SHIVAJI UNIVESSITY, KOLHAPUR

Shivaji University, Kolhapur

1.1 Introduction of Study:Ratio-analysis is a concept or technique which is as old as accounting concept. Financial analysis is a scientific tool. It has assumed important role as a tool for appraising the real worth of an enterprise, its performance during a period of time and its pit falls. Financial analysis is a vital apparatus for the interpretation of financial statements. It also helps to find out any cross-sectional and time series linkages between various ratios.Unlike in the past when security was considered to be sufficient consideration for banks and financial institutions to grant loans and advances, nowadays the entire lending is need-based and the emphasis is on the financial viability of a proposal and not only on security alone. Further all business decision contains an element of risk. The risk is more in the case of decisions relating to credits. Ratio analysis and other quantitative techniques facilitate assessment of this risk.1.2 Meaning of the Study:Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. The ratios are categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and Market Value Ratios.Ratio Analysis as a tool possesses several important features. The data, which are provided by financial statements, are readily available. The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages.1.3 Objectives of the Study: To understand concept of ratio analysis. To study & analyze the financial position of the company through ratio analysis. To study the liquidity position through various types of ratio. To offer suggestions based on research finding.1.4 Importance of the Study:

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

5) It is helpful in budgeting & forecasting:Accounting ratio provides a reliable data, which can be compared, studies & analyzed. These ratios provide sound footing for future prospectus. The ratio can also serves as basis for preparing budgeting future line of action.6) It is helpful in determining liquidity position:With the help of ratio analysis conclusion can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its currents obligation when they become due. The ability to meet short term liabilities is reflected in the liquidity ratio of a firm.7) It is helpful in determining long term solvency:Ratio analysis is equally important for assessing the long term financial ability of the firm. The long term solvency is measured by the leverage or capital structure & profitability ratio which shows the earning power & operating efficiency, solvency ratio shows relationship between total liability & total assets.8) It is helpful in determining operating efficiency:Yet another dimension of usefulness of ratio analysis, relevant from the view point of management is that it throws light on the degree of efficiency. The various activity ratios measure this kind of operational efficiency.1.5 Scope of Study:The scope of the study is involves collecting financial data published in the annual reports of the company every year. The analysis is done to suggest the possible solutions. The study is carried out for 4 years (2010-2014). Using the ratio analysis, firms past, present & future performance can be analyzed & this study has been divided as short term analysis. The firm should generate enough profits not only to meet the expectations of owner, but also expansion activities.

1.6 Limitation of the Study:

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

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

1.7.1 Research Design:

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

1.7.2 Source:

Primary Data:

Primary data has been obtained through personal discussions with managers and senior officials of the organization.

Secondary Data:

Secondary datas has been obtained from published reports like the annual reports of the company, balance sheets, and profit and loss account, booklets, records such as files, reports maintained by the company. Mainly the annual report consists of two parts;

1) Profit and Loss Account: Profit and loss account reveals the income and expenditure of the company.

2) Balance Sheet: Balance Sheet reveals the financial position of the organization.

