SUMMER TRAINING PROJECT REPORT

ON

RATIO ANALYSIS OF L.G LTD.

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

MASTER’S DEGREE IN BUSINESS ADMINISTRATION

OF

UTTARAKHAND TECHNICAL UNIVERSITY, DEHRADUN

SUBMITTED TO:

INTERNAL GUIDE EXTERNAL GUIDEDR.ATUL AGGARWAL RUPAM PANDEYProfessors Assistant manager

IMS L.G. LTD. SELAQUI Dehradun

SUBMITTED BY

AKSHAYPANWAR

(MB11B32)

INSTITUTE OF MANAGEMENT STUDIES, DEHRADUNBATCH (2011-13)

ACKNOWLEDGEMENT

This project has been made possible through the direct and indirect cooperation

of various persons for whom I wish to express my appreciation and gratitude.

I express my deep sense of thankful to the various sources both known and unknown

from where I obtained information, help, cooperation and support carrying out and

completing this project.

My acknowledgement will not be complete if I do not express my sincere thanks to all

my friends for their suggestion and encouragement in carrying out this report.

AKSHAY PANWAR

EXECUTIVE SUMMARY

LG Electronics’ brand recognition in the global consumer electronics market has increased exponentially in the past two years. The company successfully achieved “Global Top 3” status in almost every business area in the first quarter of this year. Much of this success can be attributed to LG Electronics’ commitment to drive “Innovation” and “Globalization”. LG Electronics is re-inventing its global procurement organization from highly decentralized to center-led, establishing streamline procurement leadership across five business units (companies) and eight regions. LGE’s procurement is currently comprised of 2,200 staff who are part of an 84,000-strong workforce in 115 operations globally, managing US$26 billion direct spend and US$10 billion general spend, led by Tom Linton, Executive Vice President and Chief Procurement Officer. The profitability of LG Electronics is heavily dependent on procurement’s performance and efficiency since its spend represents 80 percent of revenues. LG Electronics procurement is re-positioning the organization to a new level while maintaining its focus on high quality manufacturing and becoming a global top brand.

INDEX

TITLE PAGE

ACKNOWLEDGEMT

EXECUTIVE SUMMARY

INTRODUCTION TO THE STUDY

REAEARCH METHODOLOGY

COMPANY PROFILE

OBJECTIVE OF THE STUDY

REVIEW OF LITERATURE

FINANCIAL ANALYSIS AND FINDINGS

FINDINGS

SUGGESTIONS

BIBLOGRAPHY

OBJECTIVE OF THE STUDY

To analyze the financial performance of LG Electronics India Ltd.

Projection of financial performance of the company for the last five years

To measure the overall performance and effectiveness of LG Electronics

India Ltd. Using Profitability Ratios.

To measure the efficiency of LG Electronics India Ltd. Through Activity

ratios

To measure the LG Electronics India Ltd. Ability to meet the interest cost

and repayments schedules of its long term obligations using Solvency ratios

To measure the contribution of financing by owners as compared to

Financing by outsiders using ratios of Capital Structure.

INTRODUCTION TO THE STUDY

Notable study of the “RATIO ANALYSIS OF LG ELECTRONICS INDIA

LIMITED” is an attemt being made to find out the the soundness of the firm

in dealing with present market competition and in getting a view how the

performance is going on for the last five years. The ultimate aim of every

business undertaking is to maximize the wealth of the shareholder.

The study begins with framing the objective of the study and then devising a

methodology for the the fulfillment of the objective.

In the present study vertical analysis of the balance sheet, comparison of profit

and loss account of last five year from 20007-12 has been done.Besides ratios

have been introduced to find the quantitative relationship between figure and

group of figures.

Following are the four steps involved in the ratio analysis:-

Selection of relevant data from the financial statement depending upon the

objective of the analysis.

Calculation of appropriate ratios from the above data.

Comparison of calculated ratios with the ratios of the same firm in the past.

Interpretation of the ratio

The relationship between two accounting figures expressed mathematically, is

known as a financial ratio (or simply as a ratio). Ratios help to summarize

large quantities of financial data and to make qualitative judgment about the

firm’s financial performance. For example, consider current ratio. It is

calculated by dividing current assets by current liabilities; the ratio indicates a

relationship- a quantified relationship between current assets and current

liabilities. This relationship is an index or yardstick, which permits a

quantitative judgment to be formed about the firm’s liquidity and vice versa.

