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ACKOWLEDGEMENT:-
Training plays a vital role in Management Education. It gives a
student a chance
to interact with the practical knowledge of real corporate world
situations.
I am sincerely thankful to Mr.V Bhatnagar, Assistant General MIS
(Training
Development), VITA Milk Plant Ambala for providing me the
opportunity to
work finance department of VITA. It has been an enriching
experience & a truly
practical and educative session for me.
I came to learn more about the policies and practical working of
finance
department. Despite of his extremely busy schedule he constantly
guided me
with great patience and found time to rectify me whenever I went
wrong.
I would also like to express my sincere gratitude to Ambala Milk
Producers Co-
operative Itd. And Kurukshetra University for granting
permission to carry out
this project work and providing opportunity for enhancing
academic
qualification and experience.
I would also like to thank all those persons who helped in
completing this
project successfully.
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PREFACE:-
Management ideas without any action based on them mean nothing
.that is why
practical training is made essential part of managerial course
pedagogical.
Theoretical studies in the class rooms are not sufficient to
understand the
functioning climate and real problems coming in the way and it
is of no use,
until and unless it is applied into some practical aspect. So
practical exposure to
real practical of arrangement in various organizations.
The topic of my summer training Project is Liquidity and
Financial position of
VITA Milk Plant. It was selected as to analysis the financial
position of the
plant.
Thus to apply all theoretical &technical knowledge gained so
far on practical
training I have undergone at Vita Milk Plant Ambala. For the
above purpose I
have gone through various annual reports.
This final project offered me an opportunity to make a study and
analysis the
system. It enables me to blend my theoretical knowledge acquired
during the
study with the practical training grieved in conducting this
project report.
The submission of this part or the curriculum of the MBA
course.
At the last I wrap up the findings & analysis, suggestion
and conclusion.
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UNDERTAKING:-
I, Kamaljeet Kaur pursuing MBA from Department of Management
Swami
Devi Dyal Institute of Management affiliate to Kurukshetra
University,
Kurukshetra do here proclaim that in preparing this project
report on Liquidity
and Financial Position of VITA Milk Plant Ambala,I have not
taken any help
from any body in or opposite the institute expect from primary
sources and
secondary sources mentioned in the context.
This project is an original work and the same has not been
submitted to any
other institution for the award of any other degree. All
conclusion and
recommendations are my own efforts.
All the data collection by me has done with the help of Vita,s
manuals and
annual reports issued by the plant. The entire analysis has done
by me with the
guidance of Vita, s finance department staff.
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Statement of Project Report:-
Statement of my project problem is to compare the financial
position of the Vita
Milk Plant with other campanies.This helps in determining the
strengths and
weakness of Vita Milk Plant . financial Statements are prepared
primarily for
decision-making.But the information provided in the financial
Statements is not
end in itself as no meaning conclusion can be drawn from these
Statements
alone.However, information provided is analysed and
interpretated to draw
conclusion.
Financial analysis (also referred to as financial statement
analysis or accounting
analysis) refers to an assessment of the viability, stability
and profitability of
sub-business or projects.
It is performed by professionals who prepare reports using
ratios that make use
of information taken from financial statement and other reports.
These reports
are usually presented to top management as one of their bases in
making
business decisions.
According to Metcalf and Titard,Assessment of the (1)
effectiveness with
which funds (investment and debt) are employed in a firm, (2)
efficiency and
profitability of itsoperations, and (3)value and safety
ofdebtors' claimsagainst
the firm's assets. It employs techniques such as 'funds flow
analysis' and
financial ratios to understand the problems and opportunities
inherent in an
investment orfinancingdecision. Use and transformation of
financial data into
a form that can be used to monitor and evaluate the firm's
financial position, to
plan future financing, and to designate the size of the firm and
its rate of growth.Financial analysis includes the use of financial
statement analysis and funds
flow analysis .
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Vertical analysis: it is used to gain knowledge on the structure
of
financial statements and its parts comparing to each other. It
gives aclear picture of income statement structure, comparing
different types of
expenses to the revenue earned. Also it gives an indication on
the
structure of assets, whether they consist of current or
long-term assets
and also capital structure, answering the question whether the
capital
constitutes of long-term debts, current debts or equity.
Horizontal analysis: it is used to find out the trends of
financialperformance for a particular period of time, i.e.
comparing financial data
of several different periods.
Ratio analysis: it is used to compare the performance of the
company
with other companies and also to understand whether a company
is
improving or is on a downslide. Ratio analysis is useful, since
vertical
and horizontal financial analysis is performed only using
absolute
figures, and in ratio analysis ratios are used to analyze
financial
performance of business
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Purpose Of Financial Statement Analysis:-
The purpose of a financial analysis varies with the entity
conducting the
analysis and the users of financial analysis data. During a
financial analysis therelation between the various elements of
financial statements is established and
also compared with the other information obtained about the
business. This is a
very important tool and is used by the investors, creditors and
the management
in determining the future prospects as well as the plans
regarding the company.
This is also used to identify the areas that need improvement
and also solve any
type of financial and operational problem. The prime aim of a
financial analysis
is to analyze the current financial status and performance of
the company, so
that it will be possible to judge on the future performance of
the business.
The purpose of financial analysis usually differs depending on
the users of this
data. For example, creditors are concerned with the solvency and
liquidity
because they are the ones who purchase bonds and debt securities
of the
company. Therefore they want top know the companys ability to
pay off the
debts and interest. The investors (investing in the companys
stock) are mainly
concerned with the profitability of the company. They wish to
know what
returns they are going to earn in the form of dividends and a
higher stock value.
The term Financial Statement analysis includes both analysis
and
interpretation .a distinction should, therefore be made between
the two terms.
While the term analysis is used to mean the simplification of
financial data by
methodical classification of the data given in the financial
statement
interpretation mean explaining the meaning and significance of
the data so
simplified. However, both analysis and interpretation are
interlinked and
complementary to each other. Analysis is useless without
interpretation andinterpretation without analysis is difficult or
even impossible.
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Analysis of Short Term Financial Position or Test of
Liquidity:
Trade creditors; creditors for expenses; commercial banks;
short-terms lenders
are concerned with the short-term financial position or
liquidity of the unit.
Management is also interested in knowing how efficiently working
capital is
being utilized by the business. Shareholders and long-term
creditors are also
interested in studying the prospectus of dividend and interest
payment.
Liquidity ratios measure the ability of the unit to meet its
short-term (generally
one year) obligations and reveals the short-term financial
strength or weakness.
Such ratios provide answer to questions like:
a. Is the unit capable to meet short-term obligation?
b. Is working capital being properly utilized?
c. is the current financial position improving?
Two types of ratios are calculated for testing short-term
financial
position:-
1. Liquidity ratios
2. Current assets movement or efficiency ratios
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Liquidity Ratios
A class of financial metrics that is used to determine a
company's ability to pay
off its short-terms debts obligations. Generally, the higher the
value of the ratio,the larger the margin of safety that the company
possesses to cover short-term
debts.
Common liquidity ratios include the current ratio, the quick
ratio and the
operating cash flow ratio. Different analysts consider different
assets to be
relevant in calculating liquidity. Some analysts will calculate
only the sum of
cash and equivalents divided by current liabilities because they
feel that they
are the most liquid assets, and would be the most likely to be
used to cover short
term.
A company's ability to turn short-term assets into cash to cover
debts is of the
utmost importance when creditors are seeking payment. Bankruptcy
analysts
and mortgage originators frequently use the liquidity ratios
to
determine whether a company will be able to continue as a going
concern.
Liquidity ratio, expresses a company's ability to repay
short-term creditors out
of its total cash. The liquidity ratio is the result of dividing
the total cash by
short-term borrowings. It shows the number of times short-term
liabilities are
covered by cash. If the value is greater than 1.00, it means
fully covered.
To measure the liquidity of a firm, the following ratios can
be
calculated:-
(i) Current ratio
(ii) Acid test or quick or liquid ratio and
(iii) Absolute liquid ratio or cash position ratio
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Current asset movement or efficiency ratio:-
Efficiency here means power of business man to sold goods
quicky, receive
money from debtor quickly, and payment to his creditors as
quickly as possible ,
so efficiency ratio tells us rate of stock turnover , debtor and
creditor turnover
ratio .