2.1 Introduction of the Ratio Analysis:The ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to analyze & interpret the financial health of enterprise. With the help of ratios that the financial statements can be analyzed more clearly & decision made from such analysis. Financial analysis is the process of identifying the financial strengths & weakness of the firm properly establishing relationship between the items of balance sheet & profit & loss account. There are various methods or techniques used in analyzing financial statements. By the use of ratio analysis one can measure the financial conditions of a firm & can point out whether the conditions is strong, good, questionable or poor.Analysis &interpretation of financial statement with help of ratio is termed as ratio analysis.It is process of identifying the financial strengths & weakness of the firm. This may be accomplished either through a trend analysis of the firm over a period of time or through a comparison of the firm ratios with its nearest competitors & with the industry average. 2.2 Meaning of Ratio Analysis:Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the risk & return relationship of firms of different sizes. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths & weaknesses of a firm as well as its historical performance & current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two terms/variables. This relationship can be expressed as: i) Percentage, say, net profits are 25 per cent of sales ( assuming net profits of Rs 25,000 & sales of Rs 1,00,000, ii) Fraction ( net profit is one-fourth of sales) & iii) Proportion of numbers (the relationship between net profits and sales is 1:4). These alternative methods of expressing items which are related to each other are, for purposes of financial analysis, referred to as ratio analysis. It should be noted that computing the ratio does not add any information not already inherent in the above figures of profits & sales. What the ratios do is that they reveal the relationship in a more meaningful way so as to enable equity investors; management & lenders make better investment & credit decisions.2.3 Definition of the Ratio Analysis:Ratio analysis is a fundamental means of examining the health of a company by studying the relationships of key financial variables. Many analysts believe ratio analysis is the most important aspect of the analysis process. A firm's ratios are normally compared to the ratios of other companies in that firm's industry or tracked over time internally in order to see trends. For example, the debt ratio compares a company's total debt to its total assets. If a firm's debt ratio is low relative to its competitors' ratios or has decreased since last year, the firm is less dependent on debt and is therefore perhaps a less risky investment. To evaluate companies, analysts use many ratios, including measures of liquidity, profitability, debt, operating performance, cash flow, and valuation.2.4 Nature of Ratio Analysis:Ratio analysis is a powerful tool of financial analysis. A ratio is defined as the indicated quotient of two mathematical expressions & as the relationship between two or more things. In financial analysis, a ratio is used as a benchmark for evaluating the financial position& performance of a firm. The absolute accounting figures reported in the financial statements do not provide a meaningful understanding of the performance & financial position of the firm .An accounting figure conveys meaning when it is related to some other relevant information. For example, anRs 5 crorenet profit may look impressive, but the firms performance can be said to be good or bad only when the net profit figure is related to the firms investment. The relationship between two accounting figure, expressed mathematically, is known as a financial ratio (or simply as a ratio). Ratios help to summaries large quantities of financial data & to make qualitative judgementabout the firms financial performance. For example, consider current ratio (discussed in detail later on). It is calculated by dividing current liabilities. This relationship is an index orb yardstick, which permits a qualitative judgment to be formed about the firms ability to meet its current obligations. It measures the firms liquidity. The greater the ratio, the greater the firms liquidity & vice versa. The point to note is that a reflecting a quantitative relationship helps to form a qualitative judgement. Such is the nature of all financial ratios.2.5 Standards of Comparison:The ratio analysis involves comparison for a useful interpretation of the financial statements. A single ratio in itself does not indicate favorable or unfavorable condition. It should be compared with some standard. Standards of comparison may consist of: Past ratio, i.e., ratios calculated from the past financial statements of the same firm; Competitors ratios, i.e., ratios of some selected firms, especially the most progressive & successful competitor, at the same point in time; Industry ratio, i.e., ratios of the industry to which the firm belongs; & Projected ratios, i.e., ratios developed using the projected, or proforma, financial statements of the same firms.

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

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

2) Useful in improving future performance: Ratio analysis indicates the weak spots of the business. This helps management in overcoming such weaknesses and improving the overall performance of the business in future.3) Useful in inter-firm comparison: Comparison of the performance of one firm with another can be made only when absolute data is converted into comparable ratios. If a firm is earning a net profit of Rs. 50,000 while another firm B is earning Rs. 100,000, it does not necessarily mean that firm B is better off unless this profit figure is converted into a ratio and then compared.4) Useful in judging the efficiency of a business:As stated earlier, accounting ratios help in judging the efficiency of a business. Liquidity, solvency, profitability etc. of a business can be easily evaluated with the help of various accounting ratios like current ratio, liquid ratio, debt-equity ratio, net profit ratio, etc. Such an evaluation enables the management to judge the operating efficiency of the various aspects of the business.5) Useful in simplifying accounting figures:Complex accounting data presented in Profit and Loss Account and Balance Sheet is simplified, summarized and systematized with the help of ratio analysis so as to make it easily understandable. For example, gross profit ratio, net profit ratio, operating ratio etc. give a more easily understandable picture of the profitability of a business than the absolute profit figure.6) Determines profitabilityRatio analysis assists managers to work out the production of the company by figuring the profitability ratios. Also, the management can evaluate their revenues to check if their productivity. Thus, probability ratios are helpful to the company in appraising its performance based on current earning.

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

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

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

2.7 Uses of Ratio Analysis:

Ratio analysisis used in accounting, finance and marketing departments in order to make more well-informed decisions and reasonable forecasts. Uses of ratio analysis vary from creating common size accounting statements to determining the businesssinventoryturnover or tracking the success of a marketing campaign over time. Standard ratios are used for different departments to accomplish specific tasks. Even though the use of ratio analysis is important for a business when making decisions, there are also limitations of using such ratios.

