Shivaji University, Kolhapur

1.1 Introduction of Study:

Ratio-analysis is a concept or technique which is as old as accounting concept. Financial
analysis is a scientific tool. It has assumed important role as a tool for appraising the real
worth of an enterprise, its performance during a period of time and its pit falls. Financial
analysis is a vital apparatus for the interpretation of financial statements. It also helps to
find out any cross-sectional and time series linkages between various ratios.
Unlike in the past when security was considered to be sufficient consideration for banks
and financial institutions to grant loans and advances, nowadays the entire lending is
need-based and the emphasis is on the financial viability of a proposal and not only on
security alone. Further all business decision contains an element of risk. The risk is more
in the case of decisions relating to credits. Ratio analysis and other quantitative
techniques facilitate assessment of this risk.

1.2 Meaning of the Study:

Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick
indication of a firm's financial performance in several key areas. The ratios are
categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management
Ratios, Profitability Ratios, and Market Value Ratios.
Ratio Analysis as a tool possesses several important features. The data, which are
provided by financial statements, are readily available. The computation of ratios
facilitates the comparison of firms which differ in size. Ratios can be used to compare a
firm's financial performance with industry averages.

1.3 Objectives of the Study:

To understand concept of ratio analysis.

To study & analyze the financial position of the company through ratio analysis.
To study the liquidity position through various types of ratio.
To offer suggestions based on research finding.

1.4 Importance of the Study:

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1) It helps in evaluating the firms performance:

With the help of ratio analysis conclusion can be drawn regarding several aspect such as
financial health, profitability & operational efficiency of the undertaking. Ratio points
out the operating efficiency of the firm i.e. whether the management has utilized the
firms assets correctly, to increase the investors wealth. It ensures a fair return to its
owners & secures optimum utilization of firms assets.
2) It helps in inter-firms comparison:
Ratio analysis helps in inter firm comparison by providing necessary data. An inter - firm
comparison indicates relative position. It provides the relevant data for the comparison of
the performance of different departments. It comparison shows a variance, the possible
reasons of variation may be identified and if results are negative, the action may be
initiated immediately to bring them in line.
3) It simplifies financial statement:
The information given in the basic financial statement serves no useful purpose unless it
is interpreted and analyzed in some comparable terms. The ratio analysis is one of the
tools in the hands of those how want to know something more from the financial
statement in a simplified manner.
4) It helps in determining the financial position of the concern:
Ratio analysis facilitates the management to know whether the firms financial position is
improving, deteriorating, or is constant over the years by setting a trend with the help of
the ratios. With the help of ratio analysis, the direction of the trend of strategic ratio may
be ascertained which will help the management in the task of planning, forecasting &
controlling.

5) It is helpful in budgeting & forecasting:

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Accounting ratio provides a reliable data, which can be compared, studies & analyzed.
These ratios provide sound footing for future prospectus. The ratio can also serves as
basis for preparing budgeting future line of action.
6) It is helpful in determining liquidity position:
With the help of ratio analysis conclusion can be drawn regarding the liquidity position of
a firm. The liquidity position of a firm would be satisfactory if it is able to meet its
currents obligation when they become due. The ability to meet short term liabilities is
reflected in the liquidity ratio of a firm.
7) It is helpful in determining long term solvency:
Ratio analysis is equally important for assessing the long term financial ability of the
firm. The long term solvency is measured by the leverage or capital structure &
profitability ratio which shows the earning power & operating efficiency, solvency ratio
shows relationship between total liability & total assets.
8) It is helpful in determining operating efficiency:
Yet another dimension of usefulness of ratio analysis, relevant from the view point of
management is that it throws light on the degree of efficiency. The various activity ratios
measure this kind of operational efficiency.

1.5 Scope of Study:

The scope of the study is involves collecting financial data published in the annual
reports of the company every year. The analysis is done to suggest the possible solutions.
The study is carried out for 4 years (2010-2014). Using the ratio analysis, firms past,
present & future performance can be analyzed & this study has been divided as short
term analysis. The firm should generate enough profits not only to meet the expectations
of owner, but also expansion activities.

1.6 Limitation of the Study:

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The study was limited to only four years financial data.

The study is purely based on secondary data which were taken primarily from
published annual reports of Marat he industrial ltd.
The ratio is calculated from past financial statements and these are possible
indicators of future.
Ratio analysis explains relationships between past information while users are
more concerned about current and future information.

1.7 Research Methodology:

Research is the systematic process of collecting and analyzing data in order to increase
our understanding of the phenomenon about which we are concerned or interested. It is
an in -depth search for knowledge. It is a careful investigation or inquiry especially
through search for new facts in any branch of knowledge. The study exhibits both
descriptive and analytical character. Regarding the theoretical concept it is descriptive
since it interprets and analysis the secondary data in order to arrive at appropriate
conclusion, it is also analytical in character. The interpretation of data is done based on
ratio and percentage.

1.7.1 Research Design:

Research Design is the strategy for the study and the plan by which the strategy is to be
carried out. It is the set of decisions that make up the master plan specifying the methods
and procedures for the collection, measurement and analysis of data.
Research has used descriptive research. Descriptive studies are fact finding investigation
with adequate interpretation. It focuses on particular aspects of in the study. It is designed
to gather descriptive information and provides information for formulating more
sophisticated studies.

1.7.2 Source:

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Primary Data:
Primary data has been obtained through personal discussions with managers and senior
officials of the organization.
Secondary Data:
Secondary datas has been obtained from published reports like the annual reports of the
company, balance sheets, and profit and loss account, booklets, records such as files,
reports maintained by the company. Mainly the annual report consists of two parts;

1) Profit and Loss Account: Profit and loss account reveals the income and expenditure
of the company.
2) Balance Sheet: Balance Sheet reveals the financial position of the organization.

2.1 Introduction of the Ratio Analysis:

The ratio analysis is one of the most powerful tools of financial analysis. It is used as a
device to analyze & interpret the financial health of enterprise. With the help of ratios that
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the financial statements can be analyzed more clearly & decision made from such
analysis. Financial analysis is the process of identifying the financial strengths &
weakness of the firm properly establishing relationship between the items of balance
sheet & profit & loss account. There are various methods or techniques used in analyzing
financial statements. By the use of ratio analysis one can measure the financial conditions
of a firm & can point out whether the conditions is strong, good, questionable or poor.
Analysis &interpretation of financial statement with help of ratio is termed as ratio
analysis.
It is process of identifying the financial strengths & weakness of the firm. This may be
accomplished either through a trend analysis of the firm over a period of time or through
a comparison of the firm ratios with its nearest competitors & with the industry average.