The point to note is that a ratio reflecting a quantitative relationship helps to

form a qualitative judgment. Such is the nature of all financial ratios.

Standards of comparison:

The ration 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 ratios, i.e. ratios calculated form the past financial statements of the same

firm;

Competitors’ ratios, i.e., of some selected firms, especially the most progressive

and successful competitor, at the same pint in time;

Industry ratios, i.e. ratios of the industry to which the firm belongs; and

Protected ratios, i.e., developed using the protected or proforma, financial

statements of the same firm.In this project calculating the past financial

statements of the same firm does ratio analysis.

1.1 Theoretical background:

1.1.1 Use and significance of ratio analysis:-

The ratio is one of the most powerful tools of financial analysis.

It is used as a device to analyze and interpret the financial health of enterprise. Ratio

analysis stands for the process of determining and presenting the relationship of items

and groups of items in the financial statements. It is an important technique of the

financial analysis. It is the way by which financial stability and health of the concern

can be judged. Thus ratios have wide applications and are of immense use today. The

following are the main points of importance of ratio analysis:

a) Managerial uses of ratio analysis:-

1. Helps in decision making:-

Financial statements are prepared primarily for decision-making. Ratio analysis

helps in making decision from the information provided in these financial Statements.

2. Helps in financial forecasting and planning:-

Ratio analysis is of much help in financial forecasting and planning. Planning is

looking ahead and the ratios calculated for a number of years a work as a guide for the

future. Thus, ratio analysis helps in forecasting and planning.

3. Helps in communicating:-

The financial strength and weakness of a firm are communicated in a more easy

and understandable manner by the use of ratios. Thus, ratios help in communication and

enhance the value of the financial statements.

4. Helps in co-ordination:-

Ratios even help in co-ordination, which is of at most importance in effective

business management. Better communication of efficiency and weakness of an

enterprise result in better co-ordination in the enterprise

5. Helps in control:-

Ratio analysis even helps in making effective control of business.The weaknesses

are otherwise, if any, come to the knowledge of the managerial, which helps, in

effective control of the business.

b) Utility to shareholders/investors:-

An investor in the company will like to assess the financial position of the

concern where he is going to invest. His first interest will be the security of his

investment and then a return in form of dividend or interest. Ratio analysis will b

useful to the investor in making up his mind whether present financial position of the

concern warrants further investment or not.

C) Utility to creditors: -

The creditors or suppliers extent short-term credit to the concern. They are

invested to know whether financial position of the concern warrants their payments at a

specified time or not.

d) Utility to employees:-

The employees are also interested in the financial position of the concern

especially profitability. Their wage increases and amount of fringe benefits are related

to the volume of profits earned by the concern.

e) Utility to government:-

Government is interested to know overall strength of the industry. Various

financial statement published by industrial units are used to calculate ratios for

determining short term, long-term and overall financial position of the concerns.

f) Tax audit requirements:-

Sec44AB was inserted in the income tax act by financial act; 1984.Caluse 32 of

the income tax act requires that the following accounting ratios should be given:

1. Gross profit/turnover.

2. Net profit/turnover.

3. Stock in trade/turnover.

4. Material consumed/finished goods produced.

Further, it is advisable to compare the accounting ratios for the year under consideration

with the accounting ratios for earlier two years so that the auditor can make necessary

enquiries, if there is any major variation in the accounting ratios.

1.1.2 Limitations:

Ratio analysis is very important in revealing the financial position and soundness

of the business. But, inspite of its advantages, it has some limitations which restrict its

use. These limitations should be kept in mind while making use of ratio analysis for

interpreting the financial the financial statements. The following are the main

limitations of ratio analysis:

1. False results:-

Ratios are based upon the financial statement. In case financial statement are in

correct or the data of on which ratios are based is in correct, ratios calculated will all so

false and defective. The accounting system it self suffers from many inherent

weaknesses the ratios based upon it cannot be said to be always reliable.

2. Limited comparability:-

The ratio of the one firm cannot always be compare with the performance of

other firm, if uniform accounting policies are not adopted by them. The difference in

the methods of calculation of stock or the methods used to record the deprecation on

assets will not provide identical data, so they cannot be compared.

3. Absence of standard universally accepted terminology:-

Different meanings are given to a particular term, egg. Some firms take profit

before interest and tax; others may take profit after interest and tax. A bank overdraft is

taken as current liability but some firms may take it as non-current liability. The ratios

can be comparable only when all the firms adapt uniform terminology.