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

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

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

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

2) An individual ratio may by itself be meaningless:Except in a few cases, an accounting ratio may by itself be meaningless and acquires significance only when compared with relevant ratios of other firms or of the previous years. In fact, ratios yield their best advantage on comparison with other similar firms; also if ratios for a year are compared with ratios in the previous years, it will be a useful exercise. Comparison is the essential requirement for using ratios for interpreting a given situation in a firm or industry.

3) )Ratios are not always comparable:When the ratios of two firms are being compared, it should be remembered that different firms may follow different accounting practices. For example, one firm may charge depreciation on straight line basis and the other on diminishing value. Similarly, different firms may adopt different methods of stock valuation. Such differences will not make some of the accounting ratios strictly comparable. However, use of accounting standards makes ratio comparable.4) Ratios sometimes give a misleading picture:One company produces 500 units in one year and 1,000 units the next year; the progress is 100%. Another firm produces 4,000 units in one year and 5,000 in the next year, the progress is 25%. The second firm will appear to be less active than the first firm, if only the rate of increase or ratio is compared. It will be much more useful absolute figures are also compared along with rate of increase unless the firms being compared are equal in all respects. In fact, one should be extremely careful while comparing the results of ne firm with those of another firm if the two figures differ in any significant manner, say in size, location, degree of automation or mechanization.5) Ratios ignore qualitative factors:Ratios are as a matter of fact, tools of quantitative analysis. It ignores qualitative factors which sometimes are equally or rather more important than the quantitative factors. As a result of this, conclusions from ratio analysis may be distorted. For example, despite the fact that credit may be granted to a customer on the basis of information regarding the financial position of business as disclosed by certain ratios, but the grant of credit ultimately depends upon the credit standing, reputation and managerial ability of the customer, which cannot be expressed in the form of ratio.6) Change in price levels makes ratio analysis ineffective:Changes in price levels often make comparison of figures for a number of years difficult. For example, the ratio of sales to fixed assets in 2003 would be much higher than in 1995 due to rising prices because fixed assets are still being expressed on the basis of cost incurred a number of years ago while sales are being expressed at their current prices.7) There is no single standard for comparison:Ratios of a company have meaning only when they are compared with some standard ratios. Circumstances differ from firm to firm and the nature of each industry is different. Therefore, the standards will differ for each industry and the circumstances of each firm will have to be kept in mind. It is difficult to find out a proper basis of comparison. Therefore, the performance of one industry may not be properly comparable with that of another. Usually it is recommended that ratios should be compared with the average of the industry. But the industry average is not easily available.8) Ratios based on past financial statements are no indicators of future:Accounting ratios are calculated on the basis of financial statements of past years. Ratios thus indicate what has happened in the past. Since past is quite different from what is likely to happen in future, it is difficult to use ratios for forecasting purposes. The financial analyst is more interested in what will happen in future. The management of a company has information about the companys future plans and policies and is, therefore, able to predict future to a certain extent. But an outsider analyst has to rely only on the past ratios which may not necessarily reflect the firms future financial position and performance.2.9Types of Ratios:Several ratios, calculated from the accounting data, can be grouped into various classes according to financial activity or function to be evaluated. As stated earlier, the parties interested in financial analysis are short- and long-term creditors, owners& management. Short-term creditors main interest is in the liquidity position or the short-term solvency of the firm. Long-term creditors, on the other hand, are more interested in the long- term solvency & profitability of the firm. Similarly, owners concentrate on the firms profitability & financial condition. Management is interested in evaluating every aspect of the firms performance. They have to protect the interests of all parties & see that the firm grows profitably. In view of the requirements of the various uses of ratios, we may classify them into the following four important categories:

