liquidity ratio 1232

8/7/2019 LIQUIDITY RATIO 1232

http://slidepdf.com/reader/full/liquidity-ratio-1232 1/18

LIQUIDITY RATIO

Liquidity ratios provide information about a firm's ability to meet its short-term financialobligations. They are of particular interest to those extending short-term credit to the firm. Two

frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick

ratio.

Capital Structure R atios

The capital structure ratio shows the percent of long term financing represented by long term

debt. A capital structure ratio over 50% indicates that a company may be near their borrowing limit (often 65%)

Profitability R atios

A class of financial metrics that are used to assess a business's ability to generate earnings as

compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a

previous period is indicative that the company is doing well.

INTRESTED PARTIES IN PROFITABILITY RATIOS:

MANAGEMENT

CREDITORS

OWNERS

EFFECIENCY RATIOS

Ratios that are typically used to analyze how well a company uses its assets and liabilities

internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of

liabilities, the quantity and usage of equity and the general use of inventory and machinery.

Some common ratios are accounts receivable turnover, fixed asset turnover, sales to inventory,

sales to net working capital, accounts payable to sales and stock turnover ratio. These ratios are

meaningful when compared to peers in the same industry and can identify businesses that are

better managed relative to the others. Also, efficiency ratios are important because an

improvement in the ratios usually translate to improved profitability.

OTHER RATIOS



1. Current R atio

The current ratio is the ratio of current assets to current liabilities:

Current Ratio =Current Assets

Current Liabilities

Table No :1

Year Current Assets Current Liabilities Current Ratio

31/03/2001 2274484.47 155650 14.61281381

31/03/2002 1320653.85 755682.5 1.747630586

31/03/2003 2622403.44 1422584.63 1.843407685

31/03/2004 5697050.37 2249569.97 2.532506411

31/03/2005 11707970.88 3219700.52 3.636354005

31/03/2006 12723501.4 5493157.67 2.316245439

31/03/2007 18309120.25 6746756.07 2.713766447

31/03/2008 13392387.14 5473558.07 2.446742497

31/03/2009 15875995.03 8473543.77 1.873595683

31/03/2010 45091933.65 24675512.24 1.827396052

Average 3.555045862

Interpretation: Short-term creditors prefer a high current ratio since it reduces their risk.Shareholders may prefer a lower current ratio so that more of the firm's assets are working to

grow the business. Typical values for the current ratio vary by firm and industry. For the 2 yearsi.e; 2006-07, ratio is ideal (2:1)

Quick R atio

The current assets used in the quick ratio are cash, accounts receivable, and notesreceivable. These assets essentially are current assets less inventory. The quick ratio often is

referred to as the acid test .

Quick Ratio =Current Assets - Inventory

Current Liabilities



Table No : 2

Interpretation: Quick ratio of year 2009 is greater than other years when compared. An acid-test ratio of 1:1 is considered satisfactory as a firm can meet all current claims. This ratio is

satisfactory as it is above 1.

Net Working Capital R atio

A measure of both a company's efficiency and its short-term financial health. The working

capital ratio is calculated as:

Positive working capital means that the company is able to pay off its short-term

liabilities. Negative working capital means that a company currently is unable to meet its short-

term liabilities with its current assets

Table No : 3

Year Current Assets Current Liabilities working capital working capital ratio

31/03/2001 2274484.47 155650 2118834.47 21188.3447

31/03/2002 1320653.85 755682.5 564971.35 5649.7135

31/03/2003 2622403.44 1422584.63 1199818.81 11998.1881

31/03/2004 5697050.37 2249569.97 3447480.4 34474.804

Year Quick Assets Current Liabilities Quick Ratio

31/03/2001 2145608.44 155650 13.78482775

31/03/2002 898131.15 755682.5 1.18850330731/03/2003 1767687.83 1422584.63 1.242588871

31/03/2004 3454969.12 2249569.97 1.535835367

31/03/2005 10074365.64 3219700.52 3.128975996

31/03/2006 11061186.51 5493157.67 2.013629896

31/03/2007 16665805.26 6746756.07 2.470195319

31/03/2008 10156935.14 5473558.07 1.855636683

31/03/2009 12602266.41 8473543.77 1.487248636

31/03/2010 34395024.09 24675512.24 1.393893012

Average 3.010133484



31/03/2005 11707970.88 3219700.52 8488270.36 84882.7036

31/03/2006 12723501.4 5493157.67 7230343.73 72303.4373

31/03/2007 18309120.25 6746756.07 11562364.18 115623.6418

31/03/2008 13392387.14 5473558.07 7918829.07 79188.2907

31/03/2009 15875995.03 8473543.77 7402451.26 74024.5126

31/03/2010 45091933.65 24675512.24 20416421.41 204164.2141

Interpretation: In the current year the current liabilities of the company are more than thecurrent assets. It is not favorable for the company during the time of crisis. The company should

make an attempt to increase the current assets.