Funds are invested in various assets in business to make sales
and earn profit the
efficiency with which assets are managed directly effect the
volume of sales.
The better the management the larger is the amount of sales and
the profits.
Activity ratio measures the efficiencies and the effectiveness
with which firm
manages its resources and assets. These ratios are called
turnover ratios and can
be calculated from following ratios:-
Inventory / Stock turnover ratio = Cost of goods sold /
Average
inventory at cost
Debtors of receivables turnover ratios = Net credit sales /
Average trade
debtors
Average collection period = (Trade debtors No. of working days)
/ Net
credit sales Creditors or payables turnover ratio = Net credit
purchase / Average
trade creditors
Average payment period = (Trade creditors No. of working days) /
Net
credit purchase
Working capital turnover ratio = Cost of sales / Net working
capital
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Solvency Ratios - Test of Long Term Solvency:
The long-term financial soundness of any business can be judged
by its long-
term creditors by testing its ability to pay interest charges
regularly and itsability to repay the principal as per
schedule.
Thus long-term financial soundness (or solvency) of any business
is examined
by calculating ratios popularly, known as leverage of capital
structure ratios.
These ratios help us the interpreting repays long-term debt as
per installments
stipulated in the contract.
Following are the most important solvency ratios:
1. Debt-Equity ratio : (also known as debt to net worth ratio).
The
relationship between borrowed funds and internal owner's funds
is
measured by Debt-Equity ratio.
2. Debt Service or Interest Coverage Ratio : The ratio measures
debts
servicing capacity of a business so far as interest on long-term
loans is
concerned. The ratio is calculated with formula.
3. Debts to Total Funds or Solvency Ratio : Solvency is the term
which is
used to describe the financial position of any business which is
capable
to meet outside obligations in full out of its own assets. So
this ratio
establishes relationship between total liabilities and total
assets.
4. Reserves to Capital Ratio : This ratio establishes
relationship between
reserves and capital.
5. Capital Gearing Ratio: It is the ratio between the capital
plus reserves
i.e. equity and fixed cost bearing securities. Fixed cost
bearing securitiesinclude debentures, long-term mortgage loans
etc.
6. Proprietary Ratio : Proprietary ratio (also known as Equity
Ratio or Net
worth to total assets or shareholder equity to total
equity).
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Company Profile:
History of Milk Plant:-
The Ambala District Co-operatives milk producers Union Limited
was
registered on March 10, 1973 with registration no.55.The object
of this union is
to give assured market to the farmers for the surplus milk they
produce and to
give right choice to the right producer with the further
objective by eliminating
the milk man. The estimated milk production in our milk shed
comprising of
Ambala Panchkula &Yamuna nagar District is 5.91 las Liters
per day. The
Marketable Surplus being 1.82lacs litres per day. The present
procurement(average of 05-06) being 47.93 thousand litres per
day.
The essence of various programs launched in the state has been
to adopt the
Anand pattern of Milk Cooperatives. Under the system, the milk
producer
controls all the function of dairying likes milk procurement,
processing and
marketing.
The geographical location of the milk shed is such that it
touchesUttarPradesh, Uttaranchal, Punjab, and Himachal &UT
Chandigarh. Export of
milk from the milk shed due to location. The milk shed comprises
of Ambala,
Panchkula, District with 1270villages.The areas also comprises
of twin cities
likes Ambala City & Ambala Cantt, Yamunanagar Panchkula,
kalka etc closes
or within the milk shed.
The effective villages after deducting the uninhabited and
urbanized villages
(109) are 1161.
The main object of the Dairy is to promote economic interest of
the Milk
Producers of the Haryana State, particularly those belonging to
the
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economically weaker sections of society. And to increase its
services to both
rural and urban area.
The Federation fulfills its objective by way of by purchase and
processing of
milk into milk products and marketing the same by itself and/or
through Milk
Unions in the State, and by way of undertaking allied activities
as are conducive
for the promotion of Dairy Industry in the State such as
improvement of milch
cattle breed and productivity, promotion of milk production in
the villages and
towns of the State.
The duties of the Organization are mentioned in the Bye-laws of
the HaryanaDairy Development Co-operative Federation Limited, which
is a printed
document and is available to General Public at cost price
through its various
offices.
Vita Plus offered base mixes for a diverse array of animals,
including beef and
dairy cows, deer, dogs, horses, and pigs. The company even
honored special
requests to provide special mixes for certain birds.
Around this time, some 134,000 animals were fed base feed mixes
from Vita
Plus.
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Milk Shed Area Of Vita Milk
Area of Operation:-Of
Marketing of VITA brand milk products is being done through a
network of
distributors spread throughout INDIA. These products include
ghee, butter,
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milk powder, paneer, sweetened milk, pasteurized milk, etc.
Areas of the
operations of the VitaMilk Plant commonly are Jind, Rohtak,
Delhi, Chandigarh, and Ballargarh etc.And they basically deal in
near about
467000 Liters of milk everyday.
Quality Policy :-
As part of stringent quality measures, milk required for
processing VITA
products is procured from Dairy Cooperative Societies only. It
is ensured that
the milk is transported to chilling centers and plants in clean
and sterilized milkcans as quickly as possible. All quality
measures as per Standard of Bureau
of Indian Standards/Agmark are being applied before the products
are marketed.
Well-equipped laboratories are functioning in the chilling
centers and milk
plants to maintain ideal quality standards.
The organization aims to achieve this through:-
Understanding the dynamic needs of customers.
Continuously updating and upgrading technology.
Implementation of ISO-9001:2000 &HACCP system.
Milk Procurement :-
The area has a distinction of having about 77% of total, milk
producing of the
household .Of the total milch animal about 21%are cows. The
surplus milk
available is about 30% of the total production and of this
quantity only 29%
milk is purred by the societies. Since only 29% of the surplus
milk is being
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procured societies, the balance is lifted by mainly milkmen and
private
operators. At present it deals in 147000 liters daily.
Competition:-
To cope with competitions we have develop the following
infrastructure at the
grass root level in ours societies
S.no Infrastructure Nos Planned
1 Electronic milk-o-testers 225 268
2 Automatic milk collection units 9 21
3 Bulk milk cooling unit 4 9
Allied Activities:-
Allied Activities of the Vita Milk Plant are:-
Cattle Feed
Fodder Seed
Medicines
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Mineral Mixture
Vaccination
Artificial Insemination
Milk products at the Doorsteps
Through the societies.
Diagram of Allied Activities:-
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Itgives the brief picture of the allied activities offered by
the Vita Milk Plant.
Fodder SeedCattle FeedMineral Mixture
Medicines Allied Activitiesof VITA
Milk Products atthe doorsteps
ArtificialInseminationServicse
Vaccination Through thesocieties
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Review of Literature:-
Before doing any study, we have to review the literature of that
study which isas follows:
Trevor W.Chamberlain has done study on comparative performance
of
liquidity and profitability.
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The objective of the present study was to examine the role of
liquidity
variables in the firms investment behavior .for this a model in
which
the firms goal is to maximize the profitability of long run
survival was
compared with three interpretation of the value maximization
theory,
which focuses on profitability as the basis for investment.
Whenever
possible the model were estimated using both historical cost
and
replacement cost accounting data to measure the independent
variable
to obtain some evidence on how the relationships that govern
firm
behavior should be quantified. The finding summarized in the
preceding section suggest that the long run survival model is at
least as
compatible with firm behavior as any of the leading
profitability-based
approaches. Indeed, the liquidity flow variable in the survival
modelappears to be the most effective measure considered.
Dr.Richard Berwick has studied risk management in commercial
banks
of Vietnam.
Risk has traditional been related to events causing the possible
monetary
loss of assets or emergence of a liability. A more
contemporary
definition however, is far broader and incorporates not only
financialrisks, but also risks related to operational and strategic
objectives. Risk
includes the possibility that uncertain future events will cause
an entity
not to achieve its operational and strategic objectives, as well
as the
opportunity-cost of missed opportunities.
Nancy Marie Dodge has done research on cross border mergers
and
acquisitions.