Liquidity Ratio Leverage Ratio Activity Ratio Profitability Ratio

Liquidity ratios measure the firms ability to meet current obligations; leverage ratios show the proportions of debt and equity in financing the firms assets; activity ratios reflect the firms efficiency in utilizing its assets, and profitability ratios measure overall performance and effectiveness of the firm. Each of these ratios is discussed below. 2.9.1 Liquidity Ratios:It is extremely essential for a firm to be able to meet obligations as they become due. Liquidity ratios measure the ability of the firm to meet its current obligations (liabilities). In fact, analysis of liquidity needs the preparation of cash budgets and cash and fund flow statements; but liquidity ratios, by establishing a relationship between cash and other current assets to current obligations, provide a quick measure of liquidity. A firm should ensure that it does not suffer from lack liquidity, and also that it does not have excess liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in a poor credit worthiness, loss of creditors confidence, or even in legal tangles resulting in the closure of the company. A very high degree of liquidity is also bad; idle assets earn nothing. The firms funds will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity.The most common ratios, which indicate the extent of liquidity or lack of it, are: (i) current ratio and (ii) quick ratio. 1) Current Ratio:Current ratio is calculated by dividing current assets by current liabilities:

Current AssetsCurrent Ratio = Current Liabilities

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

Quick AssetsQuick Ratio = Quick Liabilities

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

Cash + Marketable Securities Cash Ratio = Current Liabilities4) Net Working Capital Ratio:The difference between current assets and liabilities excluding short-term bank borrowing is called net working capital (NWC) or net current assets (NCA). NWC is sometimes used as a measure of a firms liquidity. It is considered that, between two firms, the one having the larger NWC has the greater ability to meet its current obligations. This is not necessarily so; the measure of liquidity is a relationship, rather than the difference between current assets and current liabilities. NWC, however, measures the firms potential reservoir of funds. It can be related to net assets (or capital employed): Net Working Capital (NWC)Net Working Capital Ratio = Net Assets (NA)

2.9.2 Leverage Ratio:The short-term creditors, like bankers and suppliers of raw material, are more concerned with the firms current debt-paying ability. On the other hand, long-term creditors like debentures holders, financial institutions etc. are more concerned with the firms long-term financial strength. In fact, a firm should have a strong short-as well as long-term financial position. To judge the long-term financial position of the firm, financial leverage, or capital structure ratio are calculated. These ratios indicate mix of funds provided by owners and lenders. As a general rule, there should be an appropriate mix of debt and owners equity in financing the firms assets.1) Debt Ratio:Several debt ratios may be used to analyze the long-term solvency of a firm. The firm may be interested in knowing the proportion of the interest-bearing debt (also called funded debt) in the capital structure. It may, therefore, compute debt ratio by dividing total debt (TD) by capital employed (CE) or net assets (NA). Total debt will include short and long-term borrowings from financial institutions, debentures/bonds, deferred payment arrangements for buying capital equipments, bank borrowings, public deposits and any other interest-bearing loan. Capital employed will include total debt and net worth (NW).

Total Debt (TD)Debt Ratio = Total Debt (TD) + Net Worth (NW)

Total Debt (TD) = Capital Employed (CE)

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

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

Total DebtDebt Equity Ratio = Shareholders Equity

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

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

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

1) Inventory Turnover Ratio:Inventory turnover indicates the efficiency of the firm in producing and selling its product. It is calculated by dividing the cost of goods sold by the average inventory: Cost of Goods SoldInventory Turnover Ratio = Average Inventory

The average inventory is the average of opening and closing balances of inventory. In a manufacturing company inventory of finished goods is used to calculate inventory turnover.

2) Debtors (Accounts Receivable) Turnover Ratio:A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of companies. When the firm extends credits to its customers, debtors (accounts receivables) are created in the firms accounts. Debtors are convertible into cash over a short period and, therefore, are included in current assets. The liquidity position of the firm depends on the quality of debtors to a great extent. Financial analysts apply three ratios to judge the quality or liquidity of debtors: (a) debtors turnover, (b) collection period, and (c) aging schedule of debtors.

Debtors turnover: Debtors turnover is found out by dividing credit sales by average debtors:

Credit Sales Debtors Turnover Ratio = Average Debtors

Debtors turnover indicates the number of times debtors turnover each year. Generally, the higher the value of debtors turnover, the more efficient is the management of credit.

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

4) The Total Asset Turnover Ratio:The total asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. This ratio considers all assets, current and fixed. Those assets includefixed assets, like plant and equipment, as well as inventory,accounts receivable, as well as any other current assets. Total assets turnover ratio shows the firms ability in generating sales from all financial resources committed to total assets. Thus:SalesTotal assets turnover ratio = Total assets

5) Working Capital Turnover Ratio:Theworking capital turnover ratiomeasures how well a company is utilizing itsworking capital to support a given level of sales. Working capital is current assets minus current liabilities. A high turnover ratio indicates that management is being extremely efficient in using a firm's short-term assets and liabilities to support sales. Conversely, a low ratio indicates that a business is investing in too many accounts receivable and inventory assets to support its sales, which could eventually lead to an excessive amount of bad debts and obsolete inventory. A firm may also like to relate net current assets (or net working capital gap) to sales. It may thus compute net working capital turnover by dividing sales by net working capital.