2.2 Meaning of Ratio Analysis:

Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the
risk & return relationship of firms of different sizes. It is defined as the systematic use of
ratio to interpret the financial statements so that the strengths & weaknesses of a firm as
well as its historical performance & current financial condition can be determined. The
term ratio refers to the numerical or quantitative relationship between two
terms/variables. This relationship can be expressed as: i) Percentage, say, net profits are
25 per cent of sales ( assuming net profits of Rs 25,000 & sales of Rs 1,00,000, ii)
Fraction ( net profit is one-fourth of sales) & iii) Proportion of numbers (the relationship
between net profits and sales is 1:4). These alternative methods of expressing items
which are related to each other are, for purposes of financial analysis, referred to as ratio
analysis. It should be noted that computing the ratio does not add any information not
already inherent in the above figures of profits & sales. What the ratios do is that they
reveal the relationship in a more meaningful way so as to enable equity investors;
management & lenders make better investment & credit decisions.

2.3 Definition of the Ratio Analysis:

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Ratio analysis is a fundamental means of examining the health of a company by studying
the relationships of key financial variables. Many analysts believe ratio analysis is the
most important aspect of the analysis process. A firm's ratios are normally compared to
the ratios of other companies in that firm's industry or tracked over time internally in
order to see trends. For example, the debt ratio compares a company's total debt to its
total assets. If a firm's debt ratio is low relative to its competitors' ratios or has decreased
since last year, the firm is less dependent on debt and is therefore perhaps a less risky
investment. To evaluate companies, analysts use many ratios, including measures of
liquidity, profitability, debt, operating performance, cash flow, and valuation.

2.4 Nature of Ratio Analysis:

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as the indicated
quotient of two mathematical expressions & as the relationship between two or more
things. In financial analysis, a ratio is used as a benchmark for evaluating the financial
position& performance of a firm. The absolute accounting figures reported in the
financial statements do not provide a meaningful understanding of the performance &
financial position of the firm .An accounting figure conveys meaning when it is related to
some other relevant information. For example, anRs 5 crorenet profit may look
impressive, but the firms performance can be said to be good or bad only when the net
profit figure is related to the firms investment. The relationship between two accounting
figure, expressed mathematically, is known as a financial ratio (or simply as a ratio).
Ratios help to summaries large quantities of financial data & to make qualitative
judgementabout the firms financial performance. For example, consider current ratio
(discussed in detail later on). It is calculated by dividing current liabilities. This
relationship is an index orb yardstick, which permits a qualitative judgment
to be formed about the firms ability to meet its current obligations. It measures the firms
liquidity. The greater the ratio, the greater the firms liquidity & vice versa. The point to
note is that a reflecting a quantitative relationship helps to form a qualitative judgement.
Such is the nature of all financial ratios.

2.5 Standards of Comparison:

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The ratio analysis involves comparison for a useful interpretation of the financial
statements. A single ratio in itself does not indicate favorable or unfavorable condition. It
should be compared with some standard. Standards of comparison may consist of:

Past ratio, i.e., ratios calculated from the past financial statements of the same

firm;
Competitors ratios, i.e., ratios of some selected firms, especially the most

progressive & successful competitor, at the same point in time;

Industry ratio, i.e., ratios of the industry to which the firm belongs; &
Projected ratios, i.e., ratios developed using the projected, or proforma, financial
statements of the same firms.

2.6 Advantages of Ratio Analysis:

As stated earlier, ratio analysis is one of the most important tools of financial analysis.
Financial health of a business can be diagnosed by this tool. Such an analysis offers the
following advantages:

1) Useful in analysis of financial statements:

Ratio analysis is the most important tool available for analyzing the financial statements
i.e. Profit and Loss Account and Balance Sheet. Such analysis is made not only by the
management but also by outside parties like bankers, creditors, investors etc.

2) Useful in improving future performance:

Ratio analysis indicates the weak spots of the business. This helps management in
overcoming such weaknesses and improving the overall performance of the business in
future.
3) Useful in inter-firm comparison:

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Comparison of the performance of one firm with another can be made only when
absolute data is converted into comparable ratios. If a firm is earning a net profit of Rs.
50,000 while another firm B is earning Rs. 100,000, it does not necessarily mean that
firm B is better off unless this profit figure is converted into a ratio and then compared.
4) Useful in judging the efficiency of a business:
As stated earlier, accounting ratios help in judging the efficiency of a business. Liquidity,
solvency, profitability etc. of a business can be easily evaluated with the help of various
accounting ratios like current ratio, liquid ratio, debt-equity ratio, net profit ratio, etc.
Such an evaluation enables the management to judge the operating efficiency of the
various aspects of the business.
5) Useful in simplifying accounting figures:
Complex accounting data presented in Profit and Loss Account and Balance Sheet is
simplified, summarized and systematized with the help of ratio analysis so as to make it
easily understandable. For example, gross profit ratio, net profit ratio, operating ratio etc.
give a more easily understandable picture of the profitability of a business than the
absolute profit figure.
6) Determines profitability
Ratio analysis assists managers to work out the production of the company by figuring
the profitability ratios. Also, the management can evaluate their revenues to check if their
productivity. Thus, probability ratios are helpful to the company in appraising its
performance based on current earning.

7) Helpful in evaluating solvency

By computing the solvency ratio, the companies are able to keep an eye on the correlation
between the assets and the liabilities. If, in any case, the liabilities exceed the assets, the
company is able to know its financial position. This is helpful in case they wish to set up
a plan for loan repayment.
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8) Better financial analysis
Ratio analysis is also helpful to recluses, in addition to shareholders, debenture holders,
and creditors. Besides, bankers are also able to know the profitability of the company to
find out whether they are able to pay the dividend and interests under a specific period.

9) Performance analysis
Ratio analysis is also helpful in analyzing the performance of a company. Through
financial analysis, companies can review their performance in the past years. This is also
helpful in identifying their weaknesses and improving on them.

10) Forecasting
At present, many companies use ratio analysis to reveal the trends in production. This
provides them an opportunity for estimation of future trends and thus the foundation for
budget planning so as to determine the course of action for the growth and development
of the business.

2.7 Uses of Ratio Analysis:

Ratio analysis is used in accounting, finance and marketing departments in order to make
more well-informed decisions and reasonable forecasts. Uses of ratio analysis vary from
creating

common

size

accounting

statements

to

determining

the

businesss inventory turnover or tracking the success of a marketing campaign over time.
Standard ratios are used for different departments to accomplish specific tasks. Even

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though the use of ratio analysis is important for a business when making decisions, there
are also limitations of using such ratios.

Uses of ratio analysis include breaking data down so that it can be compared. When
comparing two sets of data, ratios can help bring the numbers to equivalent figures. For
instance, if the business wants to compare its monthly cost of goods sold for the past
year, it should not look at the raw numbers. Instead, the business should calculate the cost
of goods sold as a percentage of the total sales in order to determine if costs truly have
increased or decreased.
Making forecasts is another use of ratio analysis. Comparing ratios over time can help a
business make reasonable predictions about what it should expect in the future if
conditions remain the same or similar. Breaking data down to ratios and comparing the
ratios over time also can help businesses see if trends or cycles emerge.
Standard ratios have been developed to accomplish certain types of analysis within
different areas of business. For instance, in finance it is common to use the earnings per
share, gross profit margin, return on assets, and inventory turnover ratios. Not only does
this help a business in comparing historical data between itself and competitors, but
employees are generally trained in using these specific ratios before being hired. Even
though most ratios are easy to compute, the analyst must understand the significance of
each ratio in order to avoid making false assumptions.

