CHAPTER 1 - INTRODUCTION

Finance is regarded as the lifeblood of the business enterprise. This is because

in the modern money oriented economy, finance is one of the basic foundations of all
kinds of economic activities. It is master key, which provides access to all sources for
being employed in a manufacturing and merchandising activity. It has rightly been
said that business needs money to make more money. However it is also true that
money begets more money only when it is properly managed. Hence efficient
management of every business enterprise is clearly linked with efficient management
of its finance. The three important activities of business enterprise are finance,
production and marketing. Out of these, finance occupies great importance. Only
through proper finance management other functions such as production marketing etc.
can be better performed by managers. A firm can acquire funds from internal as well
as external sources. Internal sources constitute issue of shares and retained earnings,
while external sources are loans from financial institution, bonds etc. The modern
finance manager occupies a key position in the top management and plays a dynamic
role in solving complex problems concerning financial matters. When capital is
invested in an enterprise it becomes the responsibility of management to administrate
the financial affairs with caution and wisdom to achieve overall objectives of the
business. In accounting, financial statements are the means of convey to management
owners and to interested outsiders to know about profitability etc. The preparation of
financial is not the first step in the accounting process but they are the end products of
accounting process. Which give concise accounting information of the accounting
period is over. All financial transaction is recorded first in subsidiary books and
subsequently. They are posted to ledger accounts, the balances of ledger accounts at
the end of the year are ultimately presented through financial statements. These
statements are called final accounts.

The study is focused on a company on paint industry Asian paints. Asian

paint is India’s largest paint company and Asia’s third largest paint company with a
turnover of 77.06 billion. The group has an enviable reputation in the corporate world
for professionalism face track growth and building shareholders equity. Asian paints
become a corporate force and India’s leading Paint Company.

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1.1 STATEMENT OF THE PROBLEM

Finance is the life blood of the business. The business needs financial support
to carry out its operations they have to procure funds and make optimum utilization of
these funds. Every business activities require finance. Finance is needed to establish a
business, to run it to modernize it, to expand or diversify it. A firm can obtain growth
and development only by performing in a better way in all the fields. If the
performance is not up to the satisfactory level, proper precautionary measures have to
be adopted in the sick or efficient areas. The study has been undertaken to analyze the
financial performance of Asian paints. Financial performance of every organization is
made to ensure smooth working and maximizing profit and wealth. Every business
enterprise attempts to sustain itself and grow in a highly competitive environment.

1.2 SCOPE AND SIGNIFICANCE

The ultimate objective of business is to make profit. The company has to

ensure solvency and it has to maintain a reasonable liquidity position along with
profitability. Therefore periodical review of the affairs of the company to assess the
profitability, solvency and liquidity is essential. The technique adopted for assessing
the profitability liquidity and solvency of business concern is known as financial
performance analysis. The financial data is summarized in the form of financial
statements are outstanding significance to the various parties interested in growth of
the company. Asian paints are a leading paint manufacturing company in India. The
significance of the study is that, to get to know the financial performance of Asian
Paints Company and the way in which the theoretical accounting procedures are put
into practical way. The study focuses on profit and loss account and balance sheet of
the company for the last five years and other information provided by the company on
the basis of analysis it will be opportunity for us to understand the change occurred in
financial matters in the company for the last five years.

1.3 OBJECTIVES

The objective of the study is to get details of the financial performance of the
company Asian paints. To assess the profitability of the company.

To evaluate liquidity position of the company.

To evaluate the solvency position of the company.

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 To make recommendations and suggestions of the company.

1.4 PERIOD OF STUDY

The period of this study is limited to five years from 2006-07 to 2010-11

1.5 METHODOLOGY

The methodology adopted in the study is both descriptive and analytical.

The study is based on secondary data collected from Asian paints. The secondary
relating to the study is collected from the annual reports. The information so collected
has been rearranged in a meaningful manner for the purpose of analysis. For analysis
of the data ratios, averages, charts and diagrams have been used.

1.6 LIMITATIONS OF THE STUDY

The study is subject to certain limitations. In spite of the care taken in

collection, classification and analysis of data , the following limitations are noted :

The study has the limitations of accounting ratios.

The study was confined to a period of five years, only and as such the
objectives may not be fully achieved.
The study was concerned on a single company and no comparison is been
made.
Individual and split up figures are not available as some of the related items
have been given in total.
The study is based on secondary data so there is chance of errors and
omissions.

1.7 CHAPTERISATION

Chapter 1-Introduction
Chapter 2- Company Profile
Chapter 3-Analysis and interpretation
Chapter 4-Findings and suggestions

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 CHAPTER 2 – COMPANY PROFILE

INTRODUCING THE ASIAN PAINTS GROUP

Asian Paints is India’s largest paint company and Asia’s third largest
paint company, with a turnover of Rs 77.06 billion. The group has an enviable
reputation in the corporate world for professionalism, fast track growth, and
building shareholder equity. Asian Paints operates in 17 countries and has 24
paint manufacturing facilities in the world servicing consumers in over 65
countries. Besides Asian Paints, the group operates around the world through its
subsidiaries Berger International Limited, Apco Coatings, SCIB Paints and
Tubman’s. Forbes Global magazine USA ranked Asian Paints among the 200
Best Small Companies in the World for 2002 and 2003 and presented the 'Best
under a Billion ‘award, to the company. Asian Paints is the only paint company
in the world to receive this recognition. Forbes has also ranked Asian Paints
among the Best under a Billion
Companies in Asia In 2005, 06 and 07, The Company have come a long
way since its small beginnings in 1942. Four friends who were willing to take
on the worlds biggest, most famous paint companies operating in India at that
time set it up as a partnership firm. Over the course of 25 years Asian Paints
became a corporate force and India's leading paints company. Driven by its
strong consumer-focus and innovative spirit, the company has been the market
leader in paints since 1968. Today it is double the size of any other paint
company in India. Asian Paints manufactures a wide range of paints for
Decorative and Industrial use. In Decorative paints, Asian Paints is present in all
the four segments viz. Interior Wall Finishes, Exterior Wall Finishes, Enamels
and Wood Finishes. It also introduced many innovative concepts in the Indian
paint industry like Colour Worlds (Dealer Tinting Systems), Home Solutions
(painting solutions Service), Kids World (painting solutions for Kid’s room),
Colour Next (Prediction of Colour Trends through in-depth research) and
Royale Play Special Effect Paints, just to name a few. Asian Paints has always
been ahead when it comes to providing consumer experience. It has set up a
Signature Store in Mumbai where consumers are educated on colours and how
it can change their homes. Vertical integration has seen it diversify into products
such as Phthalic Anhydride and Pentaerythritol, which are used in the paint
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manufacturing process. Asian Paints also operates through APPG (50:50 JV
between Asian Paints and PPG Inc, USA, one of the largest automotive coatings
manufacturer in the world) to service the increasing requirements of the Indian
automotive coatings market. Another 50:50 JV with PPG has been proposed
which will service the protective, industrial powder, industrial containers and
light industrial coatings markets.