Interest Coverage R atio

A ratio used to determine how easily a company can pay interest on outstanding debt. The

interest coverage ratio is calculated by dividing a company's earnings before interest and taxes

(EBIT) of one period by the company's interest expenses of the same period:

Table No : 4

Year EBIT Interest expenses Interest coverage ratio

2009 203.67 15.16 13.4347

2008 99.3 20.65 4.808717

2007 71.5 14.51 4.927636

2006 58.57 13.51 4.335307

2005 45.44 14.37 3.162143



Interpretation:

The Company¶s ability to pay interest on outstanding debt has increased in the current year as theearnings of the company has increased from 99.3 to 203.67.

Debt Equity R atio

The debt-to-equity ratio is total debt divided by total equity. This ratio is obtained by dividing

the 'Total Liability or Debt ' of a company by its 'Owners Equity and Net Worth'. The ratio

measures how the company is leveraging its debt against the capital employed by its owners. If

the liabilities exceed the net worth then in that case the creditors have more stake than theshareowners.

Debt-to-Equity Ratio =Total Debt

Total Equity

Table No : 5

Year Debt Equity Debt-Equity Ratio

31/03/2001 155650 3750000 0.041506667

31/03/2002 755682.5 3900000 0.193764744

31/03/2003 1432584.63 3900000 0.36732939231/03/2004 2249569.97 3900000 0.576812813

31/03/2005 3219700.52 5800000 0.555120779

31/03/2006 5493157.67 5800000 0.94709615

31/03/2007 6746756.07 17000000 0.396868004

31/03/2008 5473558.072 17000000 0.321974004

31/03/2009 8473543.77 17000000 0.498443751

0

2

4

6

8

10

12

14

2009 2008 2007 2006 2005

Interest coverage ratio

Interest coverage ratio



31/03/2010 24675512.24 23800000 1.036786229

Average 0.493570253

Interpretation:

The debt ratio has gone up from the previous 3 years which means borrowings has gone up. It

indicates that company depends upon outsiders i.e. on outsiders fund & and it also indicates that

company is not having sound financial position. The ratio has come down from the previous year

i.e. 1.356368 to 1.328701.



Gross Profit R atio

Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage.It expresses the relationship between gross profit and sales. The gross profit margin ratio tells us

the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea andit tells us how much gross profit per £1 of turnover our business is earning.

Gross profit is the profit we earn before we take off any administration costs, selling costs and so

on. So we should have a much higher gross profit margin than net profit margin.

The formula to calculate is

Gross profit Ratio= Gross Profit * 100

Sales

Table No : 6

Year Gross profit Net sales Ratio(%)

31/03/2001 1855492.36 3181093.2 58.32876446

31/03/2002 3704740.86 5490924 67.47026293

31/03/2003 7791351.66 11353195 68.6269518

31/03/2004 23262626.74 34679176.41 67.0795248

31/03/2005 34998715.27 47984222.25 72.93796508

31/03/2006 24779386.4 58407209.84 42.42521851

31/03/2007 19158364.66 42621368.09 44.95014008

31/03/2008 19477736.17 41293352 47.1691815431/03/2009 33667226.11 70331847.75 47.86910509

31/03/2010 41387413.9 130024841.4 31.83038984

Average 54.86875041

Interpretation:

The gross profit of the company has come down. There is frequent fluctuation in the gross profit.

The ratio has come down from 5.44 to 3.86 in the current year.

Net Profit R atio

The net profit ratio is net profit expressed as a percentage of total sales. Net profit is taken beforetax and other indirect costs. Essentially the net profit ratio tells us about how the company's

profits relate to their sales. Different industries have fundamentally different net profit

ratios. The net profit ratio can tell us about the nature of the industry the company is operating inas well as serving to compare past performances of a company. The formula to calculate is



Net profit ratio= Profit After Tax * 100

Sales

Table No : 7

Year Net Profit Net Sales Ratio( % )

31/03/2001 -154993.12 3181093.2

31/03/2002 228479.33 5490924

31/03/2003 1152728.92 11353195

31/03/2004 1273925.12 34679176.41

31/03/2005 901406.29 47984222.25

31/03/2006 369772.66 58407209.84

31/03/2007 1005176.27 42621368.09

31/03/2008 1169797.52 41293352

31/03/2009 3107366.12 70331847.7531/03/2010 7426555.91 130024841.4

Average

Interpretation:

There is a lot of fluctuation in the net profits of MCF every year. In the year 2008 it was in its

high at ratio 2.91. In the current year the profits have gone up to ratio 5.46. There is a positive

trend in the net profits of the company.