Dangers of using a ratio analysis include not understanding the assumptions made in its
calculation, taking into affect price changes, or using data that may be incorrect. Uses of
ratio analysis are important in analyzing the businesss data, but they can result in
incorrect or misleading calculations. Limitations of the uses of ratio analysis should not
prevent businesses from using them, but they should make businesses take more caution
before using them in making decisions. For instance, if the business has changed its
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prices and is comparing profit ratios over this time period, it needs to take into
consideration that the price change may have had an effect on the number of sales.

2.8 Limitation of the Ratio Analysis:

Ratio analysis is a very useful technique. But one should be aware of its limitations as
well. The following limitations should be kept in mind while making use of ratio analysis
in interpreting the financial statements.

1) Reliability of ratios depends upon the correctness of the basic data:

Ratios obviously will be only as reliable as the basic data on which they are based. If the
balance sheet or profit and loss account figures are themselves unreliable, it will be a
mistake to put any reliance on the ratios worked out on the basis of that Balance Sheet or
Profit and Loss Account.

2) An individual ratio may by itself be meaningless:

Except in a few cases, an accounting ratio may by itself be meaningless and acquires
significance only when compared with relevant ratios of other firms or of the previous
years. In fact, ratios yield their best advantage on comparison with other similar firms;
also if ratios for a year are compared with ratios in the previous years, it will be a useful

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exercise. Comparison is the essential requirement for using ratios for interpreting a given
situation in a firm or industry.

3) )Ratios are not always comparable:

When the ratios of two firms are being compared, it should be remembered that different
firms may follow different accounting practices. For example, one firm may charge
depreciation on straight line basis and the other on diminishing value. Similarly, different
firms may adopt different methods of stock valuation. Such differences will not make
some of the accounting ratios strictly comparable. However, use of accounting standards
makes ratio comparable.
4) Ratios sometimes give a misleading picture:
One company produces 500 units in one year and 1,000 units the next year; the progress
is 100%. Another firm produces 4,000 units in one year and 5,000 in the next year, the
progress is 25%. The second firm will appear to be less active than the first firm, if only
the rate of increase or ratio is compared. It will be much more useful absolute figures are
also compared along with rate of increase

unless the firms being compared are equal in

all respects. In fact, one should be extremely careful while comparing the results of ne
firm with those of another firm if the two figures differ in any significant manner, say in
size, location, degree of automation or mechanization.
5) Ratios ignore qualitative factors:
Ratios are as a matter of fact, tools of quantitative analysis. It ignores qualitative factors
which sometimes are equally or rather more important than the quantitative factors. As a
result of this, conclusions from ratio analysis may be distorted. For example, despite the
fact that credit may be granted to a customer on the basis of information regarding the
financial position of business as disclosed by certain ratios, but the grant of credit
ultimately depends upon the credit standing, reputation and managerial ability of the
customer, which cannot be expressed in the form of ratio.

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6) Change in price levels makes ratio analysis ineffective:
Changes in price levels often make comparison of figures for a number of years difficult.
For example, the ratio of sales to fixed assets in 2003 would be much higher than in 1995
due to rising prices because fixed assets are still being expressed on the basis of cost
incurred a number of years ago while sales are being expressed at their current prices.
7) There is no single standard for comparison:
Ratios of a company have meaning only when they are compared with some standard
ratios. Circumstances differ from firm to firm and the nature of each industry is different.
Therefore, the standards will differ for each industry and the circumstances of each firm
will have to be kept in mind. It is difficult to find out a proper basis of comparison.
Therefore, the performance of one industry may not be properly comparable with that of
another. Usually it is recommended that ratios should be compared with the average of
the industry. But the industry average is not easily available.
8) Ratios based on past financial statements are no indicators of future:
Accounting ratios are calculated on the basis of financial statements of past years. Ratios
thus indicate what has happened in the past. Since past is quite different from what is
likely to happen in future, it is difficult to use ratios for forecasting purposes. The
financial analyst is more interested in what will happen in future. The management of a
company has information about the companys future plans and policies and is, therefore,
able to predict future to a certain extent. But an outsider analyst has to rely only on the
past ratios which may not necessarily reflect the firms future financial position and
performance.

2.9Types of Ratios:
Several ratios, calculated from the accounting data, can be grouped into various classes
according to financial activity or function to be evaluated. As stated earlier, the parties
interested in financial analysis are short- and long-term creditors, owners& management.
Short-term creditors main interest is in the liquidity position or the short-term solvency
of the firm. Long-term creditors, on the other hand, are more interested in the long- term
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solvency & profitability of the firm. Similarly, owners concentrate on the firms
profitability & financial condition. Management is interested in evaluating every aspect
of the firms performance. They have to protect the interests of all parties & see that the
firm grows profitably. In view of the requirements of the various uses of ratios, we may
classify them into the following four important categories:

Liquidity Ratio
Leverage Ratio
Activity Ratio
Profitability Ratio

Liquidity ratios measure the firms ability to meet current obligations; leverage ratios
show the proportions of debt and equity in financing the firms assets; activity ratios
reflect the firms efficiency in utilizing its assets, and profitability ratios measure overall
performance and effectiveness of the firm. Each of these ratios is discussed below.

2.9.1 Liquidity Ratios:

It is extremely essential for a firm to be able to meet obligations as they become due.
Liquidity ratios measure the ability of the firm to meet its current obligations (liabilities).
In fact, analysis of liquidity needs the preparation of cash budgets and cash and fund flow
statements; but liquidity ratios, by establishing a relationship between cash and other
current assets to current obligations, provide a quick measure of liquidity. A firm should
ensure that it does not suffer from lack liquidity, and also that it does not have excess
liquidity. The failure of a company to meet its obligations due to lack of sufficient
liquidity, will result in a poor credit worthiness, loss of creditors confidence, or even in
legal tangles resulting in the closure of the company. A very high degree of liquidity is
also bad; idle assets earn nothing. The firms funds will be unnecessarily tied up in
current assets. Therefore, it is necessary to strike a proper balance between high liquidity
and lack of liquidity.
The most common ratios, which indicate the extent of liquidity or lack of it, are: (i)
current ratio and (ii) quick ratio.
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1) Current Ratio:
Current ratio is calculated by dividing current assets by current liabilities:

Current Assets
Current Ratio =
Current Liabilities
Current assets include cash and those assets that can be converted into cash within a year,
such as marketable securities, debtors and inventories. Prepaid expenses are also included
in current assets as they represented the payments that will not be made by the firm in the
future. All obligations maturing within a year are included in current liabilities. Current
liabilities include creditors, bills payable, accrued expenses, short-term bank loan,
income-tax liability and long-term debt maturing in the current year.
The current ratio is a measure of the firms short-term solvency. It indicates the
availability of current assets in rupees for every one rupee of current liability.
2) Quick Ratio:
Quick ratio, also called acid-test ratio, establishes a relationship between quick, or liquid,
assets and current liabilities. An asset is liquid if it can be converted into cash
immediately or reasonably soon without a loss of value. Cash is the most liquid assets.
Other assets that are considered to be relatively liquid and included in quick assets are
debtors and bills receivables and marketable securities (temporary quoted investments).
Inventories are considered to be less liquid. Inventories normally required some time for
realizing into cash; their value also has a tendency to fluctuate. The quick ratio is found
out by dividing quick assets by current liabilities.