INTERNATIONAL PRESENCE

Today the Asian Paints group operates in 17 countries across the world.
It has Manufacturing facilities in each of these countries and is the largest paint
company in eleven countries. The group operates in five regions across the
world viz. South Asia, South East Asia, South Pacific, Middle East and
Caribbean region through the five corporate brands viz. Asian Paints, Berger
International, SCIB Paints, and Apco Coatings and Tubman’s. The Group
operates as:
Asian Paints Limited is an India-based color and paint company. The
Company, along with its subsidiaries, has operations in 17 countries globally
with 23 paint manufacturing facilities servicing consumers in 65 countries
through Berger International, SCIB Paints, Apco Coatings and Tubman’s. The
products of the Company include ancillaries, automotive, decorative paints, and
industrial paints. During the fiscal year ended March 31, 2011, the Company
produced 474,881 metric tons of paints, enamels and varnishes; 188,880 metric
tons of synthetic resins and polymers; 29,796 metric tons of phthalic anhydride;
4,860 metric tons of malefic acid; 5,400 metric tons of pentaerythritol; 3,300
metric tons of sodium formats, and 8,100 metric tons of formaldehyde. The
Company has manufacturing plants in Maharashtra, Gujarat, Andhra Pradesh,
Uttar Pradesh, Tamil Nadu and Haryana

Asian Paints Limited was established way back on February 1, 1942 and
today stands as India’s largest paint company and Asia’s third largest paint
company with an annual turnover of Rs 5,463 crore.

Presently the company is having its presence in 22 countries with 28

manufacturing locations, over 2500 SKU’s, Integrated SAP - ERP & i2 - SCM

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solution. Besides Asian Paints, the group operates around the world through its
subsidiaries Berger International, Apco Coatings, SCIB Paints and Tubman’s.

The company manufactures paints in the category of Decorative,

Automotive and Industrial segment. Apart from these the company also
manufactures various Accessories like, Wall Primer, Wood Primer, Putty and
Strainers etc.

Asian Paints along with its subsidiaries has operations in 20 countries

across the world and 28 paint manufacturing facilities, servicing consumers in
65 countries through Berger International, SCIB Paints-Egypt, Asian Paints,
Apco Coatings and Tubman’s. Asian Paints operates in 5 regions across the
world viz. South Asia, South East Asia, South Pacific, Middle East and
Caribbean region through the five corporate brands viz. Asian Paints, Berger
International, SCIB Paints, Apco Coatings and Tubman’s. In 10 markets, it
operates through its subsidiary, Berger International Limited; in Egypt through
SCIB Paints; in 5 markets in the South Pacific it operates through Apco
Coatings and in Fiji and Samoa it also operates through Tubman’s.

The company is having its strategically located Indian plants at Bhandup

(Maharashtra), Kasha (Uttar Pradesh) and Sriperumbudur (Tamil Nadu), Ankles
war (Gujarat), Patancheru (Andhra Pradesh) and the newly built plant at Rohtak
(Haryana).

The company is having state-of-the-art supply chain system using

cutting edge technology to integrate all its plants, regional distribution centers,
outside processing centers and branches in India. All the company’s paints
plants in India, two chemical plants, 18 processing centers, 350 raw material
and intermediate goods suppliers, 140 packing material vendors, 6 regional
distribution centers, 72 depots are integrated.

The company is having a big and experienced R&D team which has
successfully managed to develop High-end exterior finished and wood finishes
in-house, which was earlier imported into the country. These products are

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currently marketed under Asian Paints Elastomeric Hi-Stretch Exterior paint
and Asian Paints PU wood finish respectively.

The company is having three subsidiaries viz. Apco Coatings - it is a

subsidiary of Asian Paints in the South Pacific islands. The company operates in
Australia, Fiji, Tonga, Solomon Islands and Vanuatu under the brand name of
Apco Coatings.

The other subsidiary of the company is Asian Paints Industrial Coatings

Limited which has been set up to cater to the powder coatings market which is
one of the fastest growing segments in the industrial coatings market.

Berger International Limited in November 2002, became a part of the

Asian Paints Group. Today, the name of Berger is synonymous with quality and
innovation. BIL has presence across three regions viz. Middle East, Caribbean
and South East Asia. Asian Paints participates in the Industrial Coatings
segment directly, through a 50:50 JV with PPG Inc. of US as well as through a
100% subsidiary

On the recommendations of Booz, Allen and Hamilton, Asian Paints

restructured itself into Growth, Decorative and International business units and
has adopted SCM and ERP technology. Asian Paints aims to become the 5th
largest decorative paint company in the world

Milestones:

2011- Asian Paints has informed that the two plants of the company's
subsidiary, SCIB Chemicals SAE, Egypt which were shut due to prolonged
curfew have restarted the operations partially with effect from February 06,
2011. 2010- Asian Paints announced the commencement of commercial
production at its new paint manufacturing facility in Rohtak, Haryana. 2008-
The company performs Bhoomi Pooja at its proposed paint plant site at Rohtak
in Haryana. 2007- Asian Paints enter into a share purchase agreement for the
sale of its stake in Asian Paints Queensland. 2006- Asian Paint Consolidated
Turnover Crosses Rs. 3000 crore. 2005- Four Asian Paints Plants Conferred

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With ‘Sword of Honour’ By the British Safety Council. 2004- Asian Paints is
the only Paint Company in the World to be awarded the Forbes Best under a
Billion companies in the world. 2003- AsianPaints (India) awarded the 9.2%
stake after emerging the highest bidder at a bid price of Rs 205 per share for a
total value of Rs 77.09 crore. 2003- Berger International (BIL) the Singapore
based subsidiary of Asian Paints, Asia s fourth largest paint company, has
entered into a technical consultancy and advice arrangement with Berger Paints
Pakistan Limited, the second largest paint company in Pakistan. 1957 - 66- The
family-owned company makes the transition to a professionally managed
organization. British company Ballmer Laurie rejects the products of a giant
British paint company in favour of Asian Paints. Asian Paints embarks on an
ambitious grassroots marketing campaign, partnering with thousands of dealers
in small towns all over India. 1967 - Asian Paints emerges as India's leading
paint company ahead of any international competition. 1945 - Asian Paints
touches a turnover of Rs. 3,50,000, with an innovative marketing strategy 'to
reach consumers in the remotest corners of the country with small packs.' 1954 -
Asian Paints mascot, Gattu, the mischievous kid, is born. 1st February, 1942 -
Armed with little knowledge and great determination, Champaklal H. Choksey,
Chimanlal N. Choksi, Suryakant C. Dani and Arvind R. Vakil get together to
manufacture paint in a garage on Foras Road, Bombay. They name their
company 'The Asian Oil & Paint Company', a name that they picked randomly
from a telephone directory.

Achievements/ recognition:

• Asian Paints is the 10th largest decorative paint company in the world
• Awarded the 'Sword of Honour' by the British Safety Council for all the
paint plants in India. This award is considered as the pinnacle of
achievement in safety across the world.
• Forbes Global magazine, USA ranked Asian Paints amongst the 200
'Best Small Companies of the world' in 2002 and 2003 and amongst the
top 200 'Under a Billion Firms' of Asia in 2005.
• Ranked 24th amongst the top paint companies in the world by Coatings
World - Top Companies Report 2006.

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• The Asset - one of Asia's leading financial magazines ranked Asian
Paints amongst the leading Indian companies in Corporate Governance
in 2002 and 2005.
• Received the Ernst & Young 'Entrepreneur of the Year - Manufacturing'
award in 2003.
• Rated Best Employer by BT-Hewitt survey, 2000 Bluest of the blue
chips by Hindu Business Line; Most admired company to work for by
ET-BT survey, 2000
• Corporate Information
Asian Paints is a fully integrated paints company that employs the most
advanced and prudent principles for its working.
• Corporate Citizenship
While working towards enhancing customer experience we at Asian
Paints, look at the bigger picture by being aware about environmental
hazards. All our manufacturing plants and units are certified
environmentally safe.
• Group Subsidiaries
Currently, South Asia, South East Asia, South Pacific, Middle East &
Caribbean region are covered through five corporate brands viz. Asian
Paints, Berger International, SCIB Paints, APCO Coatings & Taubmans
respectively.
• Awards & Recognition
We have been widely recognized by entities the world over with awards
& recognition of high caliber. With the aim of fulfilling customer needs
& receive acknowledgement in return, which eggs us on to deliver more
than expected.
• Financial Results
Our working style is inclusive and we show transparency in our
dealings. Presenting, the annual reports with information that keep you
informed and help you make decisions.