Earnings Per Share R atio

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability.

Calculated as: EPS = Net Earnings / Number of Outstanding Shares

Table No : 8



Year PAT No. Of Equity Shares Ratio

31/03/2001 -154993.12 37500

31/03/2002 228479.33 39000

31/03/2003 1557505.07 39000

31/03/2004 2272911.87 39000

31/03/2005 2028185.02 58000

31/03/2006 5121260.5 58000

31/03/2007 1005176.27 170000

31/03/2008 1264255.52 170000

31/03/2009 5698295.12 170000

31/03/2010 17533331.91 238000

Average

Interpretation:

The EPS of the current year is 0.11. As the earnings of the current year has gone up 134.87 when

compared to all the previous years. The Share holders are get huge returns.

Cash Profit Margin

It measures the cash generation in the Business a result of the operations expressed in the terms

of Sales. The cash profit is the most reliable indicator of performance. Cash Flow ratio evaluates

the efficiency of operations in terms of cash generation & it is not affected by the method of

depreciation

The Formula: Cash Profit × 100

Sales

Table No : 9

Year Cash Net sales Ratio

31/03/2001 48792.84 3181093 1.533839

31/03/2002 25199.61 5490924 0.458932

31/03/2003 25982.34 11353195 0.228855

31/03/2004 91922.29 34679176 0.265065



31/03/2005 310814.8 47984222 0.647744

31/03/2006 369753.6 58407210 0.633061

31/03/2007 8847945 42621368 20.75941

31/03/2008 209251.7 41293352 0.506744

31/03/2009 698310.1 70331848 0.992879

31/03/2010 217383.5 1.3E+08 0.167186

Average 2.619372

Interpretation:

The cash profit margin has come down. This year its facing the lowest cash profit margincompared to that of any other years listed above.

Operating profit Margin

The operating profit margin ratio indicates how much profit a company makes after paying

for variable costs of production such as wages, raw materials, etc. It is expressed as a percentage

of sales and shows the efficiency of a company controlling the costs and expenses associated

with business operations. Phrased more simply, it is the return achieved from standard operations

and does not include unique or one time transactions. Terms used to describe operating profit

margin ratios this includes operating margin, operating income margin, operating profit margin

or return on sales (ROS).

Formula: Operating profit margin = Operating income ÷ Total revenue

Table No : 10

Year Operating Income Total Revenue Ratio

2005 42.18 877.33 2.81

2006 54.74 1,130.80 1.44

2007 68.06 1,340.52 1.02

2008 93.18 1,621.29 0.67

2009 190.61 2,369.05 0.37



Interpretation:

The operating profit ratio of the company has been coming down drastically over the years. Theexpenses of the company such as wages, raw materials etc has gone up.

R eturn on Investment (ROI) R atio

The ROI is perhaps the most important ratio of all. It is the percentage of return on funds

invested in the business by its owners. In short, this ratio tells the owner whether or not all theeffort put into the business has been worthwhile. If the ROI is less than the rate of return on an

alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell

the company, put the money in such a savings instrument, and avoid the daily struggles of small

business management. The ROI is calculated as follows:

Return on Investment= Net Profit before Tax/ Net Worth

Table No : 11

Year EBIT Capital Employed Ratio (%)

31/03/2001 154993.12 4115000 3.766539976

31/03/2002 228479.33 4745486.21 4.814666399

31/03/2003 2085467.57 6302991.28 33.08694995

31/03/2004 2344266.87 9157903.15 25.59829288

31/03/2005 2149463.02 10258088.17 20.95383647

31/03/2006 5001298.91 13583940.24 36.81773345

31/03/2007 2991160.22 21389116.52 13.98449635

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Mar '

05

Mar '

06

Mar '

07

Mar '

08

Mar '

09

Operating profit margin ratio

Operating profit margin

ratio



31/03/2008 3336222.14 22558914.04 14.78893059

31/03/2009 8515944.1 25870511.16 32.91757185

31/03/2010 26888856.91 35050400.07 76.71483594

Average 26.34438539

Interpretation:

The ROI of the current year has come down from the previous year i.e. from 0.20 to 0.15 for the

current year. The ratio was in its high in the previous year.

0.00

0.05

0.10

0.15

0.20

2005 2006 2007 2008 2009

Return on Investment Ratio

ratio



Inventory Turnover.

Inventory turnover illustrates how well a company manages its inventory levels. If inventoryturnover is too low, it suggests that a company may be overstocking or overbuilding its inventory

or that it may be having issues selling products to customers. All else equal, higher inventory

turnover is better.