SalesWorking Capital Turnover ratio = Net Working Capital

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

Credit PurchaseCreditors Turnover Ratio = Average Creditors

A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows that accounts are to be settled rapidly. The creditors turnover ratio is an important tool of analysis as a firm can reduce its requirement of current assets by relying on suppliers credit. The extent to which trade creditors are willing to wait for payment can be approximated by the creditors turnover ratio.2.9.4 Profitability Ratio:Profit is the difference between revenues & expenses over a period of time (usually one year). Profit is the ultimate output of a company, and if will have no future if it fails to make sufficient profits. Therefore, the financial manager should continuously evaluate the efficiency of the company in terms of profits.The profitability ratios are calculated to measure the operating efficiency of the company. Besides management of the company, owners are also interested in the profitability of the firm. Creditors want to get interest and repayments of principal regularly. Owners want to get a required rate of return on their investment. This is possible only when the company earns enough profit. The following are the some of the important profitability ratios: 1) Gross Profit Ratio:It is the first profitability ratio calculated in relation to sales. This ratio can be called as gross profit margin of gross margin ratio. This ratio establishes a relation between gross profit and sales to measure the efficiency of the firm and it reflects its pricing policy.The ratio is calculated by dividing the gross profit by sales. A high gross profit margin indicates that the firm is able to produce at relatively lower cost and it is also a sign of good management.Whereas as a low gross profit margin reflects a higher cost of goods sold due the firms inefficient management.

Gross ProfitGross Profit Ratio = * 100 Sales

2) Net Profit Ratio:Net profit margin ratio establishes a relationship between net profit and sales of the firm. It indicates the managements ability to earn sufficient profit on sales to cover all operating expenses, the cost of merchandising of servicing and also should have a sufficient margin to reasonable compensation to shareholders. A high ratio shows better and low ratio shows the opposite.The net profit is calculated by dividing the net profit by sales, Net Profit is obtained when operating expenses, interest and taxes are deducted from gross profit. Net Profit Net Profit Ratio = *100 Sales

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

Cost of Goods Sold + Operating ExpensesOperating Ratio = *100 Net Sales

MARATHE INDUSTRIAL SERVICES LIMITEDMIRAJ3.1 Organizational Profile:1Name of the Company Marathe Industrial Services Ltd.

2AddressMandan Enclave,Shrin Govindraoji Marathe Road,MIRAJ- 416 410

3Telephone 0233-2222398,2228362

4E-mail Addressmaratheindustrial@gmail.com

5Registration No. & DateU99999MH1972 PLC015998

6Company Established Date13-09-1972

7DealershipABB India LtdLAPP India Pvt. Ltd.WAGO LimitedEaton Power Quality Pvt. Ltd.(Cooper Bussmann)Mahindra HinodayVisa Power Tech Pvt. Ltd.

8ProductsSwitchgear, Cables, Connectors, Motors, Fuses, Frequency Convertor, Lamps Home Automation

3.2 Introduction of the Organization:Marathe Industrial Services limited is Public Limited Company established in 1972.The company mainly is engaged in trading of Hi-tech electronic and electrical products.We are a part of Marathas Group which has interests in Engineering and Textiles. Marathas Group enjoys excellent reputation in our area and has extensive contracts with the decision makes in the industries of our area.Major business of the company consist of marketing products developed by Multi National Companies like ABB India Ltd., LAPP India Pvt., Ltd., WAGO Limited, Eaton Power Quality Pvt. Ltd., (Cooper Bussmann) and well established Indian Companies like Mahindra Hinoday, Visa Power Tech Pvt.Ltd., Atandra Energy etc.The Company keeping pace with technological advances, is adding several innovative Building Automation and Industrial Lighting products to its marketed product range.The company is anticipating increase in its existing marketing activity. Likewise the company is experiencing encouraging response to its newly added trade lines of Building Automation, Industrial Lighting Solutions.3.3Human Resources:The company has three full time Sales Engineers. The after sales service is handled by two well qualified technical supervisors. The company also has separate staff to take care of logistics of the material handling and also adequate administrative and accounts staff to support its operations. 3.4Area of operation:The company holds most of the dealerships for the revenue districts of Kolhapur, Satara and Sangli. Two out of three of our sales engineers are based at Kolhapur and one at Sangli. The company enjoys excellent rapport with industries, consultants and architects in Kolhapur and Sangli. The company also has offices at Ichalkaranji and Mumbai, shared with other group companies.