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 CHAPTER 3 – ANALYSIS AND INTERPRETATION

DEFINITIONS OF FINANCIAL STATEMENTS

According to John N. Myer “The Financial Statements provide a

summary of accounts of a business enterprise, the Balance Sheet reflecting the
assets and liabilities and the Income statement showing the results of operations
during a certain period”. This definition emphasizes the importance of Balance
Sheet and Profit & Loss Account, but ignores of other financial statements like
Cash Flow Statement and Statement of Retained Earnings.

Smith and Ashburn defines Financial Statements as “the end product of

financial accounting is a set of financial statements, that purports to reveal the
financial position of the enterprise the results of its recent activities, and an
analysis of what has been done with earnings.” From the definition it is clear
that financial statements reveal financial position and profitability of the
concern and the utilization of retained earnings.

NATURE OF FINANCIAL STATEMENTS

Financial statements are prepared for the purpose of periodical review or

report by the management and deal with the state of investment in business and
result achieved during the period under review. They reflect a combination of
recorded facts, accounting conventions and personal judgments. From this it is
clear that financial statements are affected by three things i.e., recorded facts,
accounting conventions and personal judgments. Only those facts which are
recorded in the business books will be reflected in the financial statements.

Following points reflect truly the nature of financial statements of business

entities:

(i) These are reports or summarized reviews about the performance,

achievements and weakness of business.
(ii) These are prepared at the end of the accounting period so that various
parties may take decisions of their future actions in respect of the
relationship with the business.

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 (iii)The reliability of financial statements depends on the reliability of
accounting data. These statements cannot be said true and fair
representatives of the strength or profitability of the concern if there are
numerous frauds and the defalcations in the accounts.
(iv) The figures in the financial statements are a combination of recorded
facts. There may be certain developments and factors which may be very
important for the business are not taken into account as these are not
recorded in the routine of accounting. Moreover, fixed assets are
recorded at historical value without taking into consideration the change
in their values due to price level fluctuations.
(v) These statements are prepared as per accounting concepts and
conventions.
(vi) These statements are influenced by the personal judgment of the
accountant though he is expected to be more objective in his approach.
These judgments may relate to valuation of inventory, depreciation of
fixed assets and while making distinction between capital and revenue.

OBJECTIVES OF FINANCIAL STATEMENTS

The accounting Principles Board of America mentions the objectives of

financial statements as follows:

(i) To provide reliable financial information about economic resources and

obligations of a business enterprise.
(ii) To provide reliable information about the net resources (resources less
obligations) of an enterprise that results from its activities.
(iii)To provide financial information that assists in estimating the earning
potential of a business.
(iv) To provide other needed information about changes in economic
resources or obligations.
(v) To disclose to the extent possible, other information related to financial
statements that is relevant to the needs of the users of these statements.

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LIMITATIONS OF FINANCIAL STATEMENTS

Following are the main limitations of financial statements:

(i) Interim and not final report: Financial statements do not depict the
exact position and are essentially interim reports. The exact position
can be only known if the business is closed.
(ii) Lack of precision and definiteness: Financial statements may not
be realistic because these are prepared by following certain basic
concept and conventions. For example, going concern concept gives
us an idea that business will continue and assets are to be recorded at
the cost but the book value at which the asset is shown may not be
actually realizable. Similarly, by following the principle of
conservatism the financial statements will not reflect the true
position of the business.
(iii) Lack of objective judgment: Financial statements are influenced by
personal judgment of the accountant. He may select any method for
depreciation, valuation of stock, amortization of fixed assets and
treatment of deferred revenue expenditure. Such judgment if based
on integrity and competency of the accountant will definitely affect
the preparation of the financial statements.
(iv) Record only monetary facts: Financial statements disclose only
monetary facts i.e., those transactions are recorded in the books of
accounts which can be measured in monetary terms. Those
transactions which cannot be measured in monetary terms such as,
conflict between production manager and marketing manager may
be very important for a business concern but not recorded in the
business books.
(v) Historical in nature: These statements are drawn after the actual
happening of the events. They attempt to present a view of the past
performance and have nothing to do with the accounting for the
future. Modern management is forward looking but these statements
do not directly help them in making future estimates and taking
decisions for the future.

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 (vi) Artificial view: These statements do not give a real and correct
report about the worth of the assets and their loss of value
(vii) Scope for manipulations: These statements are sometimes prepared
according to the needs of the situation or the whims of the
management. A highly efficient concern may declare dividend by
wrongly showing profit in the profit and loss account. For this under
or over valuation of inventory, over or under charge of depreciation,
excessive or inadequate provision for anticipated losses and other
such manipulations may be resorted to. Window dressing may also
be resorted to in order to show better financial position of concern
than its real position.
(viii) Inadequate Information: There are many parties who are interested
in the information given in the financial statements but their
objectives and requirements differ. The financial statements as
prepared under the provisions of the Companies Act 1956, fail to the
needs of all. These are mainly prepared to safeguard the interest of
shareholders.

The above limitations of financial statements must be taken into consideration

before making their analysis.

MEANING OF ANALYSIS OF FINANCIAL STATEMENTS

Analysis is the process of critical examining in details accounting

information given in the financial statements. For the purpose of analysis,
individual items are studied, their interrelationships with other related figures
established, the date is sometimes rearranged to have better understanding of the
information with the help of different techniques or tools for the purpose.
Analysis financial statements is a process of evaluating relationship between
component parts of financial statements to obtain a better understanding of
firm’s position and performance. In the words of Myer, “Financial Statements –
Analysis is largely a study of relationship among the various financial factors in
a business as disclosed by a single set of statements and a study of trends of
these actors as shown in a series of statements.” The analysis of financial
statements thus refers to the treatment of the information contained in the

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financial statements in a way so as to afford a full diagnosis of the treatment of
the profitability and financial position of the firm concerned. For this purpose
financial statements are classified methodically, analyzed and compared with
the figures of previous years or other similar firms.

OBJECTIVES (OR USES) OF FINANCIAL ANALYSIS

Financial analysis is helpful in assessing the financial position and

profitability of a concern. This is done through comparison of ratios for the
same concern over a period of years; or for one department of a concern against
other departments of the same concern (intra-firm comparison). Accounting
ratios calculated for a number of years show the trend of the change of position,
i.e., whether the trend is upward or downward or static. The ascertainment of
trend helps us in making estimates for the future. Keeping in view the
importance of accounting ratios the accountant should calculate the ratios in
appropriate form, as early as possible, for to the management for managerial
control.

Main objectives of analysis of financial statements are to assess:

• The present and future earning capacity or profitability of the concern.

• The operational efficiency of the concern as a whole and of its various
parts or departments.
• The short-term & long-term solvency of the concern for the benefit of
the debenture holders and trade creditors.
• The comparative study in regard to one firm with another firm or one
department with another department.
• The possibility of developments in the future by making forecast and
preparing budgets.
• The financial stability of a business concern,
• The real meaning and significance of financial data and
• The long-term liquidity of its funds.

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TYPES OF FINANCIAL STATEMENT ANALYSIS

Different types of financial statements analysis can be made on the basis of:

The nature of the analyst and the material used by him.

The objectives of the analysis, and
The modus operandi of the analysis.