Quick Assets
Quick Ratio =
Quick Liabilities

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3) Cash Ratio:
Since cash is the most liquid asset, a financial analyst may examine cash ratio and its
equivalent to current liabilities. Trade investment or marketable securities are equivalent
of cash. A cash ratio of 0.5 to 1 is considered as satisfactory. Therefore they may be
included in the computation of cash ratio.

Cash + Marketable Securities

Cash Ratio =
Current Liabilities
4) Net Working Capital Ratio:
The difference between current assets and liabilities excluding short-term bank borrowing
is called net working capital (NWC) or net current assets (NCA). NWC is sometimes
used as a measure of a firms liquidity. It is considered that, between two firms, the one
having the larger NWC has the greater ability to meet its current obligations. This is not
necessarily so; the measure of liquidity is a relationship, rather than the difference
between current assets and current liabilities. NWC, however, measures the firms
potential reservoir of funds. It can be related to net assets (or capital employed):
Net Working Capital (NWC)
Net Working Capital Ratio =
Net Assets (NA)

2.9.2 Leverage Ratio:

The short-term creditors, like bankers and suppliers of raw material, are more concerned
with the firms current debt-paying ability. On the other hand, long-term creditors like
debentures holders, financial institutions etc. are more concerned with the firms longterm financial strength. In fact, a firm should have a strong short-as well as long-term
financial position. To judge the long-term financial position of the firm, financial
leverage, or capital structure ratio are calculated. These ratios indicate mix of funds

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provided by owners and lenders. As a general rule, there should be an appropriate mix of
debt and owners equity in financing the firms assets.
1) Debt Ratio:
Several debt ratios may be used to analyze the long-term solvency of a firm. The firm
may be interested in knowing the proportion of the interest-bearing debt (also called
funded debt) in the capital structure. It may, therefore, compute debt ratio by dividing
total debt (TD) by capital employed (CE) or net assets (NA). Total debt will include short
and long-term borrowings from financial institutions, debentures/bonds, deferred
payment arrangements for buying capital equipments, bank borrowings, public deposits
and any other interest-bearing loan. Capital employed will include total debt and net
worth (NW).

Total Debt (TD)

Debt Ratio =
Total Debt (TD) + Net Worth (NW)
Total Debt (TD)
=
Capital Employed (CE)

2) Debt-Equity Ratio:
The relationship between borrowed funds and owners capital is a popular measure of the
long term financial solvency of a firm. This relationship is shown by the debt-equity
ratios. This ratio reflects the relative claims of creditors and shareholders against the
assets of the firm. Alternatively, this ratio indicates the relative proportions of debt and
equity in financing the assets of a firm. The relationship between outsiders claims and
owners capital can be shown in different ways and, accordingly, there are many variants
of the debt-equity (D/E) ratio.

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Long-Term Debt
Debt Equity Ratio =
Shareholders Equity

The debt considered here is exclusive of current liabilities. The shareholders equity
includes (i) equity and preference share capital, (ii) past accumulated profits but excludes
fictitious assets like past accumulated losses, (iii) discount on issue of shares and so on.
Another approach to the calculation of the debt-equity ratio is to relate the total debt
(not merely long-term debt) to the shareholders equity. That is,

Total Debt
Debt Equity Ratio =
Shareholders Equity

3) Capital Employed to Net Worth Ratio:

There is yet another alternative way of expressing the basic relationship between debt and
equity. One may want to know: How much funds are being contributed together by
lenders and owners for each rupee of the owners for each rupee of the owners
contribution? Calculating the ratio of capital employed or net assets to net worth can find
this out:
Capital Employed (CE)
CE - to-NW Ratio =
Net Worth (NW)
Net Assets (NA)
Or

NA-to-NW Ratio =
Net Worth (NW)

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2.9.3 Activity Ratio:

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

1) Inventory Turnover Ratio:

Inventory turnover indicates the efficiency of the firm in producing and selling its
product. It is calculated by dividing the cost of goods sold by the average inventory:
Cost of Goods Sold
Inventory Turnover Ratio =
Average Inventory
The average inventory is the average of opening and closing balances of inventory. In a
manufacturing company inventory of finished goods is used to calculate inventory
turnover.

2) Debtors (Accounts Receivable) Turnover Ratio:

A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of
companies. When the firm extends credits to its customers, debtors (accounts receivables)
are created in the firms accounts. Debtors are convertible into cash over a short period
and, therefore, are included in current assets. The liquidity position of the firm depends
on the quality of debtors to a great extent. Financial analysts apply three ratios to judge
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Shivaji University, Kolhapur

the quality or liquidity of debtors: (a) debtors turnover, (b) collection period, and (c)
aging schedule of debtors.

Debtors turnover: Debtors turnover is found out by dividing credit sales by average
debtors:
Credit Sales
Debtors Turnover Ratio =
Average Debtors
Debtors turnover indicates the number of times debtors turnover each year. Generally, the
higher the value of debtors turnover, the more efficient is the management of credit.

3) Fixed Asset Turnover Ratio:

Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the value
of fixed assets (on the balance sheet). It indicates how well the business is using its fixed
assets to generate sales. Generally speaking, the higher the ratio, the better, because a
high ratio indicates the business has less money tied up in fixed assets for each unit of
currency of sales revenue. A declining ratio may indicate that the business is overinvested in plant, equipment, or other fixed assets.
Sales
Fixed Assets Turnover Ratio =
Fixed Assets

4) The Total Asset Turnover Ratio:

The total asset turnover ratio measures the ability of a company to use its assets to
efficiently generate sales. This ratio considers all assets, current and fixed. Those assets
include fixed assets, like plant and equipment, as well as inventory, accounts receivable,
A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

as well as any other current assets. Total assets turnover ratio shows the firms ability in
generating sales from all financial resources committed to total assets. Thus:
Sales
Total assets turnover ratio =
Total assets
5) Working Capital Turnover Ratio:
The working capital turnover ratio measures how well a company is utilizing its working
capital to support a given level of sales. Working capital is current assets minus current
liabilities. A high turnover ratio indicates that management is being extremely efficient in
using a firm's short-term assets and liabilities to support sales. Conversely, a low ratio
indicates that a business is investing in too many accounts receivable and inventory assets
to support its sales, which could eventually lead to an excessive amount of bad debts and
obsolete inventory. A firm may also like to relate net current assets (or net working
capital gap) to sales. It may thus compute net working capital turnover by dividing sales
by net working capital.