4. Price level changes affect ratios:-

The comparability of ratios suffers, if the prices of the commodities in two

different years are not the same. Change in price effect the cost of production, sale and

also the value of assets. It means that the ratio will be meaningful for comparison, if the

prices do not change.

5. Ignoring qualitative factors:-

Ratio analysis is the quantitative measurement of the performance of the

business. It ignores qualitative aspect of the firm, how so ever important it may be. It

shoes that ratio is only a one sided approach to measure the efficiency of the business.

6. Personal bias:-

Ratios are only means of financial analysis and an end in it self. The ratio has to

be interpreted and different people may interpret the same ratio in different ways.

7. Window dressing:-

Financial statements can easily be window dressed to present a better picture of

its financial and profitability position to outsiders. Hence, one has to be very carefully

in making a decision from ratios calculated from such financial statements.

8. Absolute figures distortive:-

Ratios devoid of absolute figures may prove distortive, as ratio analysis is

primarily a quantitative analysis and not a qualitative analysis.

1.1.3 Classification of ratios:

Several ratios, calculated from the accounting data can be grouped into various

classes according to financial activity or function to be evaluated. Mangement is

interested in evaluating every aspect of the firm’s performance. They have to protect

the interests of all parties and see that the firm grows profitably.In view of thee

reqirement of the various users of ratios, ratios are classified into following four

important categories:

Liquidity ratios - short-term financial strength

Leverage ratios - long-term financial strength

Profitability ratios - long term earning power

Activity ratios - term of investment utilization

Liquidity ratios measure the firm’s ability to meet current obligations;

Leverage ratios show the proportions of debt and equity in financing the firm’s assets;

Activity ratios reflect the firm’s efficiency in utilizing its assets;

Profitability ratios measure overall performance and effectiveness of the firm

It is difficult to give exhaustive list of accounting ratios. However, a list of

common, relevant and important ratios can definitely be attempted. Moreover,

these ratios these ratios can be grouped on the basis of some or other common

feature. Therefore, the ratios can be studied by classifying into following

groups:

(a) The Liquidity Ratio

1. Current ratio

2. Quick Ratio

(b) The Activity Ratio

1. Debtors Turnover Ratio

2. Fixed Asset Turnover Ratio

3. Current Asset Turnover Ratio

4. Total Asset Turnover Ratio

5. Working Capital Turnover Ratio

(c) The Leverage Ratio

1. Debt Equity Ratio

2. Proprietary Ratio

3. Solvency Ratio

4. Interest Coverage Ratio

5. Fixed Asset To Net Worth

(d) The Profitability Ratio

1. Gross Profit Ratio

2. Net Profit Ratio

3. Operating Margin Ratio

4. Earning Per Share

5. Dividend Per share

6. Dividend Payout Ratio

THE LIQUIDITY RATIO

The liquidity refers to maintenance of cash, bank balance, which are easily

convertible into cash in order to meet the liabilities as and when arising. So the

liquidity ratio study the firm’s short term solvency and its ability to pay of its

liabilities. It should be intuitive to observe that a firm, no matter how profitable

it is, cannot continue to exist unless it is able to meet its obligations as they

arise. The day to day problems of financial management consists of highly

important task of finding sufficient cash to meet current obligations. To the

extent that a firm has to make payments to its suppliers before it is paid to for

the goods and services it provides, a cash short fall has to be met, usually

through the short-term borrowings. The liquidity ratios are devised to keep a

track on the extent of the firm’s exposure to the risk that it will meet its short-

term obligation

These ratios as a group are intended to provide information about a firm’s

liquidity and the primary concern is the firm’s ability to pay its current

liabilities. The liquidity ratios provide a quick measure of liquidity of the firm

by establishing relationship between its current assets and current liabilities.

If a firm does not have sufficient liquidity, it may not be in a position to meet

its commitments and thereby loose its credit worthiness.

THE ACTIVITY RATIO

The Activity Ratios are also called the Turnover Ratios or Performance Ratios

as they highlight the ability of management to convert or turn over assets of the

firm into Sales. Activity Ratios measure the efficiency of a firm in employing

the available resources. Such ratio reflects the degree of effectiveness of fund

utilization in the business activity.

A Turnover Ratio or an Activity Ratio is a measure of movement and thus

indicates as to how frequently an account has moved/turned over a period.

These Ratios make a comparative study of the level of sales and the investment

into various assets accounts.

A sharp rise in this ratio may indicate that a company is expanding too quickly,

and is allowing sales to increase more rapidly then the underlying asset base.