These are discussed one by one

1. According to the nature of the analyst and the material used by him .on
this basis, the financial analysis can be external and internal analysis

a. External analysis : it is made by those presence who are not connected with
the enterprise they do not have access to the enterprise. They do not have acess
to the detailed record of the company and have to depend mostly on published
statements

b. Internal analysis : The internal analysis is made by those presence who have
acess to the books of accounts. They are the members of the organization.
Analysis of financial statements or other financial data for managerial purpose
is the internal types of analysis. The internal analysis can give more reliable
result than the external analyst because every type of information is at his
disposal.

2. According to the objectives of the analysis:

a. Long-term analysis : This is analysis is made in order to study the long-term

financial stability. Solvency and liquidity as well as profitability and earning
capacity of a business concern.

b. Short-term analysis: This is made to determine the short-term solvency,

stability & liquidity as well as earning capacity of the business

3. According to the modus operandi of the analysis:

a. Horizontal (or dynamic) analysis: This is analysis is made to review and

analyze financial statements of a number of years and therefore based of
financial data taken from several years.

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b. Vertical (or static) analysis: This analysis is made to review and analyze the
financial statements of one particular year only. Ratio analysis of the financial
year relating to a particular accounting year is an example of this type of
analysis.

Techniques (tools or methods) of analysis and interpretations

Following techniques can be used

Comparitive Financial Statements

Common Measurement Statements
Trend percentage Analysis
Fund Flow Statement
Net working Capital Analysis
Cash Flow Statement
Ratio Analysis

1. Comparative Financial Statements

This is done to make the financial data more meaningful. These
statements is prepared to show absolute data of two or more years,
increases or decreases an absolute data in value and in terms of
percentages.
a. Comparative Income Statement
This statement helps in deriving meaningful conclusions as it is very
easy to ascertain the changes in sales volume, administrative expenses,
selling and distribution expenses, cost of sales etc.
b. Comparative Balance Sheet
This facilitates the comparison of figures of two or more periods and
provide necessary information which may be useful in forming an
opinion regarding the financial condition as well as progressive outlook
of the concern.

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2. Common Measurement (size) Statement (Common measurement
analysis)
In the income statement the sale figure is taken as base and all other
figures are expressed as percentage of sales. Similarly in the balance
sheet the total of assets and liabilities is taken as base and all other
figures are expressed as a percentage to his total. The percentages so
calculated can be easily compared with the corresponding percentages
in other periods and meaningful conclusions can be drawn.
a. Trend Percentages Analysis
This analysis is an important tool of horizontal financial analysis. This
method is immensely helpful in making a comparative study of the
financial statements of several years. Under this trend percentages are
calculated for each item of the financial statements taking the figure of
base year as 100.
b. Funds Flow Statements (or analysis)
This statement is prepared in order to reveal clearly the various sources
where from the funds are prepared to finance the activities of a
business concern during the accounting period and also brings to
highlight to uses to which these funds are put during the said period.
c. Cash Flow Statement (or analysis)
This statement is prepared to know clearly the various items of inflow
and outflow of cash it is an essential tool for short-term financial
analysis and is very helpful in the evaluation of current liquidity of a
business concern.
d. Statement of changes in working capital (or net working
analysis)
This statement is prepared to know the net change in working capital of
the business between two specified dates. It is prepared from current
assets and current liabilities of the said dates to show the increase or
decrease in working capital.
e. Ratio analysis
It is done to develop meaningful relationship between individual items
or group of items usually shown in the periodical financial statements
published by the concern.
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Limitations of Financial Statement Analysis

I. Historical nature of financial statement

The basic nature of these statements is historical, i.e., relating to the past period.
Past can never be a precise and infallible index of the future and can never be
hundred percent helpful for the future forecast and planning.

II. No substitute for judgement

Analysis of financial statements is a tool which can be used profitably by an

expert analyst but may lead to faulty conclusions if used by unskilled analyst.
The results of analysis, thus, should not be taken as judgement or conclusions.

III. Reliability of Figures

The reliability of analysis depends on reliability of the figures of the financial

statements under scrutiny. The entire working of analysis will be vitiated by
manipulations in the income statement, window dressing in the balance sheet,
questionable procedures adopted by the accountant for the valuation of fixed
assets and such other factors.

IV. Single year analysis is not much valuable and useful

The analysis of these statements relating to a single year only will have limited
use and value. Analysis should be extended over a number of years so that the
results may be compared to draw meaningful conclusions.

V. Results may have different interpretation

The results or indications derived from the analysis of these statements may be
differently interpreted by different users. For example, a high current ratio may
suit the banker.

VI. Change in accounting methods

Analysis will be effective if the figure derived from the financial statements are
comparable. Due to change in accounting methods the figures of the current
period may have no comparable base, then the whole exercise of analysis will
become futile and will be of little value.

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VII. Pitfalls in interfirm Comparison

When different firms are adopting different procedures, records, objectives,

policies and different items under similar headings, comparison will become
more difficult. If done,it will not provide reliable base to assess the
performance, efficiency, profitability and financial condition of the firm as
compared to industry as a whole.

VIII. Price level changes reduce the validity of analysis

The continuous and rapid changes in the value of money, in the present day
economy, also reduces the validity of the analysis.

IX. Shortcoming of the tool of analysis

There different tools of analysis available to the analyst. Which tool is to be

used in a particular situation depends on the skill, training, intelligence and
expertise of the analyst. If wrong tool is used, it may give misleading results and
may lead to wrong conclusion.

Ratio Analysis

Ratio analysis is one of the powerful tool of the financial analysis . A ratio can be
defined as “the indicated quotient of two mathematical expressions “and as “the
relationship between two or more things”. Ratio thus the numerical or an arithmetical
relationship between two figures. A ratio can be used as a yardstick for evaluating the
financial position and performance of a concern because the absolute accounting data
cannot provide meaningful understanding and interpretation .A ratio is the
Relationship between two accounting items expressed mathematically. Ratio analysis
helps the analyst to make quantitative judgment with regard to concern’s financial
position and performance .

Absolute figures are valuable but they standing alone convey no meaning unless
compared with another .Accounting ratios show interrelationships which exist among
various accounting data. When relationships among various accounting data supplied
by financial statements are worked out , they are known as accounting ratios. The
analysis of financial statement with ratio called ratio analysis. Ratio analysis stands
for the process of determining and presenting the relationship of items and groups of

19
items in the financial statements. It is an important technique of financial analysis .It
is a way by which financial stability and health of a concern can be judged.

Classification of ratios

Ratios may be classified in a number of ways keeping in view the particular purpose.
This classification is as under:

1. Profitability ratios
2. Coverage ratios
3. Turnover ratios
4. Financial ratios
5. Leverage ratios

Importance (or advantages) of Ratio Analysis

1. Useful in financial position analysis

Accounting ratios reveal the financial position of the concern. This helps the
banks, insurance companies and other financial institutions in leading and
making investment decision.

2. Useful in simplifying accounting figures

Accounting ratios simplify, summarise and systematize the accounting figures

in order to make them more understandable and in lucid form. They highlight
the inter-relationship which exists between various segments of the business as
expressed by accounting segments.

3. Useful in assessing the operational efficiency

Accounting ratios helps to have to have an idea of the working of a concern.

The efficiency of the firm becomes evident when analysis is based on
accounting ratios. They diagnose the financial health by evaluating liquidity,
solvency, profitability etc….

4. Useful in forecasting purposes

If accounting ratios are calculated for a number of years, then a trend is

established. This trend helps in setting up future plans and forecasting.

20
 5. Useful in locating the weak spots of the business

Accounting ratios are of great assistance in locating the weak spots in the
business even though the overall performance may be efficient. Weakness in
financial structure due to incorrect policies in the past or present are revealed
through accounting ratios.

