advance , bank

overdraft, short-term loans, provision for tax , proposed dividend and unclaimed dividend.

GEX CURRENT RATIO

Gokaldas Exports Ltd has Current Ratio of 0.63 indicating that it has a negative working

capital and may not be able to pay financial obligations in time and when they become

due. Generally, companies would aim to maintain a current ratio of at least 1 to ensure that

the value of their current assets cover at least the amount of their short term obligations.

If we analyse the four year trend the highest was 0.87 in the year 2010,then too it was

having a negative working capital, the least being in 2013 it went down to 0.48 but has

rose to 0.68 in 2014.

The company currently has very low current ratio it can pay only 68% of its short term

debts, we can see that the company has reduced its inventory level from 2010 Rs 370.79

crore to 2014 Rs 201.92, the current assets also have decreased drastically from 2010 Rs

Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

0.63

0.480.54

0.73

0.87

CURRENT RATIO


8/21

8 | P a g e

513.32 crore to 2014 Rs 239.55 crore, and the companies liabilities have increased from

2010 Rs 88.6 crore to 2014 167.11 crore. Though there is huge growth in current assets

from 2010 Rs 59,998.07 lakhs to Rs 68,190.63 lakhs in 2014.The liabilities have also

increased.

2. QUICK RATIO

1. Definition

Quick ratio establishes the relationship between quick/ liquid assets and current liabilities.

2. Formula

Quick ratio = Quick Assets

Current Liabilities

3. Explanation

It is vital that a company have enough cash on hand to meet accounts payable, interest

expenses and other bills when they become due. The higher the ratio, the more financially

secure a company is in the short term. A common rule of thumb is that companies with a

quick ratio of greater than 1.0 are sufficiently able to meet their short-term liabilities.

In general, low or decreasing quick ratios generally suggest that a company is over-

leveraged, struggling to maintain or grow sales, paying bills too quickly or collecting

receivables too slowly. On the other hand, a high or increasing quick ratio generally

indicates that a company is experiencing solid top-line growth, quickly convertingreceivables into cash, and easily able to cover its financial obligations. Such companies

often have faster inventory turnover and cash conversion cycles.

Finally, the formula assumes that a company would liquidate its current assets to pay

current liabilities, which is not always realistic, considering some level of working capital

is needed to maintain operations.

It is also important to understand that the timing of asset purchases, payment and

collection policies, allowances for bad debt and even capital-raising efforts can all impact


9/21

9 | P a g e

the calculation and can result in different quick ratios for similar companies. Capital needs

that vary from industry to industry can also have an effect on quick ratios.

GEX is currently having a quick ratio of 1.21 in 2014 which is satisfactory , it increased

in comparison to last year where it was in negative (only 0.78). But if we see the overall

trend from 2010 it was having a 2.52 which was above satisfactory. In 2011 also it had

2.38 then it decreased to 1.38 in 2012 further decreasing to 0.78 in 2013 the lowest in

these 5 years. In 2013 the sundry debts had become low as well as the cash in bank was

less compared to 2014.

3. INVENTORY TURNOVER RATIO

1. Definition

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is

managed by comparing cost of goods sold with average inventory for a period.

2. Formula


1.21

0.78

1.38

2.38

2.52

QUICK RATIO


10/21

10 | P a g e

Inventory Turnover = Cost of Goods Sold / Average Inventory

3. Explanation

Inventory turnover is a measure of how efficiently a company can control its merchandise,

so it is important to have a high turn. This shows the company does not overspend by

buying too much inventory and wastes resources by storing non-saleable inventory. It also

shows that the company can effectively sell the inventory it buys.

This measurement also shows investors how liquid a company's inventory is. Think about

it. Inventory is one of the biggest assets a retailer reports on its balance sheet. If this

inventory can't be sold, it is worthless to the company. This measurement shows how

easily a company can turn its inventory into cash.

Creditors are particularly interested in this because inventory is often put up as collateral

for loans. Banks want to know that this inventory will be easy to sell.

GEX INVENTORY TURNOVER RATIO


5.51

4.04

6.12

3.96

3.11

INVENTORY TURNOVER

Cost of Goods Sold = Opening Stock+ Purchases+ Carriage Inward +Direct

Wages and Expenses - ClosingStock

* Cost of Goods Sold = Sales - Gross profit

* AverageStock = (OpeningStock + closing stock)/2
http://www.myaccountingcourse.com/accounting-dictionary/balance-sheethttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Inventoryhttp://www.myaccountingcourse.com/accounting-dictionary/balance-sheet


11/21


12/21

12 | P a g e

GEX total asset turnover ratio has gradually increased from 1.42 in 2010 to 2.57 in 2014.

It measures the ability of a company to use its assets to efficiently generate sales. The

higher the ratio indicates that the company is trying to utilize its assets efficiently to

generate sales. We can see that there is a drastic reduction in the current assets in these

five years.

5. NET PROFIT MARGIN

1. Definition

A ratio of profitability calculated as net income divided by revenues, or net profits divided

by sales. It measures how much out of every dollar of sales a company actually keeps in

earnings.