Conversely a reduction in the ratio can indicate a decline in efficiency or fall in

demand for the firm’s product.

These ratios are usually calculated with reference to sales/cost of goods sold

and are expressed in terms of rate or times.

THE LEVERAGE RATIO

The financial position of a company can be studied and analyzed on two

perspective i.e. the Short-Term financial position and the Long Term financial

position. The Short-Term financial, which is also known as the Short-Term

Liquidity position or simply the Liquidity of the Firm has already been

discussed with the help of Liquidity Ratio. Leverage Ratio deals with Long-

Term financial position, its composition and implications. Leverage indicates

of the use a company makes of the borrowed funds to increase the return on

Owner’s Equity. Leverage ratios measures the contribution of financing by

owners compared with financing provided by firms Creditors.

The proportion of debt capital to the total capital of the firm is usually referred

to as Leverage or Trading on the Equity.

Since the debt involves firm’s commitment to pay interest over the long run

and eventually to repay the principal amount, the financial analyst, the

debtlender, the preference shareholders, the equity shareholders and

management will pay close attention to the degree of indebtedness and the

capacity of the firm to serve the debt. The more the debt a firm uses, the higher

is the probability that the firm may be unable to fulfill its commitments

towards its debtlender

The ability to obtain and to repay a Long-Term debt often depends on the

firm’s ability to obtain capital from shareholders.

Therefore the relation between shareholders equity and creditors equity is

evaluated.

THE PROFITABILITY RATIOS

The last group of financial ratios and probably the most often used group of

ratios are the Profitability Ratios. The Profitability Ratios measure the

Operational efficiency of the firm.

There are two groups of persons who are may be specifically interested in the

analysis of the profitability of the firm.

The management which is interested in overall profitability

The Shareholders who are interested in ultimate return available to them.

The performance of the firm can be evaluated in terms of its earnings with

reference to a given level of assets or sales or owners interest etc.

Profitability ratios based on Sales of the Firm

Profits are a factor of sales and are earned indirectly as a part of sales revenue.

So whenever a firm makes sales, it earns profit. But how much? How is the

total sales revenue is going to be used for meeting the cost of goods sold,

indirect expenses and return to shareholders etc. All this aspect can be

analyzed with the help of Profitability Ratio

Profitability ratios based on Assets/Investments

A financial analyst can employ another set of financial ratios to find out how

efficiently the firm is using its assets because the profitability of a firm can be

analyzed with reference to assets employed to earn a return. Normally, the

more the assets employed, greater should be the profits and vice-versa.

Profitability analysis from point of view of Owners

Ultimately the profits of the firm belong to the owners who have invested their

funds in the form of equity capital or preference share capital or retained

earnings.

LIQUIDITY RATIOS:

It is extremely essential for a firm to be able to meet the obligations as they become

due. Liquidity ratios measure the ability of the firm to meet its current obligations

(liabilities). The liquidity ratios reflect the short-term financial strength and solvency

of a firm. In fact, analysis of liquidity needs the preparation of cash budgets and cash

and funds 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 of

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 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 firm’s 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 are lack of it, are:

(i) Current ratio

(ii) Quick ratio.

(iii)Cash ratio and

(iv)Networking capital ratio.

1.2 RESEARCH METHODOLOGY

1.2.1Need for the study:

The problems, which are common to most of the public sectors under taking,

are materials scarcity. Capacity utilization and mainly working capital requirements and

Eswar rubber Pvt.Ltd. are no exception. Thus the importance of the study reveals as to

how efficiently the working cap[ital has been used so far in the organization.

1.2.2 SCOPE OF THE STUDY: The scope of the study is limited to 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 5years(2007-12).

1.2.3 Objectives of the study:

To examine the financial performance of the LG LTD. for the period of 2007

to 2012.

To analyses interpret and to suggest the operational efficiency of the LG LTD

by comparing the balance sheet& profit & loss A\c

To critically analyses the financial performance of the LG LTD With Help of

the ratios.

1.2.4 Data sources:

The study is based on secondary data. However the primary data is also collected to

fill the gap in the information..

Primary data will be through regular interaction with the officials of LG

LTD

Secondary data collected from annual reports and also existing manuals

and like company records balance sheet and necessary records.

1.2.5 LIMITATIONS:

The study is based on only secondary data.

The period of study was 2007-12 financial years only.

COMPANY’S PROFILE

“A better life with Digital” is LG Electronics Digital Appliance Company’s (DAC)

mission.