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The finding in this study could potentially help policy makers
enhance the
attractiveness of their respective country in order to attract
cross-border and
other types of FDI.For example, if country a realized that
government
effectiveness vs. control of corruption was an impediment to
cross-border
M&S activity they could redirect resources as well as
re-engineer process so
as to increase government effectiveness. This type of
redirection could assist
nation in attracting foreign partners who could infuse capital
into their
country as well as positive spill-over such as know-how.
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Objectives of the Study
The Main objectives of my study are:
To understand the working of the Vita Milk Plant Ambala
finance
department.
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To financially analysis the Plants annual reports with the help
of ratio
analysis.
To analysis the reasons for the changes in financial position of
Vita Milk
Plant from last 3 years.
To analysis the efficiency and flexibility of the system of
financing of
Vita Milk Plant.
To analysis the factors responsible for financial deficit of
Vita Milk
Plant.
To examine the Liquidity position of the Vita Milk Plant.
To examine the relationship between the liquidity and
profitability
To study the pattern of financing of this company.
To suggest a few pragmatic measure and technique for
possible
Improvement in the management of working capital.
Scope of Study:-
The financial analysis of Vita has been done on the basis of
Vita manuals in
depth study of annual reports and other financial statements,
comparative
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analysis of various annual reports, recent trends in capital
structure and
profitability structure for the last 3years and the causes for
such changes.
Significance of the study:-
The analysis discloses the facts of firms.
These analyses help management in decision making.
It also helpful in operational and control activity.
These are the main tools of the planning of the busines
firms.
It helps investors in investment decisions.
It explains the solvency position to short and as well as long
term
lenders.
It helps the vita Milk Plant in improving its Long term
financial position
in order to attract the investors and funds requirement.
The suppliers of goods on credit, banks, financialinstitution,
investors,
management all make use of ratio analysis as a tool in
evaluating the
financial position and performance of a firm for granting
credit,
providing loans or making investment in the firm.
Research Methodology
Nature of study and data collection:-
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The Present study is of analytical and exploratory in
nature.Accordingly,the use
will be made of primary as well as secondary data collected from
different
sources.
As secondary research look the help of various sites like
www.vitaindia.com
and intranet at my office premises to understand the basic
organization of the
finance department. Also the research mainly was exploratory
followed by
descriptive research. The primary research includes the annual
reports of Vita.
The functioning of finance department was studied using the
observation
method at the premises of Vita Milk Plant at Ambala.
Data Collection:-
The process of data collection begins after a research problem
has
Been defined and research design has been chalked out. There are
two
Types of data-
PRIMARY DATA-
It is first hand data, which is collected by researcher
Itself. A primary source of data includes the personal interview
from
various accounts officers in the enterprise.
TYPES OF DATA COLLECTION
Primary DataCollection
Secondary DataCollection
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Primary data is collected by various approaches so as to get a
precise, accurate,
realistic and relevant data. The main tool in gathering primary
data was
investigation and observation. It was achieved by a direct
approach
and personal observation from the officials of the company.
SECONDARY DATA:-
The secondary sources of data include annual report,
Website of bpsl.net Company which contains the details which
is
helpful for making my project report. It is the data which is
already
collected by someone else. Researcher has to analyze the data
and
interpret the results. It has always been important for the
completion
of any report. It provides reliable, suitable, adequate and
specificknowledge.
Data Analysis:-
As the absolute accounting figures reported in the various
budgets do not
provides a meaningful understanding of the financial
performance, therefore,
the ratio analysis would be used as a major tool for evaluating
the financial
performance of Vita.
The annual compound growth rate, trend analysis and would be
used as per the
requirement of the data.
Limitation of the study
The main limitation of the study is:-
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The study had to be basically carried out by getting information
from the
Internet and also annual reports of vita were not available of
current
financial year.
It being my first attempt to undertake such an analysis. Thus
the lack of
experience is also obstacle to accomplish the project in proper
way.
Dealing with data on which work has already been done. So
changes in
data have not been possible.
The time duration for working with the plant was less.
To make a better interpretation a number of ratios have to be
calculated
which is likely to confusion than helping in making meaning
conclusion.
There were no well accepted rules pr standards for all the
ratios. No
interpretation for future can be made from the past ratios.
While making the study no consideration is made to the changes
in
prices levels and this makes the interpretation invalid.
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SWOT ANALYSIS OF THE VITA MILK PLANT:-
STRENGTHS:-
Strong public image
Strong Milk brand
Quality Milk
Wide range of products
WEAKNESS:-
Supply and distribution system for other milk products
Availability of Finance for promotion
Production of milk is more in winters and less in summers
but
consumption of milk is more in summers and less in winters.
OPPORTUNITIES:-
Vast scope for other milk products on the basis of strong
public
image.
Subsidiary income to farmers.
THREATS:-
Increasing competition from private organization.
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Milk Time
Vatika
Super
Mother Diary
Although Vita is not considering them as emerging
competitors.
Vita Products
Vita Mango Drink Flavoured toned Milk
Vita Namkeen Lassi Jal Jeera
Vita Dahi
Mithi Lassi
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Vita Milk Plant
Vita Paneer
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Introduction to the Ratio:-
A relationship between various accounting figures, which are
connected witheach other, expressed in mathematical terms, is
called accounting ratios.
According to Kennedy and Macmillan, "The relationship of one
item to
another expressed in simple mathematical form is known as
ratio."
Robert Anthony defines a ratio as "simply one number expressed
in terms of
another.
Accounting ratios are very useful as they briefly summaries the
result of
detailed and complicated computations. Absolute figures are
useful but they
do not convey much meaning. In terms of accounting ratios,
comparison of
these related figures makes them meaningful. For example, profit
shown by
two-business concern is Rs. 50,000 and Rs. 1, 00,000. It is
difficult to say
which business concern is more efficient unless figures of
capital
investment or sales are also available.
Analysis and interpretation of various accounting ratio gives a
better
understanding of the financial condition and performance of a
business
concern.
Ratio Analysis:-
Ratio analysis is one of the techniques of financial analysis to
evaluate the
financial condition and performance of a business concern.
Simply, ratiomeans thecomparison of one figure to other relevant
figure or figures.
According to Myers, " Ratio analysis of financial statements is
a study of
relationship among various financial factors in a business as
disclosed by a
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single set of statements and a study of trend of these factors
as shown in a
series of statements."
Ratio Analysis Plays an Important Role in Business Planning
Ratio Analysis is the basic tool of financial analysis and
financial analysis itself
is an important part of any business planning process as SWOT
(Strengths,
Weaknesses, Opportunities and Threats), being the basic tool of
the
strategic analysis plays a vital role in a business planning
process and no
SWOT analysis would be complete without an analysis of
companies
financial position. In this way Ratio Analysis is very important
part of
whole business strategic planning.
There are mainly six types of ratios:
1) Return On Capital Employed: This ratio helps to examine the
figure for profit
earned in relation to the money invested (Capital Employed) in
the
business. It is generally acceptable to use either Net Profit
before Tax or
Net Profit After Tax.
ROCE= (Net Profit / Capital Employed)*100
2) Profit Ratio: This ratio is helpful to assess the adequacy of
profit earned and
their trends in comparison with the past.
Gross Profit Margin= (Gross Profit/ Sales)*100
Net Profit Margin= (Net Profit/ Sales) *100
3) Solvency Ratio: In order to maintain the status of going
concern a business
must be able to meet its debts for which it should have enough
working
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capital. The working capital ratio helps to examine secured
financial
position of a business.
Working Capital Ratio= Current Asset/ Current Liability
Liquidity Ratio= Liquid Asset/ Liquid Liability
4) Asset Turn over Ratio: Figure arrived from this calculation
helps
management to ensure efficient utilization of resources
applied.
Rate of Stock Turnover (in number) = Cost of Goods Sold/
Average
Stock Level
Stock Turnover (in days) = (Average Stock/ Cost fo Goods
Sold)*365
Assumption for ratio analysis:-
All of the firms sales and purchases are considered to be on
credit basis for the purpose of calculations.
The sales and purchase figure are arrived at after deducting
returns from them.
Personal expenses which is salaries and wages, is assumed to
be
as a factory expenses.
