RATIOS FOR WORKING CAPITAL MANAGEMENT:-
TABLE 3: SHOWING THE CURRENT RATIO FOR 3 YEARS
(Rs. in Lakhs)
2:1 is considered as the standard for this ratio. From the table, it is evident that in all 3 years the current ratio is far below the ideal level. The company has recorded a highest ratio of 1.26:1 in 2007-08 and a lowest of 1.168:1 in 2009-10.
TABLE 4: Showing the net Working capital Turnover Ratio
(Rs. in Lakhs)
Interpretation :-
In the year 2007-08, the sale has increased by 8.38% when compared to previous year, with decrease in net working capital by 37.43%, it represents efficient use of net working capital in generating sales.
In the year , the sales has increased by 10.73% when compared to previous year, with decrease in net working capital by 12.02%, it represents efficient use of net working capital in generating sales.
In the year 2009-10, the sales have increases by 22.12% when compared to previous year. It represents efficient use of NWC in generating sales.
TABLE 5: Showing the Gross Working Capital Ratio
(Rs. in Lakhs)
NWC Turnover Ratio 7.01 8.80 10.85
Interpretation :-
In the year 2007-08, current assets are utilized efficiently to generate sales. It is evident from that current assets have increases by 2.93% whereas sales have been increased by 8.4%.
In the year, current assets have increased more than sales when compared to previous year; this shows that current assets have been underutilized.
In the year 2009-10, current assets are utilized efficiently to generate sales. It is evident from the fact that current assets have increased by 0.48%
whereas sales have been increased by 22.12%.
TABLE 6: Showing Current Asset Turnover Ratio
(Rs. in Lakhs)
From the table we can come to know that, the company is maintaining a steady level of current assets turnover ratio for the past 3 years i.e. around
Particulars 2007-08 2008-09 2009-10
TABLE 7: Showing Working Capital Turnover Ratio
(Rs. in Lakhs)
Particulars 2007-08 2008-09 2009-10
COGS
Net Working cap
17204.42 2405.13
18229.12 2168.66
21526.23 2146.60
Ratio 6.979 8.405 10.02
The company is showing a steady increase of working capital turnover ratio i.e. in last three years. It recorded a lowest of 6.97 times in 2007-08 and a highest of 10.02 times in 2009-10.
TABLE 8: Showing Operating Cycle
(Rs. in Lakhs)
Particulars 2007-08 2008-09
Inventory Period 1.187 1.227
Account Receivables
Period 0.372 0.30
Operating Cycle 1.559 1.527
The time to convert cash into cash by the company is around 45 days on an average. The highest time taken to convert was 1.5 months in and lowest being in the year 2006-07 i.e., 1.3 months.
ANALYSIS OF FINANCIAL STATEMENTS
1) Overall Profitability Ratio :- It is also known as ‘Return on Investment’ (ROI) or ‘Return on Capital Employed’ (ROCE). It indicates the percentage of return on the total capital employed in the business. It is calculated by using the following
formula:-ROI= Net profit after taxes Capital Employed
The term capital has been given different meanings by different accountants. Some of the popular are as
follows:-✔ Sum total of all the assets whether fixed or current.
✔ Sum total of fixed assets.
✔ Sum total of long-term funds employed in the business i.e.,
Share Capital + Reserves and Surplus + Long-term Loans – (Non-business Assets + Fictitious assets)
Calculation of Return On Investments for the year ending 31st March 2009
ROI = 747.60 *100 = 10.53%
7098.22
Interpretation:-The organization is getting Rs. 10.53 for every Rs. 100 invested by it.
1) Gross Profit Ratio :- This ratio establishes relationship between gross profit and net sales. Its formula is
Gross Profit Ratio :- Gross profit --- *100 Net sales
This ratio shows the margin left after meeting the manufacturing costs. It measures the efficiency of production as well as pricing. It also helps in ascertaining whether the average percentage of mark up on the goods is maintained.
However, the gross profits should be adequate to cover the operating expenses and to provide for fixed charges, dividend and building up of reserves.
Calculation of Gross Profit Ratio for the year March 20 10
Gross Profit Ratio = 1780.64 * 100 = 7.63%
23306.88
Interpretation:-15-20% is considered as the ideal for this ratio. The organization has earned a gross return of 7.63%, which is far below the ideal ratio. Hence its profitability position is very poor.
2) Net Profit Ratio :- This indicated the net margin earned on a sale of rupees hundred. It is calculated as
follows:-Net Profit Ratio:- follows:-Net operating profit --- * 100 Net sales
This ratio helps in determining the efficiency with which the affairs of the business are being managed. In other words, it measures the overall efficiency of production, administration, selling, financing, pricing and tax management. An increase in the ratio over the previous period indicates improvement in the operational efficiency of the business provided the gross profit ration is constant. The ratio is thus an effective measure to check the profitability of the business. However, constant increase in the above ratio year after year is a definite indication of improving conditions of the business.
A firm with high net profit can do better in the adverse conditions.
Similarly, a firm with high profit margin can make better use of favorable conditions.
Calculation of Net Profit Ratio for the year March 200 9 Net Profit Ratio = 679.54 * 100 = 2.91%
23306.88 Interpretation :-
5-10% is considered as the ideal for this ratio. The organization has made a net return of 2.91%, which is below the ideal level. Hence, its profitability position is not satisfactory.
3) Debt-Equity Ratio :- It is determined to ascertain the soundness of the long-term financial position of the company. It is also known as
‘external-internal equity ratio’. It is calculated as follows:-Total long-term debt Debt
-- Or Shareholders’ funds Equity
This ratio indicates the proportion between shareholders funds (i.e.
tangible net worth) and the long-term borrowed funds. The ratio may be treated as ideal if it is 1. In other words, the investor may take debt-equity ratio as quite satisfactory, if shareholders funds are equal to borrowed funds.
However, a lower ratio say 2/3rd borrowed funds and 1/3rd owned funds might also not be considered as unsatisfactory because some businesses needs heavy investment in fixed, assets, that has an assured return on its investment like public utility concerns. The lower the debt-equity ratio, the higher is the degree of protection enjoyed by the creditors.
It is to be noted that preference shares redeemable within a period of
the ratio consists of all types of debt i.e., both short-term as well as long-term
Calculation of Debt Equity Ratio for the year March 200 9 Debt = Long Term Loans
Equity = Share Capital + reserves + P&L A/c
Debt Equity Ratio = 3204.01 = .7082:1 4523.94
Interpretation :-
1:1 is considered as ideal for this ratio. The organization’s debt equity ratio is below the standard level; hence its long-term solvency position is not satisfactory.