LGE DAC has been making ceaseless efforts to create a new culture in our daily life to

present convenience to all its customers all over the world.

In the midst of the revolutionary era never experience before, LG has taken the

initiative to be at the forefront. For instance, LGE DAC introduced the world first

internet home network products among many other market innovative products in the

global appliance market last year. A futuristic life you have only dreamed about is now

available to you.

This and many more is attributed to LGE DAC’s product leadership and innovative

activities, LGE DAC is achieving rapid growth to become the leading global home

appliance company. LG DAC is recognized in the market along the world for its

innovative home appliances.

LGE DAC’s success is based on their Fast Innovative activity, which in tern is based on

LGE DAC’s management philosophy of” Great Company, Great people” (GCGP). It

believes that a great company produce great people and great people makes a great

company and this synergistic relationship is the foundation of their success.

“Gearing Up To Become the Global Digital Leader”

At LGE, there have been innovators of technology and products that can break into new

marketplace for the four decades since the LGE foundation day in 1958.

At present, 5300 employee of 72 domestic and overseas establishments lead the way in

the global electronics industry.

LG ELECTRONICS INDIA LIMITED (LG EIL) is a wholly owned subsidiary of

LG Electronics, South Korea. The company started its operation in Delhi, in May 1997

and within a short span of thirty months, LGEIL had achieved a turnover of

approximately 1,900 crores. LGEIL has introduced its wide range of products to the

Indian Consumers and has successfully carved a niche for itself. LGEIL success story is

a result of its investment in cutting-edge technology and its relentless efforts to bring

home the smiling face.

The all-out efforts guided by “digital LG”, the 21st century vision announced in 1999,

have resulted in flourishing product and technological innovations that combined with

the corporate resources and that enriched the LGE digital culture.

As their Digital LG Vision has progressed, they have reached a place where they are

now, setting new standards worldwide in the digital technologies and products. For

instance, their internet-featured home appliance digital TVs, next generation mobile

handsets and other digital products are on the global leading edge.

As for the future business cores, LGE have directed their energies in Research and

Development for the home network technologies and introduced the world’s first home

network appliances.

“Extraordinary Innovation Activities”

At DAC, Total Productivity control, 3 by 3 and 6sigma have been the vehicles driving

the innovation activities which made them the pioneers in the digital world.

DAC VISION AND PHILOSOPHY

“One of the Global Majors”

At the Digital Appliance Company (DAC), one of the LG’s three-holding companies,

the mid-term goal is becoming a global major player in the digital appliance field by

2005.

To this end, DAC is refocusing on global management, strategic alliances, innovations

and employee performance-based activities, along with Great Company Great People

(GCGP) initiatives and “Fast Innovation Management”.

Fast Innovation

High-powered management is indispensable to accelerating towards our goal of

becoming the major global player in the time of hyper competition. DAC’s Fast

Innovation has functioned as a competitive-empowering strategy and groundbreaking

technology three years ahead of others. The Fast Innovation aims at solidifying low-

cost and high efficiency business structure while speeding up overall innovations 30%

faster than those of competitors.

Great Company Great People (GCGP)

A great company is built by encouraging great aspirations. The dedicated employees at

DAC are devoted to achieve professional growth and amplifying the corporate

resources. Our great people meet the challenges to help build DAC into a strong

presence.

“In the Lead of Digital-Ware”

Since the 1960’s, DAC’s full-scale global markets in 160 countries and establish

manufacturing plants, sales and branch offices in key global locations today.

Welcoming the revolution from home appliances and internet-featured appliances to

diverse home appliances, DAC is in the lead in the digital appliance industry.

CORE VALUES

Ownership: This is our company. We accept personal responsibility, and

accountability to meet business needs

Passion For Winning: We all are leaders in our area of responsibility, with a deep

commitment to deliver results. We are determined to be the best at doing what

matters most

People Development: People are our most important asset. We add value through

result driven training, and we encourage & reward excellence

Consumer Focus: We have superior understanding of consumer needs and develop

products to fulfill them better

Team Work: We work together on the principle of mutual trust & transparency in a

boundary-less organization. We are intellectually honest in advocating proposals,

including recognizing risks

Innovation: Continuous innovation in products & processes is the basis of our

success

Integrity: We are committed to the achievement of business success with integrity.