Sales
Working Capital Turnover ratio =
Net Working Capital

6) Creditors Turnover Ratio:

It is a ratio between credit purchases and the average amount of creditors outstanding
during the year. It is calculated as followings:
Credit Purchase
Creditors Turnover Ratio =
Average Creditors

A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio
shows that accounts are to be settled rapidly. The creditors turnover ratio is an important
tool of analysis as a firm can reduce its requirement of current assets by relying on
suppliers credit. The extent to which trade creditors are willing to wait for payment can
be approximated by the creditors turnover ratio.

2.9.4 Profitability Ratio:

Profit is the difference between revenues & expenses over a period of time (usually one
year). Profit is the ultimate output of a company, and if will have no future if it fails to
make sufficient profits. Therefore, the financial manager should continuously evaluate
the efficiency of the company in terms of profits.
The profitability ratios are calculated to measure the operating efficiency of the company.
Besides management of the company, owners are also interested in the profitability of the
firm. Creditors want to get interest and repayments of principal regularly. Owners want to
get a required rate of return on their investment. This is possible only when the company
earns enough profit. The following are the some of the important profitability ratios:
1) Gross Profit Ratio:
It is the first profitability ratio calculated in relation to sales. This ratio can be called as
gross profit margin of gross margin ratio. This ratio establishes a relation between gross
profit and sales to measure the efficiency of the firm and it reflects its pricing policy.
The ratio is calculated by dividing the gross profit by sales. A high gross profit margin
indicates that the firm is able to produce at relatively lower cost and it is also a sign of
good management.
Whereas as a low gross profit margin reflects a higher cost of goods sold due the firms
inefficient management.

Gross Profit
Gross Profit Ratio =
A.G.I.M.S.,Sangli.

* 100
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Shivaji University, Kolhapur

Sales

2) Net Profit Ratio:

Net profit margin ratio establishes a relationship between net profit and sales of the firm.
It indicates the managements ability to earn sufficient profit on sales to cover all
operating expenses, the cost of merchandising of servicing and also should have a
sufficient margin to reasonable compensation to shareholders. A high ratio shows better
and low ratio shows the opposite.
The net profit is calculated by dividing the net profit by sales, Net Profit is obtained when
operating expenses, interest and taxes are deducted from gross profit.
Net Profit
Net Profit Ratio =

*100
Sales

3) Operating Ratio:
The operating ratio is a financial term defined as a company's operating expenses as a
percentage of revenue. This financial ratio is most commonly used for industries which
require a large percentage of revenues to maintain operations. And this ratio also used to
measure the operational efficiency of the management. It shows whether the cost
component in the sales figure is within normal range.
The operating ratio can be used to determine the efficiency of a company's management
by comparing operating expenses to net sales. It is calculated by dividing the cost of
goods sold+ operating expenses by the net sales. A low operating ratio means high net
profit ratio i.e., more operating profit.

Cost of Goods Sold + Operating Expenses

Operating Ratio =

*100
Net Sales

A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

MARATHE INDUSTRIAL SERVICES LIMITED

MIRAJ
3.1 Organizational Profile:
1

Name of the Company

Marathe Industrial Services Ltd.

Address

Telephone

Mandan Enclave,
Shrin Govindraoji Marathe Road,
MIRAJ- 416 410
0233-2222398,2228362

E-mail Address

[email protected]

Registration No. & Date

U99999MH1972 PLC015998

Company Established Date

13-09-1972

A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

7

Dealership

ABB India Ltd

LAPP India Pvt. Ltd.
WAGO Limited
Eaton Power Quality Pvt. Ltd.
(Cooper Bussmann)
Mahindra Hinoday
Visa Power Tech Pvt. Ltd.

Products

Switchgear, Cables, Connectors, Motors,

Fuses, Frequency Convertor, Lamps Home
Automation

3.2 Introduction of the Organization:

Marathe Industrial Services limited is Public Limited Company established in 1972.
The company mainly is engaged in trading of Hi-tech electronic and electrical products.
We are a part of Marathas Group which has interests in Engineering and Textiles.
Marathas Group enjoys excellent reputation in our area and has extensive contracts
with the decision makes in the industries of our area.
Major business of the company consist of marketing products developed by Multi
National Companies like ABB India Ltd., LAPP India Pvt., Ltd., WAGO Limited, Eaton
Power Quality Pvt. Ltd., (Cooper Bussmann) and well established Indian Companies like
Mahindra Hinoday, Visa Power Tech Pvt.Ltd., Atandra Energy etc.
The Company keeping pace with technological advances, is adding several innovative
Building Automation and Industrial Lighting products to its marketed product range.

A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

The company is anticipating increase in its existing marketing activity. Likewise the
company is experiencing encouraging response to its newly added trade lines of Building
Automation, Industrial Lighting Solutions.

3.3Human Resources:
The company has three full time Sales Engineers. The after sales service is handled by
two well qualified technical supervisors. The company also has separate staff to take care
of logistics of the material handling and also adequate administrative and accounts staff
to support its operations.

3.4Area of operation:
The company holds most of the dealerships for the revenue districts of Kolhapur, Satara
and Sangli. Two out of three of our sales engineers are based at Kolhapur and one at
Sangli. The company enjoys excellent rapport with industries, consultants and architects
in Kolhapur and Sangli. The company also has offices at Ichalkaranji and Mumbai,
shared with other group companies.

A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

3.5 Name of the Board of Directors:

Mr. Arvind Govind Marathe

Mr. Jayant Dattatraya Marathe

Mr. Chandrashekhar Arvind Marathe

3.6Kaustubh
Organization
Structure:
Mr.
Arvind
Marathe
Technical Staff

Engineer Mr. Vivekanand B. Pathak

Mr. Guruprasad A.Dasalkar
Mr. Babasaheb A. Gurav

Finance

Accountant Mr. Sanjay V. Kadam

Working Staff

Other Technical & Administrative Staff -10Nos

Working Time

10.00 A.M. to 6.00 PM

3.7 Organization Chart:

Board of Directors

A.G.I.M.S.,Sangli.

Page 28
Technical Staff

Accountant
Engineer
Finance
Working
Staff

Shivaji University, Kolhapur

Other Technical
Staff

Administrative
Staff

Data Analysis:
For the calculations of the ratios the data is analyzed using the following information:
Current assets = Cash in Hand and Bank, Investment, Advances And Receivables,
Current Assets, Prepaid Expenses, Closing Stock, Debtors.
A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

Quick Assets= Current Assets Current Liabilities

Cost of Goods Sold= Sales Gross Profit

Average Stock= Opening Stock + Closing Stock / 2.