For calculating the average of inventory, debtors, and
creditors
the opening and closing balances of these have to be taken
into
account.
For all the calculations a month is assumed to be of 30 days
and
year of 360 days.
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Perpetual life of the firm.
Advantages and Uses of Ratio Analysis:-
There are various groups of people who are interested in
analysis of financial
position of a company. They use the ratio analysis to workout a
particular
financial characteristic of the company in which they are
interested. Ratio
analysis helps the various groups in the following manner: -
To workout the profitability : Accounting ratio help to measure
the
profitability of the business by calculating the various
profitability
ratios. It helps the management to know about the earning
capacity of
the business concern. In this way profitability ratios show the
actualperformance of the business.
To workout the solvency : With the help of solvency ratios,
solvency of
the company can be measured. These ratios show the
relationship
between the liabilities and assets. In case external liabilities
are more
than that of the assets of the company, it shows the unsound
position of
the business. In this case the business has to make it possible
to repay its
loans.
Helpful in analysis of financial statement : Ratio analysis help
the
outsiders just like creditors, shareholders, debenture-holders,
bankers to
know about the profitability and ability of the company to pay
them
interest and dividend etc.
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Helpful in comparative analysis of the performance : With the
help of
ratio analysis a company may have comparative study of its
performance
to the previous years.
To simplify the accounting information : Accounting ratios are
very
useful as they briefly summaries the result of detailed and
complicated
computations.
To workout the operating efficiency : Ratio analysis helps to
workout the
operating efficiency of the company with the help of various
turnover
ratios. All turnover ratios are worked out to evaluate the
performance of
the business in utilizing the resources.
To workout short-term financial position : Ratio analysis helps
to
workout the short-term financial position of the company with
the help
of liquidity ratios.
Limitations of Ratio Analysis:-
In spite of many advantages, there are certain limitations of
the ratio analysis
techniques and they should be kept in mind while using them in
interpreting
financial statements.
Limited Comparability: Different firms apply different
accounting
policies. Therefore the ratio of one firm can not always be
compared
with the ratio of other firm. Some firms may value the closing
stock on
LIFO basis while some other firms may value on FIFO basis.
Similarly
there may be difference in providing depreciation of fixed
assets or
certain of provision for doubtful debts etc.
False Results: Accounting ratios are based on data drawn
from
accounting records. In case that data is correct, then only the
ratios will
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be correct. For example, valuation of stock is based on very
high price,
the profits of the concern will be inflated and it will indicate
a wrong
financial position. The data therefore must be absolutely
correct.
Qualitative factors are ignored: Ratio analysis is a technique
of
quantitative analysis and thus, ignores qualitative factors,
which may be
important in decision making. For example, average collection
period
may be equal to standard credit period, but some debtors may be
in the
list of doubtful debts, which is not disclosed by ratio
analysis.
Effect of window-dressing: In order to cover up their bad
financial
position some companies resort to window dressing. They may
record
the accounting data according to the convenience to show the
financial
position of the company in a better way.
Costly Technique: Ratio analysis is a costly technique and can
be used
by big business houses. Small business units are not able to
afford it.
Misleading Results: In the absence of absolute data, the result
may be
misleading. For example, the gross profit of two firms is 25%.
Whereasthe profit earned by one is just Rs. 5,000 and sales are Rs.
20,000 and
profit earned by the other one is Rs. 10,00,000 and sales are
Rs.
40,00,000. Even the profitability of the two firms is same the
magnitude
of their business is quite different.
Ratio analysis as an evaluation tool:-
Obviously there are many different aspects and factors involved
in evaluating a
business, including management capability, innovations in
products and
technology, shifts in market demands, and general economic
conditions,
among others. But one of the advantages of using financial
statements is
that they provide you with objective, concrete data with which
to perform
analysis. Ratio analysis by itself is just one tool you can use
in evaluating
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your own business, or a potential investment opportunity. For
example,
comparisons of balance sheets and income statements from one
period to
another can be very effective in detecting changes, trends and
shifts.
Calculating ratios based on the current period balance sheet and
income
statement can be very useful, and when combined with a
comparative
analysis from period to period, it becomes a very dynamic way of
gauging
performance.
How you use the insights you gain from your analytical work will
of course
depend on your purpose in reading the financial statements. If
you are
looking at a company in which you already have an investment, or
in which
you are thinking about investing, you may use the results of
your analysisto either buy or sell, or to increase or decrease your
holdings of that stock.
If you are looking at your own company, you can use your
analysis to see
where your business is strong, and where it could use some
adjustments or
improvements. This will help you make financial decisions about
your
business operations.
Liquidity:-
Liquidity in business refers to availability of cash in times of
uncertainty or in
times of unwanted cash outlay. It is the capacity of any
business to be
prepared for any cash disbursements without any burden on where
to get
some money. This aspect is very important in any kind of
business.
In managing your own home business, you should take into
consideration the
liquidity of your business. You should examine your business
whether you
have available cash ready for disbursements or whether almost
all of yourcash is invested in inventories or other non-cash
assets. It is very important
for you to know this for you to be prepared for any uncertain or
unwanted
cash outlays.
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Some businesspeople prefer to invest more on inventory rather
than having
much cash tied up in their investment portfolio. This can be
good for the
reason that this cash invested in inventories can generate
another income
rather than putting it only in a bank for savings that can only
produce a
minimal level of interest.
Others prefer to lend cash to other people and apply a much
higher interest
compared to the bank's rate. There are others who would invest
in a long-
term investment like real estate, long-term bonds, etc. for them
to be
prepared for the future. The problem with these kinds of
investments is that
they cannot produce instant cash in emergencies. There are some
remedies
for these instances. You can barrow money from other financial
sources,you can place your properties up for collateral to acquire
some money, or
you can sell your structured settlements. In managing a
business, it is very
important to have available cash to be used for emergencies or
for other
unforeseen payments that do not usually occur in a normal
business
operation. This is very important because sometimes the
eventualities that
we never prepared for are the very ones that can give us real
burdens in the
future. To have a good investment mix, you should know and
analyze your
business and insure that there is no over-investment occuring in
the process.
Importance of liquidity
1)-Importance of liquidity to lenders:-
Liquidity is of great concern to lenders because they can
reasonably expect to be
repaid in much the same pattern as the borrowing firm has been
paying its
creditors in the recent past. Since a firm must meet its day to
day
obligations, the liquidity of a firm is an indication of its
ability to repay a
loan. Lenders indeed look for a high liquidity as their
protection. As it has
been indicated in Chapter 4 Section A and Chapter 4 Section B,
suppliers
and banks put much weight on this aspect right from the
start.
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2)- Importance of liquidity to investors, management and other
view points
All those evaluating a firm must also be first concerned with
liquidity: they need
to be assured that the firm is a going concern, and default is
not likely in the
near future. But, as opposed to short term lenders who count on
a firm'sready cash for payment of claims, from the point of view of
investors and
management, holding large cash balances is not necessarily
desirable. Idle
cash is costly to the firm: the firm forgoes the return it can
earn on
productive assets.
Holding cash or keeping on hand other liquid assets must have an
intrinsic
reason. For investors and management, these reasons are far
more
important than the ability to meet payments out of the cash
generated from
holding inventory or receivables. As already pointed out,
receivables are
part of the sales strategy of the firm. Most firms would prefer
prepayments
for all their sales, thus avoiding risk of customer default.
They allow
customers to take 30, 60, 90 days or more to pay for their
purchases, only in
order to encourage them to buy immediately rather than later.
Likewise,
inventory is held to offer greater product variety to customers
(i.e. it is
justified by sales strategy), and to allow the production
process to takeplace without excessive discontinuity.Holding cash
can be justified not by
needs to make immediate payments, but by needs for long run
growth since
flexibility must exist in the firm a) to undertake rapidly the
most desirable
projects, and b) to deal without major disruptions with
unforeseen
problems. The more a company seeks growth and faces risk, the
more it
must have a cushion of ready cash. Cash on hand is essential to
take
advantage quickly of new opportunities stemming from new
products,
changing customer tastes or changing market conditions. When a
product
failure or other catastrophe occurs, a healthy cash position
helps handle the
situation by closing a department and moving on to better
opportunities.