3.5 Name of the Board of Directors:

Mr. Arvind Govind Marathe

Mr. Jayant Dattatraya Marathe

Mr. Chandrashekhar Arvind Marathe

Mr. Kaustubh Arvind Marathe

3.6 Organization Structure:

Technical Staff Engineer Mr. Vivekanand B. Pathak

Mr. Guruprasad A.Dasalkar

Mr. Babasaheb A. Gurav

Finance Accountant Mr. Sanjay V. Kadam

Working Staff Other Technical & Administrative Staff -10Nos

Working Time 10.00 A.M. to 6.00 PM

3.7 Organization Chart:

Working StaffAccountantFinanceEngineerTechnical StaffBoard of Directors

Administrative StaffOther Technical Staff

Data Analysis:For the calculations of the ratios the data is analyzed using the following information:Current assets = Cash in Hand and Bank, Investment, Advances And Receivables, Current Assets, Prepaid Expenses, Closing Stock, Debtors.Quick Assets= Current Assets Current LiabilitiesCost of Goods Sold= Sales Gross ProfitAverage Stock= Opening Stock + Closing Stock / 2.Working Capital = Current Assets Current Liabilities.Account Receivable = Debtors + Bills Receivable.Account Payable = Creditors + Bills Payable.Operating Expenses = Administrative Expenses + Selling and Distribution Expenses + Other Expenses.Total Debt= Secured Loan, Unsecured Loan, Deposit.

1. Current Assets:TABLE NO - AParticulars

2010-20112011-20122012-20132013-2014

Inventories58803648424545102171439943818

Trade Receivable1137874011650074739663118305049

Cash and Bank Balance2465307271409522539561168375

Short Term Loans and Advances1722993799454597978496

Other Current Assets322678461462100629509

Current Assets =20064318233439762033238930404797

2. Current Liabilities:TABLE NO - BParticulars

2010-20112011-20122012-20132013-2014

Short Term Borrowings1797424375644728633122348041

Trade Payables68888289802018774349518823876

Other Short Term Liabilities477591449408311663322

Short Term Provisions1233235839708719323838873

Current Liabilities =10397078144431131140924622074112

3. Quick Assets:TABLE NO - C

Particulars

2010-20112011-20122012-20132013-2014

Total of current Assets20064318233439762033238930404797

Less- Closing Stock+58803648424545102171439943818

Prepaid insurance40487181100629509

Less Total =58844128431726102272059953327

Quick Assets =14179906149122501010518420451470

4. Working Capital:

TABLE NO - DParticulars

2010-20112011-20122012-20132013-2014

Current Assets20064318233439762033238930404797

Less- Current Liabilities10397078144431131140924622074112

Working Capital = 9667240890086389231438330685

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

LIQUIDITY RATIO:-1) Current Ratio:- Current Asset Current Ratio = Current Liabilities

TABLE NO 1YearCurrent AssetsCurrent LiabilitiesRatio

2010-201120064318103970781.92

2011-201223343976144431131.61

2012-201320332389114092461.78

2013-201430404797220741121.37

CHART NO 1

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

Quick Assets Quick Ratio = Quick LiabilitiesTABLE NO 2

YearQuick AssetsQuick LiabilitiesRatio

2010-201114179906103970781.36

2011-201214912250144431131.03

2012-201310105184114092460.88

2013-201420451470220741120.92

CHART NO 2

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

2010-201152111569207384322.51

2011-201238134371249433441.52

2012-201337826533222200321.70

2013-201443401597321974641.34

TABLE NO 3

CHART NO 3

Interpretation:-The ratio indicates the amount of sales realized per rupee of investment in total assets. This ratio is more in important in manufacturing concerns, as it indicates the utilization of total assets. The higher the ratio higher will be amount of sales generated per rupee of investment in assets. In above chart the total assets ratio has a decreasing trend. However this being a trading company the ratio is not as relevant as it would be in a manufacturing firm.2) Working Capital Turnover Ratio:-Sales Working Capital Turnover Ratio = Net Working Capital