2. Formula

Net Profit Margin = Net ProfitSales

3. Explanation

Net profit margin is one of the most closely followed numbers in finance. Shareholders

look at net profit margin closely because it shows how good a company is at converting

revenue into profits available for shareholders.


430.38 433.81477.67

685.91

805.01

2.57 2.13 1.72 1.52 1.42

TOTAL ASSET TURNOVER RATIO

Total Assets Asset Turnover Ratio
http://www.investinganswers.com/financial-dictionary/businesses-corporations/revenue-5108http://www.investinganswers.com/financial-dictionary/businesses-corporations/revenue-5108


13/21

13 | P a g e


-0.64

-11.49

-13.19

-7.7

-0.16

NET PROFIT MARGIN

Profit Margin measures overall efficiency of a company and shows its ability to withstand

competition as well as defend against adverse conditions such as rising costs, falling

prices,

decline in sales or management distress. Profit margin tells investors how well the

company executes on its overall pricing strategies as well as how effective the company in

controlling its costs.

Gokaldas

Exports Ltd

has Profit Margin of -0.64% in 2014 .This is 27.27% lower than that of the Consumer Goods

sector, and 142.95% lower than that of Profit Margin industry, the Profit Margin for all stocks

is 69.52% lower than the company. After 2010 the net profit was alarmingly going in

negatives, it had reached till -13.19 in 2012. Gokaldas is located in Bangalore, and most of its

factories too due to which the wages are high, cost of production is increasing.

6. DEBTORS RATIO

1. Definition


14/21

14 | P a g e

Calculate debtors turnover ratio with the help of debtors turnover ratio formula and

examples for accounts receivable turnover ratio days payment.

2. Formula

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

But when the information about opening and closing balances of trade debtors and credit

sales is not available, then the debtors turnover ratio can be calculated by dividing the

total sales by the balance of debtors (inclusive of bills receivables) given and formula can

be written as follows.

Debtors Turnover Ratio = Total Sales / Debtors

3. Explanation

Debtors turnover ratio measures the efficiency of a business in collecting its credit sales.

Generally a high value of accounts receivable turnover is favourable and lower figure may

indicate inefficiency in collecting outstanding sales. Increase in accounts receivable

turnover overtime generally indicates improvement in the process of cash collection on

credit sales.


15/21

15 | P a g e

GEX current debtors ratio is 12.68, if we analyse the four years ratio then the ratio has

decreased compared to last two years and from 2010. The least ratio was in the year 2012

12.49. The general turnover trend is quite fast in an average the debtors are converted to

cash in 27 to 35 days. Last year the collection period was 28 days. The higher turnover

ratio and shorter average collection period, the better is the trade credit management and

better is the liquidity of debtors. There is a prompt payment on debtorspart.

7. OPERATING MARGIN

1. Definition

A ratio used to measure a company's pricing strategy and operating efficiency.

2. Formula

Operating Margin

=

OperatingIncome

Revenue

3. Explanation

Operating margin is a measurement of what proportion of a company's revenue is left over

after paying for variable costs of production such as wages, raw materials, etc. A healthy

operating margin is required for a company to be able to pay for its fixed costs, such as

interest on debt. To determine the quality of a company, it is best to look at the change in


12.68

13.83

13.62

12.49

13.82

DEBTORS TURNOVER RATIO


16/21

16 | P a g e

operating margin over time and to compare the company's yearly or quarterly figures to

those of its competitors. If a company's margin is increasing, it is earning more per dollar

of sales. The higher the margin, the better.

GEX has attained a profit margin of 3.84 in March 2014 an increase from a negative

operating expense of4.81 in March 2013.The negative operating expense went up to

6.49 in March 2012. But when compared to March 2010 the operating profit was the

highest of 4.32. The companies employee cost in 2010 was Rs 91.21crore and it increased

to Rs. 123.71 crore. The company has reduced its employee cost to Rs 113.93 crore in

2014.Miscelenious expense has increased from Rs 6.37 crore in 2010 to Rs 359.75 crore in

2013. In 2014 it reduced its miscellaneous expense to Rs 103.68 crore are the major reason

due to which they have been able to come out from negative operating expense in 2014.

8. DEBT-EQUITY RATIO

1. Definition

A measure of a company's financial leverage calculated by dividing its total liabilities by

stockholders' equity. It indicates what proportion of equity and debt the company is using

to finance its assets.

2. Formula

Debt-to-Equity Ratio =

Total Liabilities

Shareholders' Equity

3. Explanation

Lower values of debt-to-equity ratio are favourable indicating less risk. Higher debt-to-

equity ratio is unfavourable because it means that the business relies more on external

lenders thus it is at higher risk, especially at higher interest rates. A debt-to-equity ratio of

1.00 means that half of the assets of a business are financed by debts and half by

shareholders' equity. A value higher than 1.00 means that more assets are financed by debt

that those financed by money of shareholders' and vice versa.