We are honest with consumers, with business partners and with each other

HUMAN RESOURCE

Today the organisation draws its strength from the highly motivated

workforce which consists of qualified, trained and experienced Managers, Engineers,

Supervisors and Workmen, ever willing to meet the exacting and changing demands of

the enlightened customers, and wholly committed to working towards the company’s

vision of leadership in the Transformer Industry.

While the Workmen and Supervisors undergo the induction training, the

Graduate Engineers undergo a vigorous one-year training programme to gain skill,

knowledge and competence, in order that they can measure upto the challenging tasks

and assume higher responsibilities.

For achieving Managerial excellence, individuals identified for taking up vital

Managerial position undergo long-term training in the reputed Premier Management

Institutes of the country.

Employees at various levels and from diverse functions are exposed to various

Technical and Behavioral training programmes based on the identified needs for self-

development and for the enhancement of organisational effectiveness.

Review of literature:

Financial statements have two major uses in financial analysis .first, they are used to

present a historical recover of the firm’s financial development. Second, they are used

for a course of action for the firm.

A performance financial statement is prepared for a future period. It is the financial

manager’s estimate of the firm’s future performance.

The operation and performance of a business depends on many individuals are

collective decisions that are continually made by its management team. Every one of

these decisions ultimately causes a financial impact, for better or works on the

condition and the periodic results of the business. In essence, the process of managing

involves a series of economic choices that activates moments of financial resources

connected with the business.

Some of the decisions made by management one will be the major, such as investment

in a new facility, raising large amounts of debts or adding a new line of products or

services. Most other decisions are part of the day to day process in which every

functional area of the business is managed. The combine of effect of all decisions can

be observed periodically when the performance of the business is judged through

various financial statements and special analysis.

These changes have profoundly affected all our lives and it is important for

corporate managers, share holders, tenders, customers and suppliers to investment and

the performance of the corporations on which then relay. All who depend on a

corporation for products, services, or a job must be med about their company’s ability

to meet their demands time and in this changing world. The growth and development of

the corporate enterprises is reflected in their financial statement.

LIQUIDITY AND PROFITABILITY:

Liquidity and profitability are two important demanders in determining the soundness

of an enterprise.

Liquidity means ability of a firm to meet its current obligations when they become

due for payment. It has two aspects – quantitative and qualitative. Qualitative aspect

implies the quantum of current assets a firm possesses irrespective of making any

difference b/w various types of current assets such as inventories, cash and so on.

Qualitative aspect reforms the quality of current in terms of their realization in to cash

considering time dimension involved in maturing different components of current

assets.

Profitability is the capacity of earning profits and due most important measure of

performance of affirms. It is generally assumed that there is negative relationship b/w

liquidity and profitability i.e. higher liquidity results in lower profitability and vice-

versa.

The objectives of the study:

To study the growth and development of the company.

To study the behavior of liquidity and profitability of the companies.

To analyze the factors determining the liquidity and profitability.

To comparative study of selected companies on the basis of selected ratios.

Statement of the problem:

Development of industries depends on several factors such as financial personnel,

technology, and quality of the product and marketing art of these. Financial aspects

assume a significant role in determining the growth of industries. All of the company’s

operations virtually affect its need for cash. Most of these data covering operations

areas are however outside the direct responsibility of the financial executives. Values

top management appreciates the value of good financial executives to know the

profitability and liquidity of the concern. The firm whose present operations are

inherently difficult should try to makes its financial analysis to enable its management

to stay on top of its working position. In this context the researcher is interested in

undertaking an analysis of the financial performance of companies to examine and to

understand how management of fiancé plays a crucial role of the financial performance

analysis of selected companies in India has been undertaken.

(a) LIQUIDITY RATIOS

1. CURRENT RATIO = CURRENT ASSET/CURRENT LIABILITIES

The ratio is the indicator of the firm’s commitment to meet its short-term

liabilities. It is an index of the concerns financial stability since it shows

the extent to which the Current Asset exceeds Current Liabilities. A very

high ratio is not desirable which means less efficient use of funds, slow

moving stock, and increase in debtors, Cash and Bank balance lying idle. It

also means excessive dependence on long-term sources of fund, which are

costlier than Current Liabilities and can results in lowering down the

profitability of the concern. A very low ratio can mean that the concern is

not maintaining adequate Cash balances that can result in Bad Credit

Image, loss of Creditors confidence. An ideal ratio is 2:1,which means

creditors will be able to get their payment in full.