6. Useful in comparison of performance

Through accounting ratios comparison can made between one department of a

firm with another of the same firm in order to evaluate the performance of
various departments in the firm. Manager is naturally interested in such
comparison in order to know the proper and smooth functioning of such
departments.

Limitations Of Accounting Ratios

• False results if based on incorrect accounting data

• No idea of probable happening in future
• Variation in accounting methods
• Price level changes
• Only one method of analysis
• No common standards
• Different earnings attached to the same term
• Ignores quantitative factors
• No use if ratios are worked out for insignificant and unrelated figures

ANALYSIS OF RATIOS

1. Profitability Ratios:
Profitability is the overall measure of the companies with regard to
efficient and effective utilization of resources at their command. It indicates in
a nut shell the effectiveness of the decisions taken by the management from
time to time. Profitability ratios are of utmost importance for a concern. These
ratios are calculated to enlighten the end results of business activities which is
the sole criterion of the overall efficiency of a business concern. Following are
the important profitability ratios:

21
 a. GROSS PROFIT RATIO
In case of gross profit ratio higher the ratio the better it is. A low ratio
indicates unfavorable trend in the form of reduction in selling prices not
accompanied by proportionate decrease in cost of goods or increase in cost of
production. The gross profit should be adequate to cover fixed expenses,
dividends and building up of reserves. It is important that a business keep up
its margin of gross profit, otherwise it may not cover its operating expenses
and thus provide an adequate return to proprietors.
Gross Profit Ratio = Gross Profit x 100
Net sales

Table 1.1 Gross Profit Ratios (Rupees in Crores)

Year Gross Profit Net Sales Ratio

2006-07 483.95 2953.30 16.38

2007-08 633.91 3595.33 17.63

2008-09 645.47 4510.12 14.31

2009-10 1047.75 5367.72 19.51

2010-11 1247.46 6606.02 18.88

Source: Annual report of Asian paints ltd from the year 2006-2011

Gross profit tells gross margin on trading. Higher the ratio, the better it is. While
comparing gross profit of 5 years we can find a fluctuating trend. On 2010 ratio is
higher compared to other years which indicates a higher profitability of Asian paints.
But in the year 2009 it was low, A lower ratio indicates unfavorable trend in the form
of reduction in selling price act accompanied by proportionate decrease in cost of
goods or increase in cost of production.

22
 Figure 1.1 Gross Profit Ratios

b. OPERATING RATIO
This ratio indicates the proportion that the cost of sales bears to sales. Cost of
sales indicated direct cost of goods sold as well as other operating expenses
which have matching relationship with sales. It excludes income and expenses
which have no bea
bearing o production and sales is non – operating incomes and
expenses as interest and dividend received on investment , interest paid on
long term loans and debentures ,profit or loss on sale of fixed assets or long
term investment. It is calculated as follows:
fol

Operating ratio = cost of goods sold + operating expenses *100

100
Net sales

Table 1.2 Operating profit Ratios

Ratio (Rupees in Crores)

Year Cost Of Sales Net Sales Ratio

2006-07 2519.09 2953.30 85.23

2007-08 3026.04 3595.33 84.17

2008-09 3916.19 4510.12 86.33

2009-10 4334.76 5367.72 80.75

2010-11 5444.75 6606.02 82.42

Source: Annual report of Asian paints ltd from the year 2006
2006-2011
2011

23
In the case of operating ratio, a low ratio is favorable to the company. Here we can
find a ratio in the year 2010 and a higher ratio on 2009. Higher the ratio, the less
favorable it is because it would have a smaller margin of operating profit for the
payment of dividends and the creation of reserves. When comparing operating ratio of
5 years, in 2010 there is low proportion that the cost of sales bears to sales which is
favorable to the company. Operating ratio of Asian paints shows a decreasing trend
which is favorable except in2
in2009.

Figure 1.2 Operating profit Ratios

c. EXPENSES RATIO
These are calculated to ascertain the relationship that exists between operating
expenses and volume of sales. Following ratios will help in analyzing the
operating ratio.
1. Material Consumed Ratio

Table 1.3 Material Consumed Ratios (Rupees in Crores)

Year Gross Profit Net Sales Ratio

2006-07 1661.78 2953.30 56.26

2007-08 1969.47 3595.33 55.87

2008-09 2640.48 4510.12 59.55

2009-10 2835.40 5367.72 53.82

2010-11 3654.93 6606.02 56.32

24
These are calculated to ascertain the relationship that exists between material
consumed and volume of sales. Material consumed ratio of previous 5 years shows a
fluctuating trend.

Figure 1.3 Material Consumed Ratios

2. Conversion Cost Ratio

= Labour cost + Manufacturing expenses x 100
Net sales

Table 1.4 Conversion Cost Ratio

Ratios (Rupees in Crores)

Labour Manufacturing Net Ratio

Year
Cost Expenses Sales

2006-07 155.60 31.53 2953.30 6.34

2007-08 195.54 39.26 3595.33 6.53

2008-09 239.77 40.45 4510.12 6.27

2009-10 262.73 52.30 5367.72 5.86

2010-11 302.34 61.46 6606.02 5.50

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

Conversion cost ratio is used to ascertain the relationship between labour and
manufacturing expenses with net sales conversion cost ratio of previous 5 years shows
a decreasing tendency which is favorable to the concern.

25
 Figure 1.4 Conversion Cost Ratio

3. Administration Expenses Ratio

= Administration expenses x 100
Net sales

Table 1.5 Administration Expense Ratios (Rupees in Crores)

Year Gross Profit Net Sales Ratio

2006-07 126.00 2953.30 4.27

2007-08 139.33 3595.33 3.87

2008-09 170.37 4510.12 3.17

2009-10 196.96 5367.72 3.66

2010-11 231.72 6606.02 3.50

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

Administration expense ratio is used to ascertain the relationship that exists

between administration expenses and volume of sales. This ratio also shows a
decreasing tendency and lays between 3.50 to 4.27 which are quite favorable to
the concern.

26
 Table 1.5 Administration Expense Ratios

4. Selling And Distribution Expenses Ratio

= Selling and Distribution x 100
Net Sales

Table 1.6 Selling And Distribution Expense Ratio (Rupees in Crores)

Year Gross Profit Net Sales Ratio

2006-07 508.88 2953.30 17.23

2007-08 646.58 3595.33 17.98

2008-09 779.34 4510.12 17.27

2009-10 940.34 5367.72 17.51

2010-11 1128.32 6606.02 17.08

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

This selling and distribution expense ratio is calculated to ascertain the relationship
that exists between selling and distribution expenses and volume of sales. There is
only a slight change in these ratios for the previous 5 years the ratio lies between
17.08 to 17.98.

27
 Figure 1.6 Selling And Distribution Expense Ratio

5. Operating Profit Ratio

This ratio establishes relationship between operating profit and sales. this
ratio indicates the portion remaining out of every rupee worth of sales after
all operating cost and expenses met.
Operating Profit Ratio = Operating Profit x 100
Net Sales

Table 1.7 Operating Profit Ratio

Ratios (Rupees in Crores)

Year Gross Profit Net Sales Ratio

2006-07 436.28 2953.30 14.77

2007-08 569.49 3595.33 15.83

2008-09 593.93 4510.12 13.16

2009-10 1032.96 5367.72 19.25

2010-11 1161.27 6606.02 17.58

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011
When comparing operating ratio of 5 years we can find an increasing trend except in
the year 2009. In case of operating profit ratio, higher the ratio, the better it is. This
ratio indicates the position remaining out of every rupee worth of sales after all
operating costs and expenses have been met. On 2010, ratio is higher which means
higher profitability of Asian paints limited. On 2007 onwards operating profit ratio is
increasing but in the year 2009 it was low which indicates lower profitability of the
concern.