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While all firms should have a cushion of safety in holding a
cash balance, that
cash balance can be rather small for a company that has a long
history of
having solved its operational problems, and that faces a market
with growth
potential. The cash balance can be all the more limited if the
company has
also access to ready credit through good relations with its
bankers.
Moreover, access to capital markets reduces further the need to
hold
liquidity for larger firms.
3)- Relation of liquidity analysis to other aspects of the firm
performance
There is (or used to be) a tendency on the part of analysts to
study liquidity of a
firm as if it were separate from other aspects of analysis. In
fact, it is not.
Liquidity can be increased by several methods:
- liquidating some fixed assets,
- raising new permanent funds,
- Increasing sales, or
- reducing costs.
If a firm has insufficient liquidity, any of these corrective
approaches can be
used in the long run (but not in the short run). For instance,
bankerssometimes advise their borrowers with insufficient liquidity
to increase
permanent funds by injecting more equity into the business. This
is the C
standing for "capital" in the 5 C's of banking mentioned in
Chapter 4
Section B-1. Indeed the new money will increase the cash
balance
(alternatively, it can be used to pay off some short term debt).
This means
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that issues pertaining to liquidity will be seen again in
chapters 10 and 11
where fixed assets and capital structure are studied.
4)-Importance of liquidity to Management:-
Management is certainly concerned with liquidity, but it does
not consider it as
a goal in itself (i.e. not on the same level as goals such as
profit and sales
growth). As noted above, receivables and inventory are tied to
sales and
productionstrategies. Thus, when receivables or inventory are
out of line
(too much or too little), the cause is usually traceable to
production, sales
efforts, fixed assets or other management decision parameters,
not liquidity.
How to Improve Liquidity:-
A company's ability to pay debts when they are due is called
liquidity. A
company needs to show that it has money, rather than losses, if
it wants to
stay in the game and improve within its industry. Read on to
learn how to
shape up your liquidity:-
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1. Earn interest on any extra cash balances . Do this by
shifting the money
into an interest-accruing account when the funds aren't
necessary
elsewhere, and then put them into a different account when you
need he
funds. This is called "sweeping accounts."
2. Assess the costs of overhead and see if there ways that you
can lower
them. Decreasing overhead costs has a great impact on how much
the
business could profit. Overhead costs are things like
advertising,
professional costs and rent.
3. Get rid of assets that are unproductive . For example, if you
have assets
that are just sitting there doing nothing, use them for
something else like
buying equipment, buildings or vehicles to gain some
revenue.
4. Look at accounts receivables often . This will ensure that
clients are
being billed correctly and that you are receiving payments from
clients
on time.
5. Negotiate longer payment terms with your merchants . This
will help you
keep your money longer, therefore generating more interest on
that
money.
6. Monitor how much money is taken away from accounts for
non-business
and business intentions. An example of this is called "owner's
draws."
Unnecessary cash drain is caused by withdrawing an excess amount
of
money.
7. Appraise profitability on the company's services and products
. Find out
where you can increase prices. This will help raise or at least
maintain
profitability. Prices should be adjusted as markets and costs
chance.
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In order to determine the liquidity of the firm basically three
types of the ratios
are calculated which includes:-
Current Ratio
Quick Ratio
Absolute Current Ratio
Financial Statement Analysis
Current ratio:-
A liquidity ratio that measures a company's ability to pay
short-term obligations.
Also known as "liquidity ratio", "cash asset ratio" and "cash
ratio".
The ratio is mainly used to give an idea of the company's
ability to pay
back its short-term liabilities (debt and payables) with its
short-term
assets (cash, inventory, receivables). The higher the current
ratio, the
more capable the company is of paying its obligations. A ratio
under 1
suggests that the company would be unable to pay off its
obligations if
they came due at that point. While this shows the company is not
in
good financial health, it does not necessarily mean that it will
go
bankrupt - as there are many ways to access financing - but it
is
definitely not a good sign.
The current ratio can give a sense of the efficiency of a
company's
operating cycle or its ability to turn its product into cash.
Companies that
have trouble getting paid on their receivables or have long
inventoryturnover can run into liquidity problems because they are
unable to
alleviate their obligations. Because business operations differ
in each
industry, it is always more useful to compare companies within
the same
industry.
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Formula of calculating the Current ratio:-
1)-The Current Ratio formula is:
Current Ratio= Current Assets/Current Liabilities
Interpretation:-A current ratio 2:1 is considered to be an ideal
ratio. but Vita
Milk Plant current ratio first increases then start decreases
i.e. 4.918:1,
6.97:1,4.86:1. Higher the ratio is considered to be good because
it showsthat firm is efficiently able to pay its currents
liabilities.
2)-Quick ratio:-
In finance, the Acid-test or quick ratio or liquid ratio
measures the ability of a
company to use its near cash or quick assets to extinguish or
retire its
current liabilities immediately.
Quick assets include those current assets that presumably can be
quickly
converted to cash at close to their book values. A company with
a Quick
Ratio of less than 1 can not currently pay back its current
liabilities.
Years
2008
2009
201
2008 2009 2010
Current
Assets
202424419.7
7
230313033.2
3
260467918.29
CurrentLiabilities
41156396.37 33033250.67 53564922.08
Current Ratio 4.918:1
6.97:1
4.86:1
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Note that Inventory is excluded from the sum of assets
financially. Ratio
is financially viable option for business entities but the
liquidity of the
liabilities show financial stability. Generally, the acid test
ratio should be
1:1 or higher; however this varies widely by industry. [1] In
general, the
higher the ratio, the greater the company's liquidity (i.e., the
better able
to meet current obligations using liquid assets).[2]
Notice that very often Acid test refers instead of Quick ratio
to Cash
ratio:
Formula of calculating the quick ratio:-
Quick Ratio=Liquid Assets/Current Liabilities
Years 2008 2009 2010
Liquid Assets 42376202.31 40130218.09 45770007.08
Current
Liabilities
41156396.37 33033250.67 53564922.08
Quick Ratio 1.029:1 1.21:1 .85:1
Interpretation: A quick ratio 1:1 is considered to be an ideal
ratio but Vita Milk
Plant current ratio first increases then start decreases i.e
1.029:1,1.21:1,.85:1. Higher the ratio is considered to be good
because it
shows that firm is efficiently able to pay its currents
liabilities out of its
immediate current assets.
3)-Absolute Liquidity Ratio:-
Absolute liquid ratio extends the logic further and eliminates
accounts
receivable (sundry debtors and bills receivables) also. Though
receivables
are more liquid as comparable to inventory but still there may
be doubts
considering their time and amount of realization. Therefore,
absolute
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liquidity ratio relates cash, bank and marketable securities to
the current
liabilities. Since absolute liquidity ratio lays down very
strict and exacting
standard of liquidity, therefore, acceptable norm of this ratio
is 50 percent.
It means absolute liquid assets worth one half of the value of
current
liabilities are sufficient for satisfactory liquid position of a
business.
However, this ratio is not as popular as the previous two ratios
discussed.
Formula for calculating the absolute ratio:-
Absolute Liquid Ratio=Absolute Assets/Current Liabilities
Years 2008 2009 2010
Absolute Assets 19893294.31 25421125.05 28557978.15
Current
Liabilities
41156396.37 33033250.67 53564922.08
Absolute
liquidity
Ratio
.483:1 .769:1 .483:1
Interpretation :-A absolute ratio less than is considered to be
an ideal ratio but
Vita Milk Plant current ratio first increases then start
decreases i.e .
483:1,.769:1,.483:1. Higher the ratio is considered to be good
because it
shows that firm is efficiently able to pay its currents
liabilities out of its
cash and bank balance only.
Capital structure ratio:-
A capital structure ratio over 50% indicates that a company may
be near their
borrowing limit (often 65%).
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The capital structure ratio is included in the financial
statement ratio analysis
spreadsheets highlighted in the left column, which provide
formulas,
definitions, calculation, charts and explanations of each
ratio.
The capital structure ratio and other ratios are key to
understanding financialstatements. Our ratio calculation
spreadsheets reduce time and effort in
calculating decision making ratios. They reduce risk for lenders
and
investors and enable owners, managers and consultants to
increase
productivity and business profits. These spreadsheets are
bargain priced to
provide a huge return on investment.
