INTRODUCTION

Ratios are presentation technique, which helps the reader to get idea about the
performances & Position of a firm with least efforts. He can get overall view of the firm from
the ratios presented to him. He can compare such ratios with the ratios of the past & also
with ratios other firm in industry. For getting insight we must know how such ratios are
calculated.

Types of Ratios

Liquidity Profitability Solvency Activity

Ratios Ratios Ratios Ratios

ASSIGNMENT: TEX PLC

A. Operating performance and risk Ratios

1. Return on Total Assets

It is a ratio that measures a company's earnings before interest and taxes (EBIT) against its
total net assets. The ratio is considered an indicator of how effectively a company is using its
assets to generate earnings before contractual obligations must be paid.

To calculate ROTA:

The greater a company's earnings in proportion to its assets (and the greater the coefficient
from this calculation), the more effectively that company is said to be using its assets.

To calculate ROTA, you must obtain the net income figure from a company's income
statement, and then add back interest and/or taxes that were paid during the year. The
resulting number will reveal the company's EBIT. The EBIT number should then be divided
by the company's total net assets (total assets less depreciation and any allowances for bad
debts) to reveal the earnings that company has generated for each rupee value of assets on
its books.

TEX PLC
 RATIO Year 2004 YEAR 2005
Return on Total Assets 1156/3345=0.345 1645/4120 =0.399
The ratio signifies that TEX Plc has generated for each rupee of asset around 40 cents in
2005 compared to around 35 cents in 2004.

This rise can be contemplated on the rise in sales of the company, of the order Rs 3482000.
The rise has been accompanied by a normal rise in the cost of sales, and a rise in the costs
as well. The huge amount spent by Tex plc can be a cause for the increase in costs.

2. Operating Profit Margin

Operating profit Margin is a ratio used to measure a company's pricing strategy and
operating efficiency.

Calculated as:

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

after paying for variable costs of production such as wages, raw materials, etc. A healthy
operating margin is required for a company to be able to pay for its fixed costs, such as
interest on debt.

Also known as "operating profit margin" or "net profit margin".

TEX PLC

RATIO Year 2004 YEAR 2005

Operating Profit Margin 1156/6374=0.18 1645/9856=0.17

In 2004 TEX Plc had an operating margin of 18 %, which means that it makes RS 0.18
(before interest and tax) for every rupee of sales , compared to year 2005 whereby it has an
operating margin of 17%, this means that it makes RS 0.17 (before interest and taxes) for
every rupee of sales.

The fall in operating profit margin, can be explained by an increase in the cost of sales and
an increase in selling and distribution expenses, followed by a rise in sales, which increases
the denominator of the ratio.
3. Assets Turnover

The amount of sales generated for every rupee worth of assets. It is calculated by dividing
sales by assets.

Formula:

Also known as the Asset Turnover Ratio.

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue
- the higher the number the better. It also indicates pricing strategy: companies with low
profit margins tend to have high asset turnover, while those with high profit margins have
low asset turnover.

TEX PLC

RATIO Year 2004 YEAR 2005

Asset Turnover 6374/3345=1.90 9856/4120=2.39

In 2004, TEX Plc had an asset turnover ratio of the order 1.90 compared to 2.39, in 2005.
The main source of this increase can be related to the growth in sales.There has been a
favorable increase in 2005, therefore stating that the company is efficiently using its
resources (assets) into the generation of sales.

4. Gross profit Margin

A financial metric used to assess a firm's financial health by revealing the proportion of
money left over from revenues after accounting for the cost of goods sold. Gross profit
margin serves as the source for paying additional expenses and future savings.

Also known as "gross margin".

Calculated as:

Where:
COGS = Cost of Goods Sold
TEX PLC

RATIO Year 2004 YEAR 2005

Gross Profit Margin 3106/6374=0.49 5640/9856=0.57

In 2004 Tex Plc had a Gross Margin of 49 %, compared to 57 % in 2005, which means that
the amount of revenue left after deduction of cost of goods sold, was of the order 49% in
2004 and, 57% in 2005.

The rise may be attributed to an increase in sales in 2005.

5. Expenses Margin

A financial metric used to assess a firm's financial health by revealing the proportion of
money left over from revenues after accounting for the operating expenses.

Formulae:

Operating Expenses/Sales

TEX PLC

RATIO Year 2004 YEAR 2005

Expenses Margin 1950/6374=0.30 3395/9856=0.34
B. Financial risk Ratios

1. Return on Equity

The amount of net income returned as a percentage of shareholders equity. Return on

equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but
after dividends to preferred stock.) Shareholder's equity does not include preferred shares.

Also known as "return on net worth" (RONW).

The ROE is useful for comparing the profitability of a company to that of other firms in the
same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by
subtracting preferred dividends from net income and subtracting preferred equity from
shareholders' equity, giving the following: return on common equity (ROCE) = net income -
preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income by average shareholders'
equity. Average shareholders' equity is calculated by adding the shareholders' equity at the
beginning of a period to the shareholders' equity at period's end and dividing the result by
two.

3. Investors may also calculate the change in ROE for a period by first using the
shareholders' equity figure from the beginning of a period as a denominator to determine
the beginning ROE. Then, the end-of-period shareholders' equity can be used as the
denominator to determine the ending ROE. Calculating both beginning and ending ROEs
allows an investor to determine the change in profitability over the period.