Inventory Turnover = (Cost of Sales) / (Average Inventory)

Table No : 12

Year Cost of Sales Inventories Turnover

2005 828.18 94.09 8.80

2006 1,074.08 142.25 7.55

2007 1,267.07 141.96 8.93

2008 1,531.61 170.68 8.97

2009 2,272.16 170.77 13.31



Interpretation:

The inventory turnover of the company is been increasing over the years which means the salesof the company has come up and is doing good. The turnover has increased from 11.93 to 14.48.

Debtors Turnover.

The accounts receivable turnover ratio measures how effective the company's credit policies are.

If accounts receivable turnover is too low, it may indicate the company is being too generousgranting credit or is having difficulty collecting from its customers. All else equal, higher

receivable turnover is better.

Accounts Receivable Turnover = Revenue / (Average Accounts Receivable)

Table No : 13

Year Accounts receivable Revenue Times

2005 22.18 879.19 39.64

2006 13.19 1,083.84 82.17

2007 37.39 1,372.56 36.71

2008 17.01 1,627.67 95.69

2009 9.05 2,471.98 273.15

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Mar

'05

Mar

'06

Mar

'07

Mar

'08

Mar

'09

Inventory Turnover ratio

Inventory Turnover ratio



Interpretation:

The credit policies of the company are very good. The turnover is not low it has been increasing

over the years. The difficulty of collecting credit from the customers has come down as the

turnover is better.

Total Assets Turnover R atio

Total asset turnover is a catch-all efficiency ratio that highlights how effective management is at

using both short-term and long-term assets. All else equal, the higher the total asset turnover, the

better. The total asset turnover ratio measures the ability of a company to use its assets to

generate sales. The total asset turnover ratio considers all assets including fixed assets, like plant

and equipment, as well as inventory and accounts receivable. The calculation for the total asset

turnover ratio is:

Asset Turnover R atio= Net Sales/Total Assets

Table No : 14

Year Net Sales Total Assets Turnover

2005 878.02 417.74 2.10

2006 1,082.31 544.3 1.99

2007 1,371.05 575.86 2.38

0.00

50.00

100.00

150.00

200.00

250.00

300.00

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Accounts Receivable Turnover

Accounts Receivable

Turnover



2008 1,625.39 752.81 2.16

2009 2,469.62 785.98 3.14

Interpretation:

The ability of a company to use its assets to generate sales has increased compared to the previous years i.e. from 2.47 to 3.14. Due to increase in sales of the company there is effective

management in short & long term assets.

Dividend Payout R atio

The dividend payout ratio is the percentage of a company's annual earnings paid out

as cash dividends. A low dividend payout ratio can indicate a fast-growing company whose

shareholders willingly forego cash dividends, because the company uses the extra money to

generate higher returns and, in turn, a high stock price. A high dividend payout ratio can indicate

a blue-chip that pays high dividends and whose stock price is temporarily depressed. But a high

dividend payout ratio can also point to a mature company with few growth opportunities.

Table No : 15

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50


Asset Turnover Ratio

Asset Turnover Ratio

Payout Ratio =Dividends Per Share

Earnings Per Share

Year Earnings Per Share(Rs)

Dividend Ratio

2005 1.88 0 0.00

2006 2.12 6 2.83

2007 2.32 6 2.59

2008 3.41 6 1.76

2009 2.38 7 2.94



Interpretation:

The dividend payout ratio is high compared to previous years so the company is a maturedcompany. The dividend paid over the years is high. The stock price of the company is

temporarily depressed.

R eturn on capital Employed

This Ratio shows the relation between the Profits Earned Before Interest & Tax and the CapitalEmployed to earn such Profit. It measures the profit which a firm earns on investing a unit of capital. This Ratio has a great importance to the shareholders and investors and also to the

Management. Higher the Ratio the better it is.

Return on capital Employed= EBIT/Capital Employed

Table No : 16

Year EBIT Capital employed Return on capital

Employed

200549

.15 307.09 0.162006 56.72 294.09 0.19

2007 73.45 331.78 0.22

2008 89.68 448.39 0.20

2009 96.89 434.1 0.22

0.00

0.50

1.00

1.50

2.00

2.50

3.00


Payout Ratio

Payout Ratio



Interpretation:

Higher the return on capital higher is the benefit to the shareholders and investors of thecompany. The company is earning sufficient Revenues and profits in order to make the best use

of its capital assets.

0.00

0.05

0.10

0.15

0.20

0.25


Return on capital Employed

Return on capital

Employed

liquidity ratio 1232

Documents