To determine the optimum capital structure of the firm following
ratio arecalculated which includes :-
Debt-Equity Ratio
Debt to Total Fund Ratio
Fixed Assets Ratio
Propriety Ratio
Interest Coverage Ratio
1)-Debt-Equity Ratio:-
Indicates what proportion of equity and debt that the company is
using to
finance its assets. Sometimes investors only use long term debt
instead of
total liabilities for a more stringent test.
A ratio greater than one means assets are mainly financed with
debt, less than
one means equity provides a majority of the financing. If the
ratio is high
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(financed more with debt) then the company is in a risky
position -
especially if interest rates are on the rise.
Formula for calculating the Debt equity ratio:-
Debt equity ratio=Total Liabilities/ Shareholders Equity
Years 2008 2009 2010
Total Liabilities 183192078.56 219467570.59 248731338.40
Shareholder
equity
5736510.18 7429339.10 12433460.65
Debt equity
ratio
31% 29.16% 20%
Interpretation:-Generally, Debt-Equity Ratio of 2:1 is
considered to safe but
Vita Milk plant Debt-Equity Ratio decrease i.e 31%,29.16%,20%
which is
good indication that it is improving its long term financial
position.
2)-Debt to Total Funds Ratio:-
This ratio gives same indication as the debt-equity ratio as
this is a variation of
debt-equity ratio. This ratio is also known as solvency ratio.
This is a ratio
between long-term debt and total long-term funds. Debt to Total
Funds
Ratios shows the proportion of long-term funds, which have been
raised by
way of loans. This ratio measures the long-term financial
position and
soundness of long-term financial policies. In India debt to
total funds ratio
of 2:3 or 0.67 is considered satisfactory. A higher proportion
is not
considered good and treated an indicator of risky long-term
financial
position of the business. It indicates that the business depends
too much
upon outsiders loans.
Formula for calculating the debt to total fund ratio:-
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Debt to Total Funds Ratio = Debt/Total Funds
Years 2008 2009 2010
Debt 183192078.56 219467570.59 248731338.40
Total Funds 188928528.74 226896909.69 261164799.05
Ratio 9.69% 96% 95%
Interpretation:-Generally, Debt to Total Funds Ratio of 67% is
considered to
safe but Vita Milk plant Debt-Equity Ratio first increase then
starts
decreasing i.e 9.69%,96%,95% which is bad indication because
higher the
ratio higher it risky for the organization.
3)-Fixed Assets Ratio:-
Fixed Assets Ratio establishes the relationship of Fixed Assets
to Long term
funds. This ratio indicates as to what extent fixed assets are
financed out of
long-term funds. It is well established that fixed assets should
be financed
only out of long-term funds. This ratio workout the proportion
of
investment of funds from the point of view of long-term
financialsoundness. This ratio should be equal to 1. If the ratio
is less than 1, it
means the firm has adopted the impudent policy of using
short-term funds
for acquiring fixed assets. On the other hand, a very high ratio
would
indicate that long-term funds are being used for short-term
purposes, i.e. for
financing working capital.
Formula for calculating the Fixed assets ratio:-
Fixed Assets Ratio = Long-term Funds/Net Fixed Assets
Years 2008 2009 2010
Long term
Funds
13932149.57 14570404.57 16185844.30
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Fixed assets 34468307.55 36141294.35 35260278.15
Fixed Assets
Ratio
40% 40% 45%
Interpretation:-Generally, Higher Fixed Assets Ratio of is
considered to begood and Vita Milk plant Fixed Assets Ratio first
remain stable then startsincreasing i.e 40%,40%,45% which is good
indication because higher theratio higher it safe for the
organization.
4)-Proprietary Ratio:-
Proprietary Ratio establishes the relationship between
proprietors funds and
total tangible assets. This ratio is also termed as Net Worth to
Total Assets
or Equity-Assets Ratio.Objective and Significance: This ratio
indicatesthe general financial position of the business concern.
This ratio has aparticular importance for the creditors who can
ascertain the proportion of
shareholders funds in the total assets of the business. Higher
the ratio,
greater the satisfaction for creditors of all types.
Formula for calculating the Proprietary ratio:-
Proprietary Ratio = Proprietors Funds/Total Assets
Years 2008 2009 2010
Proprietary
Fund
13932419.57 14570404.57 16185844.30
Total assets 54143601.76 26645432.58 29572196.44
Ratio 25% 42% 50%
Interpretation:-Generally, i.e 25%,42%,50% which is good
indication because
higher the ratio higher it safe for the organization. Higher
Proprietary Ratio
of is considered to be good and Vita Milk plant Proprietary
Ratio rapidly
increases
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5)-Total Debt To Total Assets:-
A metric used to measure a company's financial risk by
determining how much
of the company's assets have been financed by debt. Calculated
by adding
short-term and long-term debt and then dividing by the company's
totalassets.
This is a very broad ratio as it includes short- and long-term
debt as well as all
types of both tangible and intangible assets.
Formula for calculating the Fixed Assets Turnover ratio:
Total Debt To Total Assets=Short term loans + Long term loans
/Total
Assets
Years 2008 2009 2010
Total Debt 183192078.56 219467570.59 248731338.40
Total Assets 54143601.76 26645432.58 29572196.44
Total Debt To
Total
AssetsRatio
3.38:1 8.23:1 8.41:1
6)- Fixed Assets to Proprietor's Fund Ratio:
Fixed assets to proprietors fund ratio establish the
relationship between fixed
assets and shareholders funds.The purpose of this ratio is to
indicate thepercentage of the owner's funds invested in fixed
assets.The fixed assetsare considered at their book value and the
proprietor's funds consist of the
same items as internal equities in the case of debt equity
ratio.
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Formula for calculating the Fixed Assets Turnover ratio:
Fixed Assets to Proprietors Fund = Fixed Assets / Proprietors
Fund
Years 2008 2009 2010
Fixed Assets 34468307.55 36141294.35 35260278.15
Proprietors
Fund
13932419.57 14570404.57 16185844.30
Fixed Assets to
Proprietors
Fund Ratio
2.47:1 2.48:1 2.17:1
7)-Interest Coverage Ratio:-
Interest Coverage Ratio is a ratio between net profit before
interest and tax and
interest on long-term loans. This ratio is also termed as Debt
Service
Ratio. This ratio expresses the satisfaction to the lenders of
the concern
whether the business will be able to earn sufficient profits to
pay interest on
long-term loans. This ratio indicates that how many times the
profit covers
the interest. It measures the margin of safety for the lenders.
The higher the
number, more secure the lender is in respect of periodical
interest.
Formula for calculating the Interest coverage ratio:-
Interest Coverage Ratio = Net Profit before Interest and
Tax/Interest on
Long-term Loans
Years 2008 2009 2010
Net Profit 15564067.43 17905510.86 34806822.4
Interest on
Loans
14350988.50 16477244 19752081
Ratio 1.08times 1.08 times 1.76 times
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Interpretation:-Generally, Higher Interest Coverage Ratio of is
considered to
be good and Vita Milk plant Interest Coverage Ratio rapidly
increases i.e.
1.08times,1.08times,1.76times which is good indication because
higher the
ratio higher it safe for the organization as the lenders are
more secure about
payment of the interest regularly.
Activity ratio:-
Accounting ratios that measure a firm's ability to convert
different accounts
within their balance sheets into cash or sales.
Companies will typically try to turn their production into cash
or sales as
fast as possible because this will generally lead to higher
revenues. Such ratios are frequently used when performing
fundamental analysis
on different companies. The asset turnover ratio and inventory
turnover
ratio are good examples of activity ratios.
An indicator of how rapidly a firm converts various accounts
into cash
or sales. In general, the sooner management can convert assets
into sales
or cash, the more effectively the firm is being run.
In order to calculated that how rapidly stock are converted into
sales and
relationship between Fixed assets and sales, working capital
turnover
etc.following ratios are calculated which includes:-
Fixed Assets Turnover Ratio
Working Capital Turnover Ratio
Stock Turnover Ratio
Debtors Turnover Ratio
Debt Collection Period
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1)-Fixed Assets Turnover Ratio:-
Fixed assets turnover ratio establishes a relationship between
net sales and net
fixed assets. This ratio indicates how well the fixed assets are
beingutilized.