Working Capital = Current Assets Current Liabilities.

Account Receivable = Debtors + Bills Receivable.

Account Payable = Creditors + Bills Payable.

Operating Expenses = Administrative Expenses + Selling and Distribution Expenses +

Other Expenses.

Total Debt= Secured Loan, Unsecured Loan, Deposit.

1. Current Assets:
TABLE NO - A
Particulars

2010-2011

2011-2012

2012-2013

2013-2014

Inventories
Trade Receivable
Cash and Bank Balance
Short Term Loans and

5880364
11378740
2465307
17229

8424545
11650074
2714095
93799

10217143
7396631
2253956
454597

9943818
18305049
1168375
978496

A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

Advances
Other Current Assets
Current Assets =

322678

461462

10062

9509

20064318

23343976

20332389

30404797

2. Current Liabilities:
TABLE NO - B
Particulars

2010-2011

2011-2012

2012-2013

2013-2014

Short Term

1797424

3756447

2863312

2348041

Borrowings
Trade Payables

6888828

9802018

7743495

18823876

Other Short Term

477591

44940

83116

63322

Liabilities
Short Term Provisions

1233235

839708

719323

838873

Current Liabilities =

10397078

14443113

11409246

22074112

3. Quick Assets:
TABLE NO - C

Particulars

2010-2011

2011-2012

2012-2013

2013-2014

Total of current
Assets

20064318

23343976

20332389

30404797

Less- Closing
Stock+
Prepaid insurance

5880364

8424545

10217143

9943818

4048

7181

10062

9509

Less Total

5884412

8431726

10227205

9953327

Quick Assets

14179906

14912250

10105184

20451470

A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

4. Working Capital:

TABLE NO - D
Particulars

2010-2011

2011-2012

2012-2013

2013-2014

Current Assets

20064318

23343976

20332389

30404797

Less- Current
Liabilities

10397078

14443113

11409246

22074112

9667240

8900863

8923143

8330685

Working Capital

Using the data from the balance sheet and tables, the calculations of ratios are carried out.
After calculating the ratios, the interpretation is given.

LIQUIDITY RATIO:1) Current Ratio:Current Asset

Current Ratio =
Current Liabilities
TABLE NO 1
Year
2010-2011
2011-2012
2012-2013
2013-2014

A.G.I.M.S.,Sangli.

Current Assets
20064318
23343976
20332389
30404797

Current Liabilities
10397078
14443113
11409246
22074112

Page 32

Ratio
1.92
1.61
1.78
1.37

Shivaji University, Kolhapur

CHART NO 1

CURRENT RATIO
2.5
2
1.92
1.5

1.78

1.61

1.37
1

Ratio

0.5
0

2010-2011

2011-2012

2012-2013

2013-2014

Interpretation:
The ratio indicates the financial strength and the solvency of the company. It shows the
proportion of current assets to current liabilities. Normally, it is expected that current
ratio should be 2:1, which indicates that current assets should be twice as compared to
current liabilities. 2010-11, 2011-12, 2012-13, 2013-14 current ratios have a decreasing
trend. Hence, it is advisable to the company to increase its current ratio to be in a
favorable position.

2) Quick Ratio:Quick Assets

Quick Ratio =
Quick Liabilities
TABLE NO 2

Year
2010-2011
2011-2012
2012-2013
2013-2014
A.G.I.M.S.,Sangli.

Quick Assets
14179906
14912250
10105184
20451470

Quick Liabilities
10397078
14443113
11409246
22074112
Page 33

Ratio
1.36
1.03
0.88
0.92

Shivaji University, Kolhapur

CHART NO 2

QUICK RATIO
1.6
1.4
1.36

1.2
1

1.03

0.8

0.88

0.92

2012-2013

2013-2014

Ratio

0.6
0.4
0.2
0

2010-2011

2011-2012

Interpretation:
This Ratio indicates the proportion of quick assets to quick liabilities. The ideal acid test
ratio should be 1:1 which means that the quick assets should be equal to quick liabilities.
2010-11, 2011-2012 quick ratio is good but in above 2012-13, 2013-14 ratios are below
1:1 hence, it is advisable to the company to increases its quick ratio to be in a favorable
position.

ACTIVITY RATIO:1) Total Assets Turnover Ratio:Sales

Total Assets Turnover Ratio =
Total Assets
TABLE NO 3
Year
2010-2011
2011-2012
2012-2013
2013-2014
A.G.I.M.S.,Sangli.

Sales
52111569
38134371
37826533
43401597

Total Assets
20738432
24943344
22220032
32197464
Page 34

Ratio
2.51
1.52
1.70
1.34

Shivaji University, Kolhapur

CHART NO 3

TOTAL ASSETS TURNOVER RATIO

3
2.5

2.51

2
1.5

1.7

1.52

Ratio
1.34

1
0.5
0

2010-2011

2011-2012

2012-2013

2013-2014

Interpretation:The ratio indicates the amount of sales realized per rupee of investment in total assets.
This ratio is more in important in manufacturing concerns, as it indicates the utilization of
total assets. The higher the ratio higher will be amount of sales generated per rupee of
investment in assets. In above chart the total assets ratio has a decreasing trend. However
this being a trading company the ratio is not as relevant as it would be in a manufacturing
firm.
2) Working Capital Turnover Ratio:Sales
Working Capital Turnover Ratio =
Net Working Capital
TABLE NO 4

A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

Year

Sales

Net Working
Capital
52111569
9667240
38134371
8900863
37826533
8923143
43401597
8330685
CHART NO 4

2010-2011
2011-2012
2012-2013
2013-2014

Ratio
5.39
4.28
4.23
5.20

WORKING CAPITAL TURNOVER RATIO

6
5

5.39

5.2
4.28

4.23

Ratio

2
1
0

2010-2011

2011-2012

2012-2013

2013-2014

Interpretation:The working capital turnover ratio measures how well a company is utilizing its working
capitalto support a given level of sales. Working capital is current assets minus current
liabilities. A high turnover ratio indicates that management is being extremely efficient in
using a firm's short-term assets and liabilities to support sales. Conversely, a low ratio
indicates that a business is investing in too many accounts receivable and inventory assets
to support its sales. Hence the above chart shows the working capital ratio decreased in
the year 2011 2012 and 2012 2013 but it increased in the year 2013 2014.
3) Fixed Assets Turnover Ratio:Sales
Fixed Assets Turnover Ratio =
Fixed Assets
A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

TABLE NO 5
Year
2010-2011
2011-2012
2012-2013
2013-2014

Sales
52111569
38134371
37826533
43401597

Fixed Assets
674114
1599368
1887643
1792216

Ratio
77.30
23.84
20.03
24.21

CHART NO 5

FIXED ASSETS TURNOVER RATIO

90
80
77.3

70
60
50

Ratio

40
30
20

23.84

20.03

10
0

2010-2011

2011-2012

2012-2013

24.21

2013-2014

Interpretation:This ratio indicates the amount of sales realized per rupee of investment in fixed assets.
This ratio is more important in manufacturing concerns, as it indicates the utilization of
fixed assets. Higher the ratio the higher will be the amount of sales generated per rupee of
investment in fixed assets. In above chart the fixed assets ratio are decreases, hence it
indicates that the companys fixed assets are remains static.