17/21

17 | P a g e

An increasing trend in of debt-to-equity ratio is also alarming because it means that the

percentage of assets of a business which are financed by the debts is increasing.

GEX has a current debt equity ratio of 2.55 in 2014 it implies low safety margin for

creditors. The owners are putting up less money of their own. It is a danger signal for the

creditors. If the company should fail financially, the creditors would lose heavily. There is

a greater risk in the capital structure would lead to inflexibility in the operations of the

firm as creditors would exercise pressure and interfere in management. GEX has to face

heavy burden of interest payments, particularly in adverse circumstances. It would have to

face very heavy restriction while borrowing money. If we see a 4 year trend in 2010 the

ratio was only 0.75 which was satisfactory to 1.1 in 2012 thereafter the ratio has soared to

2.55 in both the year 2013 & 2014. The book value of the share has reduced drastically

from Rs 133.85 in 2010 to Rs 35.29 in 2014.

9. RETURN ON CAPITAL EMPLOYED


2.55 2.55

1.1

0.860.75

DEBT TO EQUITY RATIO


18/21

18 | P a g e

1. Definition

A financial ratio that measures a company's profitability and the efficiency with which its

capital is employed.

2. Formula

ROCE = Earnings before Interest and Tax (EBIT) / Capital Employed

3. Explanation

Capital Employed as shown in the denominator is the sum of shareholders' equity and debt

liabilities; it can be simplified as (Total Assets Current Liabilities). Instead of using

capital employed at an arbitrary point in time, analysts and investors often calculate ROCE

based on Average Capital Employed, which takes the average of opening and closing

capital employed for the time period.

A higher ROCE indicates more efficient use of capital. ROCE should be higher than the

companys capital cost; otherwise it indicates that the company is not employing its capital

effectively and is not generating shareholder value.


7.7

-17.13

-19.66

-9.48

2.97

ROCE


19/21


20/21

20 | P a g e

earnings through leverage.

GEX has currently an interest coverage ratio below 1.0, only 0.83 indicates the business is

having difficulties generating the cash necessary to pay its interest obligations (i.e. interestpayments exceed its earnings (EBIT)).But compared to past three years were the ratios were

in negative, it has increased. Even in 2010 it was just 0.78. GEX the interest has increased

from 34.63 in 2010 to 39.96 in 2014.

CONCLUSION

The Company's accumulated losses at the end of the financial year are more than fifty percent

of its net worth and it has incurred cash losses in the current and immediately preceding

financial year.

The company has Profit Margin (PM) of (0.64) % which may suggest that it does not

properly executes on its current pricing strategies or is unable to control all of the operational

costs.

This is way below average.

Gokaldas Exports Ltd recorded loss per share of 1.95. This company had not issued any

dividends in recent years. Gokaldas has been incurring loss from 2008 from the time, it was

also the time when the management was overtook by Blackstone. The buyers will take some

time to have confidence in the new management. The demand in western market has also

reduced due to which profit has reduced and also the costing are sometime approved without

profit percentage.

Advantages of Ratio Analysis

Ratio Analysis simplifies Financial Statements, facilitates inter-firm comparison; makes

intra-firm comparison possible and helps in forecasting

Limitations of Ratio Analysis

Ratio Analysis is historical in nature; changes in price level often make comparison of figures

of the previous years difficult. It is not free from bias. Some companies, in order to cover up

their bad financial position report to window dressing. Ratio Analysis ignores qualitativefactors and different accounting practices render ratios incomparable


21/21

21 | P a g e

BIBLIOGRAPHY

1. http://www.cliffsnotes.com/more-subjects/accounting/accounting-

principles-ii/financial-statement-analysis/ratio-analysis

2. http://www.moneycontrol.com/stocks/company_info/print_main.php

3. http://faculty.philau.edu/lermackh/financial_analysis.htm

4. http://www.demonstratingvalue.org/resources/financial-ratio-

analysis#Operational
http://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/financial-statement-analysis/ratio-analysishttp://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/financial-statement-analysis/ratio-analysishttp://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/financial-statement-analysis/ratio-analysishttp://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/financial-statement-analysis/ratio-analysishttp://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/financial-statement-analysis/ratio-analysishttp://www.moneycontrol.com/stocks/company_info/print_main.phphttp://www.moneycontrol.com/stocks/company_info/print_main.phphttp://faculty.philau.edu/lermackh/financial_analysis.htmhttp://faculty.philau.edu/lermackh/financial_analysis.htmhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://www.demonstratingvalue.org/resources/financial-ratio-analysis#Operationalhttp://faculty.philau.edu/lermackh/financial_analysis.htmhttp://www.moneycontrol.com/stocks/company_info/print_main.phphttp://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/financial-statement-analysis/ratio-analysishttp://www.cliffsnotes.com/more-subjects/accounting/accounting-principles-ii/financial-statement-analysis/ratio-analysis

Documents

RATIO ANALYSIS OF GOKALDAS EXPORTS LTD