YEAR CURRENT ASSET CURRENT LIB. C.RATIO

2007-2008 273.57 70.79 3.86

2008-2009 331.58 85.09 3.89

2009-2010 300.37 112.85 2.66

2010-2011 300.27 129.42 2.32

2011-2012 332.89 159.86 2.08

In 2007-2008 &2008-09 ratio was high at 3.86 & 3.89 resp. that means that

company has an extensive investment in current asset that does not provide a

significant return.

In 2009-10 positioned improved & current ratio was at 2.66 mainly because of

significant decrease in Cash/Bank, from 69.10crore in 2008-09 to 23.43crore in

2009-10.In 2011-12 the ratio was most satisfactory and was at 2.08.

CURRENT RATIO

2. QUICK RATIO= LIQUID ASSET/CURRENT LIABILITIES

LIQUIDASSET=S.DEBTORS+CASH+BANK

This ratio is also termed as ‘Acid Test Ratio’ or ‘Liquidity ratio’. This ratio is

ascertained by comparing the Liquid asset to Current Liabilities. Prepaid

Expenses and Inventories are not taken as Liquid Asset.

The ideal Ratio is 1:1. In LG Electronics the Ratio somewhat less than 1 is also

acceptable.

YEAR LIQUID ASSET CURRENT LIB. Q.RATIO

2007-2008 146.12 70.79 2.06

2008-2009 187.28 85.09 2.20

2009-2010 161.12 112.85 1.42

2010-2011 141.73 129.42 1.09

2011-2012 154.24 159.86 0.96

Represent a similar position as of Current Ratio in 2008-09 it was high at 2.20

which was reduced to 1.42 in 2009-10 and further to 1.09 in 2010-11 mainly

due to decrease in Debtors.

In 2011-12 it was at 0.96. The ratio was initially high, as deposits in form of

Cash/Bank were high.

It is advisable to decrease the amount of liabilities, as liabilities from

2010-2011 to 2011-2012 increased by 23%. Which in the year 2008-2009 to

2009-2010 increased by only 15%.

QUICK RATIO

(b) ACTIVITY RATIO

1.DEBTORS TURNOVER RATIO=CREDIT SALES/AVG.DEBTORS

AVG.DEBTORS = OPENING DEBTORS+CLOSING DEBTORS

2

Debtors constitute an important constituent of Current Assets and therefore the

quality of Debtors to a great extent determines firms Liquidity. Sales to Account

Receivable Ratio indicate the efficiency of the staff entrusted with collection of

book debts. The higher the ratio the better it is, since it would indicate that debts

are being collected more promptly.

The ratio helps in cash budgeting since the flow of cash can be worked out on the

basis of sales.

YEAR CREDIT SALES AVG. DEBTOR D.T.R.

2007-2008 914.77 109.27 8.37

2008-2009 1042.58 103.79 10.05

2009-2010 1166.46 127.93 9.12

2010-2011 1163.19 128.88 9.02

2011-2012 1232.29 118.31 10.41

It was low in year 2007-08 and was at 8.37, which increased to 10.05 in 2008-09 as

a result of increase in Credit Sales but Avg. Debtors remaining somewhat constant.

In 2009-10 & 2010-11 Debtors Turnover Ratio reduced to 9.12 & 9.02 resp. mainly

due to increase in the amount of Avg. Debtors by 23%, while sales increased by

only 12%.

In 2011-12 the positioned improved as Sales increased while Avg. Debtors

declined and was at 10.41There is no ideal ratio. In LG Electronics the policy they

follow is that the Credit given to Debtors should be less than the Credit given by

the Creditors to the Company. Since the ratio is on increase it is Positive sign for

the company.

2. FIXED ASSET TURNOVER RATIO=NET SALES/FIXED ASSET

The ratio indicates the extent to which the investments in fixed assets contribute

towards sales. If compared with previous periods, it indicates whether the investment

in fixed assets has been judicious or not.

YEAR NET SALES FIXED ASSET FA.T.R.

2007-2008 914.77 238.51 3.84

2008-2009 1042.58 250.83 4.15

2009-2010 1166.46 242.86 4.80

2010-2011 1163.19 244.42 4.75

2011-2012 1232.29 204.65 6.02

In 2007-08 Fixed Asset Turnover Ratio was 3.84, which increased to 4.15 as with the

application of only 5% increase in Fixed Asset, sales increase by 14%

In year 2010-2011 there was a slight decline of in the ratio as with the increase in

Fixed Asset the sale revenue declined.