4) Stock Turnover Ratio:Cost of Goods Sold

Stock Turnover Ratio =
A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

Year
2010-2011
2011-2012
2012-2013
2013-2014

Cost of goods sold

46440318
32561019
31477899
37845750

Average Stock
5790249
7152455
9320844
10080481

Ratio
8.02
4.55
3.37
3.75

Average Stock
TABLE NO 6

CHART NO 6

STOCK TURNOVER RATIO

9
8

8.02

7
6
5
4

Ratio

4.55

3.75

3.37

2
1
0

2010-2011

2011-2012

2012-2013

2013-2014

Interpretation:Inventory turnover is a measure of how quickly a company can convert its inventory into
cash and profits. The goal of a company is to hold enough inventories to meet its clients
orders continuously, but not so much that the cost of holding it outweighs the profits. In
above chart shows decreasing inventory indicates that the company is converting its
inventory into cash as quickly. Hence the company makes use its inventory efficiently.

5) Debtors Turnover Ratio:Credit Sales

Debtors Turnover Ratio =
A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

Account Receivable
TABLE NO 7
Year
2010-2011
2011-2012
2012-2013
2013-2014

Credit Sales
52111569
38134371
37826533
43401597

Accounts Receivable
11378740
11650074
7396631
18305049

Ratio
4.57
3.27
5.11
2.37

CHART NO 7

DEBTORS TURNOVER RATIO

6
5

5.11
4.57

4
3

3.27

Ratio

2.37

1
0

2010-2011

2011-2012

2012-2013

2013-2014

Interpretation:Debtors or an account receivable is an important component of working capital. Debtors

will arise only when credit sales are made. In the table and figure the debtors rise in the
year 2012-2013 and decrease in the year 2013-2014. A simple logic is that debtors
increase only when sales increase and decrease when sales decrease. Company policy of
debtors is very good but a risk of bad debts is always present in high debtors. It is
suggested to the company that it needs to improve its credit policies and collection
procedures.

6) Debtors Collection Period:A.G.I.M.S.,Sangli.

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Shivaji University, Kolhapur

Months
Debtors Collection Period =
Debtors Turnover Ratio
TABLE NO 8

Year

Months

In times

Ratio

2010-11

12

4.57

2.62

2011-12

12

4.27

2.81

2012-13

12

5.11

2.34

2013-14

12

2.37

5.06

CHART NO 8

DEBTORS COLLECTION PERIOD

10
9

5.06

8
7
6

Ratio

5
2.81

4
3

2.34

2.62

2
1
0

2010-11

A.G.I.M.S.,Sangli.

2011-12

2012-13

Page 40

2013-14

Shivaji University, Kolhapur

Interpretation:
This ratio indicates the efficiency of the firm in collecting it receivable from is customers
to whom the firm has sold on credit. It also indicates how quickly the debtors are turned
into cash. The higher the ratio lower is the collection period. And lower the ratio higher
the collection period. In above chart the debtors turnover ratio should be decreased to
increase collection period.

7) Creditors Turnover Ratio:Credit Purchase

Creditors Turnover Ratio =
Accounts Payable
Year
2010-2011
2011-2012
2012-2013
2013-2014

Credit Purchase
Accounts Payable
46620548
6888828
35105200
9802018
33270497
7743495
37572425
18823876
TABLE NO 9

CHART NO 9

A.G.I.M.S.,Sangli.

Page 41

Ratio
6.76
3.58
4.29
1.99

Shivaji University, Kolhapur

CREDITORS TURNOVER RATIO

8
7
6.76

6
5
4

4.29

Ratio

3.58

3
2

1.99

1
0

2010-2011

2011-2012

2012-2013

2013-2014

Interpretation:Creditors or an account payable is an important component of working capital. Creditors

will arise only when credit purchases are made. A simple logic that creditors increase
only when purchases increase and if purchase increase on credit it is not good sign for
growth. Since the creditors turnover ratio is low. Therefore it is unable to pay this is not
satisfactory position for the company.

8) Creditors Payment Period:Months

Creditors Payment Period =
Creditors Turnover Ratio

TABLE NO 10
Year
2010-11
2011-12
2012-13
2013-14
A.G.I.M.S.,Sangli.

Months
12
12
12
12

In times
6.76
3.58
4.29
1.99
Page 42

Ratio
1.77
3.35
2.79
6.0

Shivaji University, Kolhapur

CHART NO 10

CREDITOR PAYMENT PERIOD

12
10

Ratio

1.77

2
0

2.79

3.35

2010-11

2011-12

2012-13

2013-14

Interpretation:The creditors payment period is an activity ratio. It measures the average amount of days
the business takes to pay its creditors i.e. suppliers. The more days available to pay are
better. In above chart the creditors turnover ratio should be decreased to increase the
payment period.

PROFITABILITY RATIO:1) Gross Profit Ratio:Gross Profit

Gross Profit Ratio =

*100
Net Sales

TABLE NO 11
Year
2010-2011
2011-2012
2012-2013
2013-2014
A.G.I.M.S.,Sangli.

Gross Profit
5671251
5573352
6348634
5555847

Sales
52111569
38134371
37826533
43401597
Page 43

Ratio
10.88
14.61
16.78
12.80

Shivaji University, Kolhapur

CHART NO 11

GROSS PROFIT RATIO

18
16

16.78

14

14.61

12

12.8

10

10.88

Ratio

8
6
4
2
0

2010-2011

2011-2012

2012-2013

2013-2014

Interpretation:
This is one of the most widely used ratios for the measurement of profitability. This ratio
establishes relationship between gross profit & sales to measure the relative operations
efficiency of the business. This ratio indicates the position of trading results. In the above
chart shows 2011-2012 ratio is increased in 4% as compared to the ratio of 2010-2011.
The 2012-2013 ratiosare increased in 2% a compared to the 2011-2012. But the year
2013-2014 ratio is decreased in 4% in previous year ratio.

2) Net Profit Ratio:Net Profit

Profit Ratio =

*100
Net Sales

Year
2010-2011
2011-2012
2012-2013
2013-2014

Net Profit
Sales
1926409
52111569
269455
38134371
86920
37826533
-709503
43401597
TABLE NO 12

CHART NO 12
A.G.I.M.S.,Sangli.