This ratio expresses the number to times the fixed assets are
being turned over
in a stated period. It measures the efficiency with which fixed
assets are
employed. A high ratio means a high rate of efficiency of
utilization of
fixed asset and low ratio means improper use of the assets.
Formula for calculating the Fixed Assets Turnover ratio:-
Fixed Assets Turnover Ratio = Net Sales/Net Fixed Assets
Years 2008 2009 2010
Net sales 835734939.19 910138053.43 1021929210.41
Net Fixed
assets
34468307.55 36141294.35 35260278.15
Ratio 24.2 times 25.18 times 28.9 times
Interpretation:-Higher the ratio is considered to be the good
for the firm
because higher the ratio it indicates how efficiently fixed
assets are being
utilized in increasing the sales. Vita Milk Plants Fixed Assets
Turnover
Ratio is 24.2times,25.18times,28.9times means it is increasing
which is
good indication for the Plant.
2)-Working Capital Turnover Ratio
Working capital turnover ratio establishes a relationship
between net sales and
working capital. This ratio measures the efficiency of
utilization of working
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capital. This ratio indicates the number of times the
utilization of workingcapital in the process of doing business. The
higher is the ratio, the lower is
the investment in working capital and the greater are the
profits. However, a
very high turnover indicates a sign of over-trading and puts the
firm in
financial difficulties. A low working capital turnover ratio
indicates that the
working capital has not been used efficiently.
Formula for calculating the Working capital Turnover ratio:-
Working Capital Turnover Ratio = Net Sales or Cost of Goods
Sold/Net
Working Capital
Years 2008 2009 2010
Net Sales 835734939.19 910138053.43 1021929210.41
Net Working
Capital
161268023.40 197279782.56 206902996.21
Ratio 5.1 times 4.6 times 4.9 times
Interpretation:-Higher the ratio is considered to be the good
for the firm
because higher the ratio it indicates how efficiently Working
Capital is
being utilized in increasing the sales. Vita Milk Plants Working
Capital
Turnover Ratio is 5.1times, 4.6times, 4.9times which is
fluctuating but is at
satisfactory mode for the Plant.
3)-Stock Turnover Ratio:-
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Stock turnover ratio is a ratio between cost of goods sold and
average stock.
This ratio is also known as stock velocity or inventory turnover
ratio. Stock
is a most important component of working capital. This ratio
provides
guidelines to the management while framing stock policy. It
measures how
fast the stock is moving through the firm and generating sales.
It helps to
maintain a proper amount of stock to fulfill the requirements of
the
concern. A proper inventory turnover makes the business to earn
a
reasonable margin of profit.
Formula for calculating the Stock Turnover ratio:-
Stock Turnover Ratio = Cost of Goods Sold/Average Stock
Years 2008 2009 2010
Cost of good
sold
714676487.74 814866608.35 880796415.13
Average Stock 174311338.47 175115516.18 202440363.06
Ratio 4.1 times 4.65 times 4.35 times
Interpretation:-Higher the ratio is considered to be the good
for the firmbecause higher the ratio it indicates how efficiently
stock is being converted
into sales. Vita Milk Plants Stock Turnover Ratio is 4.1times,
4.65times,
4.35times which is fluctuating but is at satisfactory mode for
the Plant. And
gives the indication that stock is converted into sales
rapidly.
4)-Debtors Turnover Ratio:-
Debtors turnover ratio indicates the relation between net credit
sales and
average accounts receivables of the year. This ratio indicates
the efficiency
of the concern to collect the amount due from debtors. It
determines the
efficiency with which the trade debtors are managed. Higher the
ratio,
better it is as it proves that the debts are being collected
very quickly.
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Formula for calculating the Debtors Turnover ratio:
Debtors Turnover Ratio = Net Credit Sales/Average Accounts
Receivables
Years 2008 2009 2010
Net credit Sales 835734939.19 910138053.43 1021929210.41
Accounts
Receivable
12290219.69 11968369.63 6623279.45
Ratio 68 times 76 times 88 times
Interpretation:-Higher the ratio is considered to be the good
for the firm
because higher the ratio it indicates how efficiently debtors
are being
converted into cash. Vita Milk Plants Debtors Turnover Ratio is
68times,
76times, 88times which is increasing at a rapid pace. And gives
the
indication that money or cash blocked in the debtors are
randomly
converted into cash.
5)-Debt Collection Period:-
Debt collection period is the period over which the debtors are
collected on an
average basis. It indicates the rapidity or slowness with which
the money is
collected from debtors. This ratio indicates how quickly and
efficiently the
debts are collected. The shorter the period the better it is and
longer the
period more the chances of bad debts. Although no standard
period is
prescribed anywhere, it depends on the nature of the
industry.
Formula for calculating the Fixed Assets Turnover ratio:
Debt Collection Period = 12 Months or 365 Days/Debtors Turnover
Ratio
Years 2008 2009 2010
365 Days 365 365 365
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Debtors
Turnover
Ratio
68 times 76 times 88 times
Ratio 5.36Days 4.8 Days 4.1 Days
Interpretation:- Again Higher the ratio is considered to be the
good for the
firm because higher the ratio it indicates in how much time
debtors are
being converted into cash. Vita Milk Plants Debtors Turnover
Ratio is
5.36days, 4.8days, 4.1days which have started decreasing. And
gives the
indication that it takes considerable time to convert money or
cash blocked
in the debtors are converted into cash.
Profitability Ratio:-
A class of financial metrics that are used to assess a
business's ability to
generate earnings as compared to its expenses and other relevant
costs
incurred during a specific period of time. For most of these
ratios, having a
higher value relative to a competitor's ratio or the same ratio
from a
previous period is indicative that the company is doing
well.
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The profitability ratios and other ratios are key to
understanding
financial statements. Our ratio calculation spreadsheets reduce
time and
effort in calculating decision making ratios. They reduce risk
for lenders
and investors and enable owners, managers and consultants to
increase
productivity and business profits. These spreadsheets are
bargain priced
to provide a huge return on investment.
The profitability ratios are the basic bank financial ratios.
Profitability
ratios are the financial statement ratios which focus on how
well a
business is performing in terms of profit.
It includes various types of the ratios calculated under it
1)-Gross Profit Ratio:-
The gross profit margin ratio (or gross margin ratio) provides
clues to the
company's pricing, cost structure and production efficiency. The
grossprofit margin ratio (or gross margin ratio) is a good ratio to
benchmark
against competitors.
Gross profit margin ratio is also called gross margin ratio.A
low gross profitmargin ratio (or gross margin ratio) indicates that
the business is unable to
control its production costs.
Formula for calculating Gross Profit Margin Ratio:-
Gross Profit Margin Ratio = Gross profit / Sales.
Years 2008 2009 2010
Gross profit 121058451.45 95271445.08 141132795.28
Sales 835734939.19 910138053.43 1021929210.41
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Ratio 1.4% 10.46% 13.81%
Interpretation:-Higher the ratio is considered to be the best as
it measure the
margin of profit available on sales. Vita Milk Plants Gross
Profit Margin
Ratio is 1.4%,10.46%,13.81% which shows that it is very low in
the
beginning but afterwards it rapidly increases which gives good
indication
that Vita is improving its profitability.
2)-Net Profit Ratio:-
The net profit percentage is the ratio of after-tax profits to
net sales. It reveals
the remaining profit after all costs of production and
administration has
been deducted from sales, and income taxes recognized. As such,
it is oneof the best measures of the overall results of a firm,
especially when
combined with an evaluation of how well it is using its working
capital. Net
profit is not an indicator of cash flows, since net profit
incorporates a
number of non-cash expenses, such as accrued expenses and
depreciation.