TABLE NO 4YearSalesNet Working CapitalRatio

2010-20115211156996672405.39

2011-20123813437189008634.28

2012-20133782653389231434.23

2013-20144340159783306855.20

CHART NO 4

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

SalesFixed Assets Turnover Ratio = Fixed AssetsTABLE NO 5YearSalesFixed AssetsRatio

2010-20115211156967411477.30

2011-201238134371159936823.84

2012-201337826533188764320.03

2013-201443401597179221624.21

CHART NO 5

Interpretation:-This ratio indicates the amount of sales realized per rupee of investment in fixed assets. This ratio is more important in manufacturing concerns, as it indicates the utilization of fixed assets. Higher the ratio the higher will be the amount of sales generated per rupee of investment in fixed assets. In above chart the fixed assets ratio are decreases, hence it indicates that the companys fixed assets are remains static.4) Stock Turnover Ratio:-

Cost of Goods Sold Stock Turnover Ratio = YearCost of goods soldAverage StockRatio

2010-20114644031857902498.02

2011-20123256101971524554.55

2012-20133147789993208443.37

2013-201437845750100804813.75

Average Stock TABLE NO 6

CHART NO 6

Interpretation:-Inventory turnover is a measure of how quickly a company can convert its inventory into cash and profits. The goal of a company is to hold enough inventories to meet its clients orders continuously, but not so much that the cost of holding it outweighs the profits. In above chart shows decreasing inventory indicates that the company is converting its inventory into cash as quickly. Hence the company makes use its inventory efficiently.5) Debtors Turnover Ratio:- Credit Sales Debtors Turnover Ratio = Account Receivable

TABLE NO 7

YearCredit SalesAccounts ReceivableRatio

2010-201152111569113787404.57

2011-201238134371116500743.27

2012-20133782653373966315.11

2013-201443401597183050492.37

CHART NO 7

Interpretation:-Debtors or an account receivable is an important component of working capital. Debtors will arise only when credit sales are made. In the table and figure the debtors rise in the year 2012-2013 and decrease in the year 2013-2014. A simple logic is that debtors increase only when sales increase and decrease when sales decrease. Company policy of debtors is very good but a risk of bad debts is always present in high debtors. It is suggested to the company that it needs to improve its credit policies and collection procedures.6) Debtors Collection Period:-Months Debtors Collection Period = Debtors Turnover RatioTABLE NO 8

YearMonthsIn timesRatio

2010-11124.572.62

2011-12124.272.81

2012-13125.112.34

2013-14122.375.06

CHART NO 8

Interpretation:

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

7) Creditors Turnover Ratio:-

Credit Purchase Creditors Turnover Ratio = Accounts Payable

YearCredit PurchaseAccounts PayableRatio

2010-20114662054868888286.76

2011-20123510520098020183.58

2012-20133327049777434954.29

2013-201437572425188238761.99

TABLE NO 9

CHART NO 9

Interpretation:-Creditors or an account payable is an important component of working capital. Creditors will arise only when credit purchases are made. A simple logic that creditors increase only when purchases increase and if purchase increase on credit it is not good sign for growth. Since the creditors turnover ratio is low. Therefore it is unable to pay this is not satisfactory position for the company.

8) Creditors Payment Period:-MonthsCreditors Payment Period = Creditors Turnover Ratio

TABLE NO 10YearMonthsIn timesRatio

2010-11126.761.77

2011-12123.583.35

2012-13124.292.79

2013-14121.996.0

CHART NO 10

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

PROFITABILITY RATIO:-1) Gross Profit Ratio:- Gross ProfitGross Profit Ratio = *100 Net Sales

TABLE NO 11YearGross ProfitSalesRatio

2010-201156712515211156910.88

2011-201255733523813437114.61

2012-201363486343782653316.78

2013-201455558474340159712.80

CHART NO 11

Interpretation:This is one of the most widely used ratios for the measurement of profitability. This ratio establishes relationship between gross profit & sales to measure the relative operations efficiency of the business. This ratio indicates the position of trading results. In the above chart shows 2011-2012 ratio is increased in 4% as compared to the ratio of 2010-2011. The 2012-2013 ratiosare increased in 2% a compared to the 2011-2012. But the year 2013-2014 ratio is decreased in 4% in previous year ratio.2) Net Profit Ratio:- Net Profit Profit Ratio = *100 Net SalesYearNet ProfitSalesRatio