Page 44

Ratio
3.69
0.70
0.22
-1.63

Shivaji University, Kolhapur

NET PROFIT RATIO

4
3.69

3
2

Ratio

1
0

0.7
2010-2011

2011-2012

0.22
2012-2013

2013-2014

-1

-1.63

-2

Interpretation:
The net profit ratio is the overall measure of a firms ability to turn each rupee of sales
into profit. It indicates the efficiency with which a business is managed. A firm with a
high net profit ratio is in an advantageous position to survive in the face of rising cost of
production and falling selling prices. Where the net profit ratio is low, the firm will find it
difficult to withstand these types of adverse conditions. In the above chart the 2010-2011
ratio is satisfactory level. But the 2011-2012, 2012-2013 ratios have decreased, and as we
see the trend in this ratio is net loss in 2013-2014.

3) Operating Ratio:Cost of Goods Sold + Operating Expenses

Operating Ratio =

*100
Net Sales
TABLE NO 13

Year
Cost of goods Sold
+Operating Expenses
2010-2011

Ratio

52111569
46440318

A.G.I.M.S.,Sangli.

Net Sales

92.29
Page 45

Shivaji University, Kolhapur

2011-2012

38134371
32561019

91.90

2012-2013

37826533
31477899

89.02

2013-2014

43401597
37845750

91.60

CHART NO 13

Operating Ratio
93
92

92.29

91.9

91.6

91

Ratio

90
89

89.02

88
87

2010-2011

2011-2012

2012-2013

2013-2014

Interpretation:
This ratio is also an important profitability ratio. This ratio explains the relationship
between cost of goods sold and operating expenses on the one hand and net sales on the
other. Operating cost refers to all expenses incurred for operating firm running a business.
The higher the ratio the lower is the profitability and the lower ratio higher the
profitability. Generally, 80% to 85% operating ratio may be considered as normal. In the
above chart shows 2011-2012 ratio is decreases by 1% as a compared to the ratio of
2010-2011. The 2012-2013 ratios are decreased in 2% as compared to the 2011-2012. But
the year 2013-2014 ratio is increase in 2% in previous year ratio. Hence it is advisable
that the firm shall try to decrease the operating ratio.

A.G.I.M.S.,Sangli.

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FINDINGS:
1. The current ratio in year 2010-11 is1.92, 2011-12 is 1.61, 2012-13 is 1.78, and 2013-14
is 1.37. The ideal current ratio is 2:1 but in this case it is more than 1:1 it is just sufficient
to pay the amount owned to various creditors. Calculated in table No. 1
2. The quick ratio in year 2010-11 is 1.36, 2011-12 is 1.03, 2012-13 is 0.88, and 2013-14
is 0.92 is less than ideal quick ratio which is 1:1, thus the company has unfavorable
liquidity position. Calculated in table No.2
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3. The total assets turnover ratio has a decreasing trend from the year 2010-2014 is 2.51,
1.52, 1.70, and 1.34times. It indicates that the company is not efficiently utilizing the
total assets. Calculated in table No. 3
4. The working capital ratio decreased in the year 2011 2012 and further decrease in
2012 2013 but it is showing an increase in the year 2013 2014. This increase should
continue in the coming year. This will happen when the firm uses its working capital
more efficiently. Calculated in table No. 4
5. Fixed assets turnover ratio is showing decreased trend from the year 2010-2014 is
77.30, 23.84, 20.03, and 24.21. It indicates that the companys fixed assets remain static.
Calculated in table No. 5
6. Stock turnover ratio shows a decreasing trend from the year 2010-2014 is 8.02, 4.55,
3.37, and 3.75. It indicates that the company makes use of its inventory efficiently.
Calculated in table No. 6
7. The debtors turnover ratio has decreased in 2013-14. Increases in this ratio is
beneficial for company because it indicates increase in the speed of collection of credit
sales & decreases debtors collection period, but in this case, the debtors turnover ratio
has decreased &debtors collection period is increased, so it is unfavorable to the
company. Calculated in table No. 7

8. The creditors turnover ratio has decreased in the year 2013-2014. Decrease in this
ratio is not beneficial for the speed of payment of credit purchase and increases creditors
payment period, so it is unfavorable to the company. Calculated in table No. 9
9.Gross profit ratio has decreased to 4% in the year 2013-2014 is 12.80 % as compare to
the previous year 2012-2013 is 16.78 % . It indicates a higher cost of production and it
could be due to low selling prices. Calculated in table No. 11
10. Net profit ratio is very low in financial year 2011-12. Company incurred loss in the
year 2013-2014.Calculated in table No. 12
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11. Operating ratio has increased to 2% of year 2013-2014 is 91.60 as compared to the
previous year 2012-2013 which was 89.02. It indicates that the higher the operating ratio
lower will be the profitability of the firm. Calculated in table No. 13

SUGGESTIONS:
Suggestions are given on the basis of findings.
1. The current ratio is 2:1 which is decreasing over the year hence the company should
inject equity to run business on strong financial base.
2. The company should maintain quick ratio as per approved business norms, hence it
should continue to see that current liability doesnt exceed current assets.
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3. The working capital ratio is decreased therefore firm should needs to use the working
capital more efficiently.
4. The company should invest in assets which will remain helpful to raise their sales.
5. The company should see that the credit sales duration of realization of bills should
progressively reduce to 2 months and eventually 1 month.
6. The company should stick to the practices of credit purchase which are in vogue in
similar industries.
7. The company has not utilized its inventory to raise the sale hence there is decline in
gross profit.
8. The net profit ratio has decreased as the company incurred expenditure on employees
benefit account by 20 % compared to last year.
9. The operating ratio has increased in the last year it is suggested that the company shall
try to reduce the operating ratio.

CONCLUSIONS:

The aim of the study of ratio Analysis of Marathe Industrial Services Ltd. was to analyze
the financial position of the company. The companys financial position is analyzed by
using the tool of annual reports from 2010-11 to 2013-14.
The conclusions drawn are:
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1. The company liquidity position is not sound over a period of study.
2. The fixed assets remain static over a period of study.
3. The inventory turnover ratio is decreasing trend resulting company makes use its
inventory efficiently.
4. The debtors turnover ratio decreases resulting increases the collection period of
debtors.
5. The creditors turnover ratio decreases resulting increases the payment period.
6. The company incurs loss during the last year.

BIBLOGRAPHY:

Books
Financial Management Khan M. Y & Jain P. K., 2007 by Tata McGraw Hill
Publishing Company Limited New Delhi.
Fifth Edition
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Financial Management Pandey I. M. 2005 byVikas Publishing House Pvt. Ltd.

Ninth Edition
Cost and Management Accounting- Arora M. N 2011 by Himalaya Publishing House
Third Edition

Research Methodology- Kothari C.R. & Garg Gaurav, 2014 by New Age International
Publishers, Limited New Delhi.
Third Edition

Financial Reports
Financial reports from the year 2010-2014of Marathe Industrial services Limited.

Website
a) www.investopedia.com
b) www.wikipedia.com

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