Formula for calculating the Net Profit Ratio:-
Net Profit Ratio =Net profit / Net sales x 100
Years 2008 2009 2010
Net profit 1213079.43 1428266.86 (15054741.40)
Net sales 835734939.19 910138053.43 1021929210.41
Ratio 1.45% 1.56% (1.43)%
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Interpretation:-Higher the ratio is considered to be the best as
it measure the
margin of Net profit available on sales. Vita Milk Plants Net
Profit Margin
Ratio is 1.45%,1.56%,(1.43)% which shows that it is very low in
the
beginning but afterwards it increases then again decreases and
become
negative which gives bad indication about its profitability
position.
3)-Operating Net Profit Ratio:-
The Net Profit Ratio is the ratio shows the relationship between
the net
operating profit and sales. It is calculated by deducting all
operating
expenses out of the gross profit earned by the firm. thus it
gives the
indication about the exact profit of the firm after deducting
the expenses out
of it and help to know that whether the firm is on right profit
track or not.
Formula for calculating the Net Profit Ratio:-
Operating Net Profit Ratio=Operating Net Profit/Net
sales*100
Years 2008 2009 2010
Operating Net
Profit
58464988.84 27914241.85 65109250.94
Net sales 835734939.19 910138053.43 1021929210.41
Ratio 6.99% 3.06% 6.37%
Interpretation:-Higher the ratio is considered to be the best as
it measure the
margin of Net profit available on sales. Vita Milk Plants Net
Profit Margin
Ratio is 6.99%,3.06%,6.37% which shows that it is satisfactory
in the
beginning but afterwards it decreases which gives bad indication
about its
profitability position and shows that it has maximum operating
expenses
which had lower down its profitability.
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Table giving the brief detail about the financial position of
the
Vita Milk Plant
Ratios Formulas 2008 2009 2010 Increase or
Decrease
1) Liquidity
Ratio:-
Current Ratio
Current Ratio= Current
Assets/Current
Liabilities
4.918:1 6.97:1 4.86:1 First
increases
then
decrease
Quick Ratio
Quick Ratio=Liquid
Assets/Current
Liabilities
1.029:1 1.21:1 .85:1 First
increases
then
decrease
Absolute
Liquid
Ratio
Absolute Liquid
Ratio=Absolute
Assets/Current
Liabilities
.483:1 .769:1 .483:1 First
increases
then
decrease
2) Capital
structure
Ratio:-
Debt equity
ratio
Debt equity ratio=TotalLiabilities/
Shareholders Equity
31% 29.16% 20% Decrease
Debt to Total
Funds
Debt to Total Funds
Ratio = Debt/Total
Funds
9.69% 96% 95% Rapidly
increase
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Ratio
Fixed Assets
Ratio
Fixed Assets Ratio =
Long-term
Funds/Net Fixed
Assets
40% 40% 45% Rapidly
increase
Proprietary
Ratio
Proprietary Ratio =
Proprietors
Funds/Total Assets
25% 42% 50% Rapidly
increase
Interest
CoverageRatio
Interest Coverage Ratio
= Net Profit beforeInterest and
Tax/Interest on
Long-term Loans
1.08times 1.08 times 1.76tim
es
Firstincreases
then
decrease
3) Activity
Ratios:-
Fixed Assets
Turnover
Ratio
Fixed Assets Turnover
Ratio = Net
Sales/Net FixedAssets
24.2times 25.18times 28.9
times
Increases
Working
Capital
Turnover
ratio
Working Capital
Turnover Ratio =
Net Sales or Cost of
Goods Sold/Net
Working Capital
5.1 times 4.6 times 4.9
tim
es
First
increases
then
decrease
Stock TurnoverRatio
Stock Turnover Ratio =Cost of Goods
Sold/Average Stock
4.1 times 4.65 times 4.35
tim
es
First
increases
then
decrease
Debtors
Turnover
Ratio
Debtors Turnover Ratio
= Net Credit
Sales/Average
68times 76times 88times Rapidly
increases
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Accounts
Receivables
Debt Collection
Period
Debt Collection Period =
12 Months or 365Days/Debtors
Turnover Ratio
5.36Days 4.8Days 4.1Days Decreases
4) Solvency
Ratio:-
Total
Debt to
Total
Assets
Total Debt To Total
Assets=Short term
loans Long termloans /Total Assets
3.38:1 8.23:1 8.41:1 Rapidly
increases
Fixed Assets to
Proprietors
Fund
Fixed Assets to
Proprietors Fund =
Fixed Assets /
Proprietors Fund
2.47:1 2.48:1 2.17:1 Decreases
5) Profitability
Ratio:-
Gross Profit
Margin Ratio
Gross Profit Margin
Ratio = Gross
profit / Sales.
1.4% 10.46% 13.81% Rapidlyincreases
good forPlant
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Net Profit Ratio Net Profit Ratio =Net
profit / Net sales x
100
1.45% 1.56% (1.43%) Belowsatisfacto
ry mode
and
become
negative.
Operating Net
Profit Ratio
Operating Net Profit
Ratio=Operating
Net Profit/Net
sales*100
6.99% 3.06% 6.37% Satisfactory
mode but
starts
decreasin
g
Graphs Section of all ratios:-
Liquidity Ratios-
Current Ratio-
Quick Ratio-
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Absolute Quick Ratio-
Capital Structure
Ratio:-
Debt-Equity Ratio-
Debt to Total Fund Ratio:-
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Fixed Assets Ratio:-
Proprietary Ratio:-
Interest Coverage Ratio:-
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Activity Ratio:-
Fixed Assets Ratio-
Working Capital Turnover Ratio-
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Stock Turnover Ratio-
Debtors Turnover Ratio-
Debt Collection Period-
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Profitability Ratio:-
Gross Profit Ratio-
Net Profit Ratio-
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Operating Profit Ratio
-
Sales:-
Profit:-
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Debts:-
Equity:-
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FINDINGS:-
Analysis and Interpretation of the data is obtained from
companys previous
years Balance sheet and following are the various findings that
are in
accordance with the objectives set forth the study:
The above study shows that the sales graph of the Vita Milk
Plant has
increased which shows that company has the good demand of
the
product in the market.
An insight of the financial performance can be studied over the
past
3years and using various ratios to measure the performance
and
consistency.
Through the ratio analysis the financial position regarding the
liquidity
and long term solvency is evaluated which its good liquidity but
long
term financial position is only on satisfactory mode this is due
to the
large amount of long term debts which acts as a burden on their
financial
position.
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Debt of the Milk Plant is more when they are compared with
the
Equities of the Milk Plant.
The Long term debts of the company should be only to the point
of 67%
in comparison to the total debts of the company but Vita Milk
Plant is
having 87% debts.
Vita Milk Plant concentrates much more on the productivity
rather than
on the finance department.
Vita Milk Plant Liquidity position is quit very good but long
term
financial position is very bad as per the ratio analysis this is
randomly
because of their dependence largely on the long term debts.
Rather than
funding through internal sources.
SUGGESTION:-
Vita Milk Plant should concentrate on its financial position
with care.
Debts should be reduced.
Shareholders Funds of Vita Milk Plant should be increased to a
certain
level so that maximum funds can be raised within the
organization.
Total assets of the company should be managed with care so that
overall
repair expenses should be reduced.
Turnover ratios should be looked into and necessary steps should
be
taken.
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More expenses should be done on promotion activities in order
to
increase the sales to earn more profit.
It should provide the facility of home delivery also.
Long term debts should be reduced and steps should be taken to
fund
through the internal sources.
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Conclusion:-
Financial ratio analysis is the calculation and comparison of
ratios which are
derived from the information in a company's financial
statements. The level and
historical trends of these ratios can be used to make inferences
about a
company's financial condition, its operations and attractiveness
as an
investment. Financial ratio Analysis is the basic tool of
financial analysis and
financial analysis itself is an important part of any business
planning process as
SWOT (Strengths, Weaknesses, Opportunities and Threats), being
the basic tool
of the strategic analysis plays a vital role in a business
planning process and no
SWOT analysis would be complete without an analysis of companies
financial
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position. In this way Ratio Analysis is very important part of
whole business
strategic planning.
Financial ratio analysis groups the ratios into categories which
tell us about
different facets of a company's finances and operations. An
overview of some ofthe categories of ratios is given below.
Leverage Ratios which show the extent that debt is used in a
company's
capital structure.
Liquidity Ratios which give a picture of a company's short
term
financial si
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