2010-20111926409521115693.69

2011-2012269455381343710.70

2012-201386920378265330.22

2013-2014-70950343401597-1.63

TABLE NO 12

CHART NO 12

Interpretation:The net profit ratio is the overall measure of a firms ability to turn each rupee of sales into profit. It indicates the efficiency with which a business is managed. A firm with a high net profit ratio is in an advantageous position to survive in the face of rising cost of production and falling selling prices. Where the net profit ratio is low, the firm will find it difficult to withstand these types of adverse conditions. In the above chart the 2010-2011 ratio is satisfactory level. But the 2011-2012, 2012-2013 ratios have decreased, and as we see the trend in this ratio is net loss in 2013-2014. 3) Operating Ratio:-

Cost of Goods Sold + Operating ExpensesOperating Ratio = *100Net Sales

TABLE NO 13

YearCost of goods Sold +Operating ExpensesNet SalesRatio

2010-2011464403185211156992.29

2011-2012325610193813437191.90

2012-2013314778993782653389.02

2013-2014378457504340159791.60

CHART NO 13

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

FINDINGS:1. The current ratio in year 2010-11 is1.92, 2011-12 is 1.61, 2012-13 is 1.78, and 2013-14 is 1.37. The ideal current ratio is 2:1 but in this case it is more than 1:1 it is just sufficient to pay the amount owned to various creditors. Calculated in table No. 12. The quick ratio in year 2010-11 is 1.36, 2011-12 is 1.03, 2012-13 is 0.88, and 2013-14 is 0.92 is less than ideal quick ratio which is 1:1, thus the company has unfavorable liquidity position. Calculated in table No.23. The total assets turnover ratio has a decreasing trend from the year 2010-2014 is 2.51, 1.52, 1.70, and 1.34times. It indicates that the company is not efficiently utilizing the total assets. Calculated in table No. 34. The working capital ratio decreased in the year 2011 2012 and further decrease in 2012 2013 but it is showing an increase in the year 2013 2014. This increase should continue in the coming year. This will happen when the firm uses its working capital more efficiently. Calculated in table No. 45. Fixed assets turnover ratio is showing decreased trend from the year 2010-2014 is 77.30, 23.84, 20.03, and 24.21. It indicates that the companys fixed assets remain static. Calculated in table No. 56. Stock turnover ratio shows a decreasing trend from the year 2010-2014 is 8.02, 4.55, 3.37, and 3.75. It indicates that the company makes use of its inventory efficiently. Calculated in table No. 67. The debtors turnover ratio has decreased in 2013-14. Increases in this ratio is beneficial for company because it indicates increase in the speed of collection of credit sales & decreases debtors collection period, but in this case, the debtors turnover ratio has decreased &debtors collection period is increased, so it is unfavorable to the company. Calculated in table No. 7

8. The creditors turnover ratio has decreased in the year 2013-2014. Decrease in this ratio is not beneficial for the speed of payment of credit purchase and increases creditors payment period, so it is unfavorable to the company. Calculated in table No. 99.Gross profit ratio has decreased to 4% in the year 2013-2014 is 12.80 % as compare to the previous year 2012-2013 is 16.78 % . It indicates a higher cost of production and it could be due to low selling prices. Calculated in table No. 1110. Net profit ratio is very low in financial year 2011-12. Company incurred loss in the year 2013-2014.Calculated in table No. 1211. Operating ratio has increased to 2% of year 2013-2014 is 91.60 as compared to the previous year 2012-2013 which was 89.02. It indicates that the higher the operating ratio lower will be the profitability of the firm. Calculated in table No. 13

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

CONCLUSIONS:

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

BIBLOGRAPHY:

Books

Financial Management Khan M. Y & Jain P. K., 2007 by Tata McGraw Hill Publishing Company Limited New Delhi. Fifth Edition

Financial Management Pandey I. M. 2005 byVikas Publishing House Pvt. Ltd. Ninth Edition

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

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

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

Websitea) www.investopedia.comb) www.wikipedia.com

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