28
 Figure 1.7 Operating Profit Ratios

6. Net Profit Ratio

This ratio explains per rupee profit generating capacity of sales. If
the cost of sales lower, then the net profit will be higher and then
divide with the net sales, the result is the sales efficiency. If lower is
the net profit per rupee of sales, lower will be the sales efficiency.
The concerns must try for achieving greater ssales
ales efficiency for
maximizing RIO. The ratio is very useful to the proprietors and
prospective investors because it reveals the overall profitability of
the concern.

Net Profit Ratio = Net Profit after Tax x 100

Net Sales

Table 1.8 Net Profit Ratios (Rupees in Crores)

Year Gross Profit Net Sales Ratio

2006-07 267.86 2953.30 9.06

2007-08 376.53 3595.33 10.47

2008-09 370.53 4510.12 8.21

2009-10 666.35 5367.72 12.41

2010-11 768.40 6606.02 11.63

29
Similar to gross profit and operating profit ratio, net profit ratio of Asian paints
of previous 5 years was increasing except on 2009. In the year 2009 it was low
which indicates a lower profitability higher the ratio, the better it is because it
gives idea of improved efficiency of the concern. In the year 2010, there was
higher profitability because the ratio is higher in that year.

Figure 1.8 Net Profit Ratios

7. Return on Capital Employed

This ratio is an indicator of the earning capacity of the capital employed.
This ratio is considered to be the most important ratio because it reflects
the overall efficiency with which capital is us
used.
Return on Capital Employed = Operating Profit x 100
Capital Employed

Table 1.9 Return on Capital Employed (Rupees in Crores)

Operating Capital Ratio

Year
Profit Employed

2006-07 436.28 851.68 51.23

2007-08 569.49 1005.90 56.61

2008-09 593.93 1159.76 51.21

2009-10 1032.96 1623.51 63.62

2010-11 1161.27 2039.45 56.94

30
This ratio is an indicator of the earning capacity of the capital employed in the
business. On 2010, return on capital employed was higher which means on that
year return yielded was more as compared to other years. It reflects the overall
efficiency with which capital is used.

Figure 1.9 Return on Capital Employed

8. Return On Shareholders Fund

When it is desired to work out the profitability of the company from the
shareholders point of view, it can be calculated as follows:
Return On Shareholders Fund = Profit after Interest and Tax x 100
Shareholders Fund

Table 1.10 Return on Shareholders Fund (Rupees in Crores)

Year Profit Shareholders Fund Ratio

2006-07 267.86 744.08 35.9

2007-08 376.53 928.5 40.55

2008-09 370.53 1094.47 33.85

2009-10 666.35 1557.22 42.79

2010-11 768.40 1975.32 38.90

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

31
When comparing 5 years return on share holder’s fund, there is an increasing trend
except in the year 2009. In case of return on share holder’s fund, a high ratio is
favorable to the concern. In the year 2009, return on share holders fund shows a lower
extent to which profitability objective is being achieved. A low ratio is unfavorable to
the concern.

Figure 1.10 Return on Shareholders Fund

9. Return On Total Asset

This ratio is calculated to measure the profit after tax against the
amount invested in total asset to ascertain whether properly utilized
or not.

Return On Total Asset = Net Profit after Tax x 100

Total Assets

Table 1.11 Return on Total Asset (Rupees in Crores)

Year Gross Profit Net Sales Ratio

2006-07 267.80 851.67 31.45

2007-08 376.53 1005.90 37.43

2008-09 370.53 1159.76 31.94

2009-10 666.35 1623.51 41.04

2010-11 768.40 2039.45 37.67

32
Higher the ratio the better it is. In the year 2010, it was 41.04 which is a high
ratio as a low ratio; return on total assets ratio indicates whether the assets are
being utilized properly or not. We can find using this ratio as in the year 2010,
assets are being utilized properly.

Figure 1.11 Return on Total Asset

10. Dividend Payout Ratio

This ratio indicates as to what proportion of earning per share has
been used for paying dividend and what has been retained for
ploughing back. This ratio is very important from shareholders’
point of view as it tells him that if a company has used whole or
substantially the whole of its earning for paying dividend and
retained nothing for ffuture
uture growth and expansion purposes, then
there will be very dim chances of capital appreciation in the price of
shares of such company.

Dividend Payout Ratio = Dividend per Equity Share

EPS

33
Table 1.12 Dividend Payout Ratios (Rupees in Crores)

Dividend Per Ratio

Year EPS
Equity Share

2006-07 14.84 28.36 52.36

2007-08 19.88 39.12 50.84

2008-09 20.47 37.78 54.19

2009-10 31.51 80.74 39.03

2010-11 37.22 80.81 46.

46.06

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

While comparing payout ratio of 5 years, we find a low ratio on 2010 and a high
ratio on 2009 as compared to other years on 2009, there will be very dim
chances of capital appreciation in the price of shares of such company. But in
the year 2010 having a low payout ratio will attract investors who are more
interested in capital appreciation.

Figur
Figure 1.12 Dividend Payout Ratios

34
 2. FINANCIAL RATIOS
These ratios are calculated to judge the financial position of the concern
from long-term as well as short-term solvency point of view. These
ratios can be divided into two broad categories.
a. Liquidity Ratio
b. Stability Ratio

(i) LIQUIDITY RATIOS

Liquidity refers to the ability of the concern to meet its current obligations as
and when these become due. The short term obligations are met by realizing
amounts from current, floating or circulating assets. The current asset should
either be liquid or near liquidity. If current assets can pay off current
liabilities, then liquidity position will be satisfactory. On the other hand, if
current liabilities may not be easily met out of current assets then liquidity
position will be bad. To measure the liquidity of a firm, the following ratios
can be calculated:

a) Current Ratio (Working Capital Ratio)

This is the most widely used ratio. It is a ratio of current assets to current
liabilities. It shows a firm’s ability to cover its current liabilities with its
current assets.
Current Ratio = Current Assets
Current Liabilities
Table 1.13 Current Ratio (Rupees in Crores)

Year Current Assets Current Liabilities Ratio

2006-07 869.21 703.15 1.24

2007-08 1035.22 1017.28 1.02

2008-09 1172.36 1034.92 1.13

2009-10 1364.85 1533.21 0.89

2010-11 1729.79 1849.61 0.93

35
Generally current ratio of 2:1 is considered ideal for a concern. i.e., current assets
should be twice of the current liabilities. But in the case of comparison of current
ratios of the 5 years we can find a ratio less than 2. It will lead to an adverse effect on
business operations and difficulty may be experienced in the payment of current
liabilities and day to day operations of the business may suffer.

Figure 1.13 Current Ratio

b) Quick Ratio
It is the ratio of liquid assets to liquid liabilities. It shows a firm’s
ability to meet current liabilities with its most liquid (quick) assets.
1:1 ratio is considered ideal ratio for a concern because it is wise to
keep the liquid assets at least equal to the liquid liabilities at all
times. Liquid assets are those assets which are readily converted
into cash and will include cash balances, bill receivable, sundry
debtors and short term investments.
Quick Ratio = Quick Asset
Current Liabilities
Table 1.14 Quick Ratios (Rupees in Crores)

Year Quick Asset Current Liabilities Ratio

2006-07 414 703.15 .59

2007-08 478.12 1017.28 .47

2008-09 600.25 1034.92 .58

2009-10 567.28 1533.21 .37

2010-11 628.87 1849.61 .34

36
In the case of past 5 years quick ratio, there is a rate which is less than 1.
Current liabilities are more than quick asset; the ideal ratio is 1:1, which means
liquid asset is less than liquid liabilities.