TEX PLC

RATIO Year 2004 YEAR 2005

Return on Equity 841/1895= 0.44 1200/3495= 0.34

The ROE has fallen from 44 % to 34 %.

2. Debt Equity Ratio

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

liabilities by stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in
the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial
statements as well as companies'.

TEX PLC

RATIO Year 2004 YEAR 2005

Debt Equity Ratio 1450/1895=0.765 625/3495=0.18

There has been a drastic fall in the debt to equity ratio, from 76% in 2004 to 18% in 2005.

The main cause being a decrease in total liabilities, whereby loan expense is no longer born,
and tax has been decreased.
C. Liquidity and Solvency Ratios

1. Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations.

The Current Ratio formula is:

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 inventory turnover 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.

This ratio is similar to the acid-test ratio except that the acid-test ratio does not include
inventory and prepaids as assets that can be liquidated. The components of current ratio
(current assets and current liabilities) can be used to derive working capital (difference
between current assets and current liabilities). Working capital is frequently used to derive
the working capital ratio, which is working capital as a ratio of sales.

TEX PLC

RATIO Year 2004 YEAR 2005

Current Ratio 1945/1450= 1.34 3170/625=5

Tex plc has a current ratio of order 1.34 in 2004 compared to 2005 where it has a ratio of 5.
However 5 is somewat a too high ratio.
The rule of thumb requires at least a ratio of 2 for the current ratio.

This means that the company is free from the risk of insolvency under normal cases.

2. Quick Asset Ratio

An indicator of a company's short-term liquidity. The quick ratio measures a

company's ability to meet its short-term obligations with its most liquid assets. The higher
the quick ratio, the better the position of the company.

The quick ratio is calculated as:

Also known as the "acid-test ratio" or the "quick assets ratio".

The quick ratio is more conservative than the current ratio, a more well-known liquidity
measure, because it excludes inventory from current assets. Inventory
is excluded because some companies have difficulty turning their inventory into cash. In the
event that short-term obligations need to be paid off immediately, there are situations in
which the current ratio would overestimate a company's short-term financial strength.

TEX PLC

RATIO Year 2004 YEAR 2005

Quick Asset Ratio (1945-525)/1450= 0.98 (3170-1075)/625=3.352

3. Cash Ratio

The ratio of a company's total cash and cash equivalents to its current
liabilities. The cash ratio is most commonly used as a measure of company liquidity. It can
therefore determine if, and how quickly, the company can repay its short-term debt. A
strong cash ratio is useful to creditors when deciding how much debt, if any, they would be
willing to extend to the asking party.

The cash ratio is generally a more conservative look at a company's ability to cover its
liabilities than many other liquidity ratios. This is due to the fact that inventory and accounts
receivable are left out of the equation. Since these two accounts are a large part of many
companies, this ratio should not be used in determining company value, but simply as one
factor in determining liquidity.

TEX PLC

RATIO Year 2004 YEAR 2005

Cash Ratio 160/1450= 0.1 325/625=0.52

4. Period of Inventory Turnover

A financial measure of a company's performance that gives investors an idea of how long it
takes a company to turn its inventory (including goods that are work in progress, if
applicable) into sales. Generally, the lower (shorter) the DSI the better, but it is important to
note that the average DSI varies from one industry to another.

Here is how the DSI is calculated:

Also known as days inventory outstanding (DIO).

This measure is one part of the cash conversion cycle, which represents the process of
turning raw materials into cash. The days sales of inventory is the first stage in that process.
The other two stages are days sales outstanding and days payable outstanding. The
first measures how long it takes a company to receive payment on accounts receivable,
while the second measures how long it takes a company to pay off its accounts payable.

TEX PLC

RATIO Year 2004 YEAR 2005

Cash Ratio (525/3268)x365=58.64 days (1075/4216)x365=93

5. Debtors collection period

Debtors Ratio OR

(Avg) Debtors+ B/R

Debt Velocity Ratio (in days) = × 365/360/12/52 (week)
Credit Sales

 Objective:-
The objective is to determine the efficiency with which the trade debtors are managed.

 Interpretations:
 High Debtors T/O ratio =shorter debtors ratio = quick recovery of money.

Low debtors T/O ratio = higher debtor ratio = delay in recovery of money.

It shows the efficiency of collection policy of the firm. It is always a goods idea to collect
quickly, money from debtors as uncertainty of collection increases with credit policy being
liberal. However a firm should under take cost benefit study of liberal credit policy, if benefit
is more than cost than it should increase credit period.

Benefit Cost
↑ In profit due to ↑ In sales ↑ In bad – debt
↑ In collection expenses
↑ In Interest cost on money blocked with debtor

TEX PLC

RATIO Year 2004 YEAR 2005

6. Creditors Turnover Period

Creditors Velocity Ratio (in days) OR

(Avg) Creditors + B. P.
Creditors Ratio = × 365/360/12/52(week)
Net Credit Purchase

 Objective: -
The objective is to determine the efficiency with which the creditors are managed.

 Interpretation:
High creditor T/O ratio = low creditor ratio = quick payment to creditor
Low creditor T/O ratio = high creditor ratio = delayed payment to creditor

It shows the market standing of the firm. A new firm may have less creditor’s ratio, as their
market standing will be less. An established firm will have greater market standing hence it
is in position to pay their creditor later. However a firm should study advantage of paying
early and availing of cash discount.

TEX PLC

RATIO Year 2004 YEAR 2005