Figure 1.14 Quick Ratios

c) Ratio of Inventory to Working Capital

It is to ascertain that there is no overstocking the ratio of inventory to
working capital should be calculated. As follows:
Ratio of Inventory to Working Capital = Inventory
Working capital

Table 1.15 Ratio of Inventory to Working Capital (Rupees in Crores)

Year Inventory Working Capital Ratio

2006-07 434.07 166.06 2.61

2007-08 538.97 17.94 30.04

2008-09 546.71 137.44 3.97

2009-10 763.14 168.36 4.53

2010-11 1071.76 119.82 8.94

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

37
The desirable ratio is 1:1. In the past 5 years, amount of inventory is more than
working capital the last 2 years working capital is negative which means current
liabilities are more than current assets. Therefore this ratio is unfavourable to
the concern.

Figure 1.15 Ratio of Inventory to Working Capital

(ii) STABILITY RATIOS

These ratios help in ascertaining the long term solvency of a firm
which depends on firm’s adequate resources to meet its long
term funds requirements, appropriate debit equity mix to raise
long term funds and earnings to pay interest and installment of
long term loans in time (i.e., coverage ratios).following ratios can
be calculated for this purposes:
p
a. Fixed Asset Ratio
This ratios explains whether the firm has raised adequate long term
funds to meet its fixed assets requirements and calculated as under
Fixed Asset Ratio = Fixed asset
Capital Employed
Table 1.16 Fixed Asset Ratios (Rupees in Crores)

Year Fixed Asset Capital Employed Ratio

2006-07 334.91 851.68 .39

2007-08 428.83 1005.90 .42

38
 2008-09 622.91 1159.76 .53

2009-10 707.46 1623.51 .43

2010-11 1057.19 2039.45 .52

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

This ratio gives an idea as to what part of the capital employed has been used in
purchasing the fixed assets for the concern. If the ratio is less than one it is good
for the concern. In the case of comparison of fixed asset ratio of Asian paints we
can find the ratio is less than one for the past 5 years that means this ratio is
favorable to the concern. This ratio is laid betwe
between .39 to .53. The ideal
deal ratio is
.67. In this case is less than .67 but it is good for the concern.

Table 1.16 Fixed Asset Ratios

b. Ratio of Current Asset to Fixed Asset

This ratio is differ from industry to industry and, therefore no standard
can be laid down. A decrease in the ratio may mean that trading is slack
or more mechanisation has been put through. An increase in the ratio
may reveal that inventories and debtors have unduly increased or fixed
assets have been intensively used. An increase in the ratio accompanied
by increase in profit, indicates the business in expanding

Ratio of Current Asset to Fixed Asset = Current Assets

Fixed Assets

39
Table 1.17 Ratio off Current Asset to Fixed Asset (Rupees in Crores)

Year Fixed Asset Current Asset Ratio

2006-07 334.91 869.21 2.59

2007-08 428.83 1035.22 2.41

2008-09 622.91 1172.36 1.88

2009-10 707.46 1364.85 1.93

2010-11 1057.19 1729.79 1.64

Source: Annual report of Asian paints ltd from the year 2006-2011
2011

This ratio will differ from industry to industry. While we compare the ratio of 5
years we can find a decreasing trend in this ratio. Ratio was decreasing from
2.59 on 2007 to 1.64 on 2011. A decrease in ratio may
may mean that trading is slack
or more mechanization has been put through.

Figure 1.17 Ratio of Current Asset to Fixed Asset

40
 3. TURNOVER RATIOS
Funds are invested in various assets in business to make sales and earn
profit. The efficiency with which assets are managed directly affects the
volume of sales. The better the management of assets, the larger is the
amount of sales and the profits. Activity ratios measure the efficiency or
effectiveness with which a firm manages its resources or assets. These
ratios are also called turnover ratios, because they indicate the speed
with which assets are converted or turned over into sales. Depending
upon the purpose a number of turnover ratios can be calculated as
follows:
a. Sales to Capital Employed
This ratio shows the efficiency of capital employed in the business
by computing how many times capital employed is turned over in a
stated period.
Sales to Capital Employed = Sales
Capital Employed

Table 1.18 Sales to capital Employed (Rupees in Crores)

Year Sales Capital Employed Ratio

2006-07 2953.30 851.68 3.46

2007-08 3595.33 1005.90 3.57

2008-09 4510.12 1159.76 3.88

2009-10 5367.72 1623.51 3.30

2010-11 6606.02 2039.45 3.23

Source: Annual report of Asian paints ltd from the year 2006-2011

This ratio shows the efficiency of capital employed in the business by

computing how many times capital employed is turned over in a stated period
ratio of sales to capital employed to the past 5 years is late between 3 to 4. The

41
higher the ratio, the grea
greater
ter are the profits. A low capital turnover ratio should
be taken to mean that sufficient sales are not being made and profits are lower.

Table 1.18 Sales to capital Employed

b. Sales to Fixed asset

This ratio measures the efficiency of the assets used. The efficient
use of assets will generate greater sales per rupee invested in all the
assets of the concern. The efficient use of the asset will result in
low sales volume coupled with higher overhead charges and under
utilization of the available capacity.
capacity. Hence the management must
strive for using total resources at optimum level, to achieve higher
RIO. This ratio expresses the number of times fixed assets are
being turned over in stated period.
Sales to Fixed asset = Sales
Fixed Asset

Table 1.19 Sales to Fixed Asset Ratio (Rupees in Crores)

Year Sales Fixed Asset Ratio

2006-07 2953.30 334.91 8.81

2007-08 3595.33 428.83 8.38

2008-09 4510.12 622.91 7.24

42
 2009-10 5367.72 707.46 7.58

2010-11 6606.02 1057.19 6.24

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

This ratio measures the efficiency of the assets use. When comparing sales to fixed
asset ratio for the past 5 years we can find a decreasing trend. Ratio was decrease
decreased
from 8.81 in the year 2007 to 6.24 in the year 2011. Higher the ratio better is the
performance. On the other hand a low ratio indicates that fixed assets are not being
efficiently utilized.

Figure 1.19 Sales to Fixed Asset Ratio

c. Sales to Working Capital

This ratio shows the number of times working capital is turnover in
a stated period. The higher the ratio, the lower is the investment in
working capital and the greater are the profits.
Sales to Working Capital = Sales
Net working capital

Table 1.20 Sales to Working Capital (Rupees in Crores)

Year Sales Working Capital Ratio

2006-07 2953.30 166.06 17.78

2007-08 3595.33 17.94 200

43
 2008-09 4510.12 137.44 32.81

2009-10 5367.72 168.36 31.88

2010-11 6606.02 119.82 55.13

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

This ratio shows the number of times working capital is turned

turned-over
over in a stated period.
Ratio of sales to working capital is fluctuating during the past 5 years. For the last
year 2011 and 2010 there was negative figure in networking capital because the
amount of current liabilities is more than the amount of current assets. In the year
2008 the ratio was 200 because working capital is a ve
very
ry lower amount as compared
to sales.

Figur
Figure 1.20 Sales to Working Capital

d. Total Asset Turnover Ratio

This ratio is calculated by dividing the net sales by the value of
total assets. A high ratio is an indicator of over trading of total
assets while a low ratio reveals idle capacity. The traditional
standard for the ratio is two types.
Total Asset T
Turnover Ratio = Sale
Total Asset

44
Table 1.21 Total Asset Turnover Ratios (Rupees in Crores)

YEAR SALES TOTAL RATIO

ASSET

2006-07 2953.30 851.68 3.46

2007-08 3595.33 1005.90 3.57

2008-09 4510.12 1159.76 3.88

2009-10 5367.72 1623.51 3.30

2010-11 6606.02 2039.45 3.23

Source: Annual report of Asian paints ltd from the year 2006-2011
2006 2011

When comparing total assets turnover ratio the ratio was above 3. A high ratio is an
indicator of over-trading
trading of total assets; the traditional standard for the ratio is 2 times.
But in this case sales is more than 2 times of the amount of total assets. There are no
chances of idle capacity because there is no lower ratio in any of the year. The ra
ratio of
total assets turnover ratio is between 3 to 4 for the past 5 years.

Figure 1.21 Total Asset Turnover Ratios

45
 CHAPTER 4 – FINDINGS, CONCLUSION AND SUGGESTIONS

FINDINGS

The various findings and conclusions of the study Are stated in the last chapter
itself. However it is considered suitable to provide a summary of these findings
and conclusion.

Various ratios are used for measuring the profitability position, solvency
position and the effectiveness or performance level of the concern profitability
ratios are used for measuring the profitability position, financial ratios are used
for measuring solvency position and turnover ratio for measuring effectiveness
of the concern.

PROFITABILITY RATIOS

• Gross profit ratio of the concern shows a better position in all years
except in the year 2009
• In case of operating ratio a low ratio is favorable to the concern. Here we
can find a lower ratio in 2010 and higher ratio n 2009, that means
operating ratio shows a better position in all years except 2009
• From the analysis of operating profit ratio we can find an increasing
trend except in the 2009. On 2007 onwards operating profit ratio is
increasing but in the year 2009 if was low which indicates lower profit
ability of the concern. In other years operating profit ratio is higher.
• Similar to gross profit and operating profit ratio net profit ratio of Asian
paints of previous 5 years was increasing except on 2009 in the year
2010, there was higher profitability.
• Return on capital employed ratio is indicating a better earning capacity
of the capital employed in the business. It was higher in all years except
in the year 2009.
• From the analysis of the return on shareholder’s few can find an
increasing trend in all years except in the year 2009. The higher the ratio
the better it is.

46
 • Using the return on total assets ratio we can find a fluctuating trend in
the previous 5 years of the concern. A higher ratio shows a better
position relating to the utilization of assets.
• Material consumed ratio shows a fluctuating tendency. This ratio lies
between 53.82 to 59.55
• Conversion cost ratio is sowing a decreasing tendency from 6.34% to
5.505
• Administration expenses ratio also shows a decreasing tendency for the
past 5 years.
• Selling & distribution expenses ratio also shows a decreasing tendency,
but there is only a slight change from year to ear ratio is lies between
17.98 to 17.08
• Decreasing tendency of expenses ratio is favorable to the concern. These
ratios show the relationship between operating expenses and volume of
sales from the analysis of payout ratio we can find a low ratio on 2010
and a higher ratio on 2009 as compared to other years.

FINANCIAL RATIOS

• The ratios used for measuring short term solvency position of the
concern is liquidity ratio and the ratios used for measuring long term
solvency position of the concern is known as stability ratios.

LIQUIDITY RATIOS

• Current ratio of the concern lies between .93 and 1.24 it was showing a
decreasing tendency. The standard for current ratio is 2:1 that means
here we can find current ratios which is less than 2.
• In the case of past 5 years quick ratio there is a rare which is less than 1.
The standard norm for quick ratio is1:1
• By analyzing ratio of inventory to working capital we can find that , in
the past 5 years amount of inventory is more than the working capital
and the desirable ratio is1:1

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STABILITY RATIO

• By analyzing fixed asset ratio we can find the ratio is less than one for
the past 5 years that means this ratio is favorable to the concern. The
ideal fixed asset ratio is 0.67
• While we compare ratio of current assets to fixed assets we can find a
decreasing trend in this ratio.

TURNOVER RATIO

• When comparing sales to fixed asset ratio for the past 5 years we can
find a decreasing trend. a low ratio indicates assets are not being
efficiently utilized.
• Sales to working capital ratio are fluctuating during the past 5 years.
• When comparing total asset turnover ratio, the ratio was above 3. The
tradition standard for the ratio is 2 times. The ratio of total assets
turnover is between 3 to 4 for the past 5 years.
• Ratio of sales to capital employed for the past 5 years laid between 3 to
4. The higher the ratio, the greater are the profit.

CONCLUSION

Asian Paints Limited is an India-based colour and paint company. The

company, along with its subsidiaries, has operations in 17 countries globally
with 23 paint manufacturing facilities servicing consumers in 65 countries
through Berger international, SCIB paints, Apco coatings and Tubman’s. The
products of the company include ancillaries, automotive, decorative paints and
industrial paints.

Asian Paints is India’s largest paint company and Asia’s third largest paint
company. The group has an enviable reputation in the corporate world for
professionalism, fast track growth and building shareholder equity. Asian Paints
operates in 17 countries and has 24 manufacturing facilities in the world
servicing consumer in over 65 countries.

Various ratios are used for measuring profitability and solvency position and
effectiveness or performance level of the concern. Profitability ratios are used

48
for measuring the profitability position; financial ratios are used for measuring
solvency position and turnover ratios for measuring the effectiveness of the
concern. On the basis of analysis of various ratios it can be said that company’s
profitability position is good. Financial ratios in certain areas are not
satisfactory and the activity ratios are not much satisfactory. The company’s
liquidity position is weak so the management efforts must be directed in
effective utilization of working capital in order to have a high growth rate.

SUGGESTIONS
On the basis of analysis & findings, it can be said that the company’s
profitability position is good. Financial ratios in certain areas are not much
satisfactory and the activity ratios are just satisfactory. So the following
recommendations are made

a) Gross profit ratio, operating profit ratio and net profit ratio are showing a
better profitability position at the sales of the firm. It will lead to better
turnover.
b) Management effort must be directed in effective utilization of the
working capital or decreasing the working capital as the working capital
ratio is not satisfactory.
c) Current ratio less than 2, it will lead to an adverse effect on business
operations and difficulty may be experienced in the payment of current
liabilities and day to day operations of the business may suffer. So the
management should make effort to increase the current asset or decrease
the current liabilities until the ideal ratio is got.
d) Here liquid asset is less than liquid liabilities and the management also
makes effort to increase the liquid assets unless the liquid position of the
concern is suffered.
e) Solvency position of the concern is not satisfactory management take
steps to improve the solvency position.
f) Ratio of current assets to fixed assets showing a decreasing trend and a
decreasing the ratio may mean that trading is lack or more
mechanization has been put through management should take effort to
improve this ratio.

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g) A low sale to fixed ratio indicates that fixed assets are not being
efficiently utilized, so the management should take necessary steps to
the effective utilization of fixed assets.
h) A high total assets turnover ratio is an indicator of trading of total asset
management may take steps to slightly reduce the over trading of total
assets.

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BIBLIOGRAPHY

Jain, S.P. and Narang, K.L. (2000). Corporate Accounting. New Delhi: Kalyani
Publishers.

Jain, S.P. and Narang, K.L. (2010). Financial Accounting. New Delhi: Kalyani
Publishers.

Maheshwari, S.N. (2000). Principles of Management Accounting. New Delhi:

Sultan Chand & Sons Educational Publishers.

Sharma, R.K. and Shashi, K.Gupta (2010) Financial Management. New Delhi:
Kalyani Publishers.

Annual Reports of Asian Paints 2006-07 to 2010-11

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