In the year 2011-12 Fixed Asset Turnover Ratio increased significantly and was 6.02

as sales increased but Fixed Asset declined as in the year 2011-12 there was a decline

in BUILDING, PLANT, FURNITURE and OFFICE EQUIPMENTS by 23%, and

depreciation increased by 20%

The increasing ratio is a good sign for LG Electronics . LG Electronics per rupee

sales generated by per rupee of tangible asset maintained by the firm is increasing.

3. CURRENT ASSET TURNOVER RATIO

=NETSALES/CURRENTASSET

This ratio measures the per rupee sales generated by per rupee of current asset

being maintained. An increasing ratio is a good sign for the company.

YEAR NET SALES CURRENT ASSET CA.T.R

2007-2008 914.77 273.57 3.34

2008-2009 1042.58 331.58 3.14

2009-2010 1166.46 300.37 3.88

2010-2011 1163.19 300.27 3.87

2011-2012 1232.29 332.89 3.70

In 2007-08 Current Asset Turnover Ratio was 3.34 which reduced in 2008-09 to

3.14 as CA increased by 21% while Sales increased by only 14% Current Asset

increased as a result of increase in Sundry Debtors and Cash & Bank Balance.

In 2009-10/2010-11 there was an increase in the ratio as current asset decreased

while Sales increased, decrease in Current Asset. was mainly due to decrease in

Cash & Bank Balance.

In 2011-12 Current Asset again increased mainly due to the increase in Inventories.

So there was a fall in the ratio. So it is a bit of concern for the company.

It is suggested that the level of inventories should be brought down, as there was

increase in inventories by 12% while sales increased by only 6%. The company

was not producing keeping in view the sales prospects.

4. TOTAL ASSET TURNOVER RATIO=SALES/TOTAL ASSET

The ratio measures the per rupee sales generated by per rupee of total assets being

maintained by the company

YEAR NET SALES TOTAL ASSET TA.T.R

2007-2008 914.77 512.08 1.78

2008-2009 1042.58 582.41 1.79

2009-2010 1166.46 543.24 2.15

2010-2011 1163.19 544.69 2.14

2011-2012 1232.29 537.54 2.29

There is no ideal ratio, it should be compared with the ratio of previous years of the

same firm if the ratio is increasing it is a good sign for the company.

In 2007-08/2008-09 the ratio was 1.78 & 1.79 resp.

In 2009-10 it increased to 2.15 which was mainly due to the fall in Current asset,

which forms a part of total asset.

In 2010-11 the ratio decreased due to fall in sales revenue.

In 2011-12 the ratio increased due to fall in total asset and increase in Net Sales.

Since the ratio has increased it is a good sign for LG Electronics as it indicates that

sale as a percentage of total assets have increased.

5. WORKING CAPITAL TURNOVER RATIO

=SALES/NET WORKING CAP.

NET WORKING CAPITAL=CURRENT ASSET- CURRENT LIABILITIES

This is also known as Working Capital Leverage Ratio. This ratio indicates whether

or not Working Capital has been effectively utilized in making sales. In case a

company can achieve higher volume of sales with relatively small amount of

working capital, it is an indication of the operating efficiency of the company. The

higher the Working Capital Turnover ratio, the lower is the investment in the

working capital and higher would the profitability.

YEAR NET SALES NET WORKING CAP WC.T.R

2007-2008 914.77 202.78 4.51

2008-2009 1042.58 246.48 4.22

2009-2010 1166.46 187.51 6.22

2010-2011 1163.19 171.02 6.80

2011-2012 1232.29 173.02 7.12

In the year 2007-08 the ratio was 4.51 which reduced to 4.22 as a result of increase

in Net Working Capital, which was mainly due to substantial increase in Current

Asset in comparison with Current Liabilities.

In year 2009-10 the ratio improved to 6.22 which was due to decrease in net working

capital by 24% while sales increase by 12%.

In 2011-12 the ratio was 7.12%, as a result of increase in sales.

Working capital ratio of LG Electronics is increasing which is a positive sign for the

company.

The sales of the company have increased with less investment in working capital.

(c) LEVERAGE RATIO

1. DEBT- EQUITY RATIO=TOTAL DEBT/TOTAL OWNER’S

EQUITY

TOTAL DEBT=LOAN+LIABILITIES

OWNER’S EQUITY=SHAREHLDERS FUND-MISC. EXPENDITURE

The DE ratio is the basic and the most common measure of studying the indebtedness

of the firm, it indicates the percentage of funds being financed through borrowings.

The Debt-Equity ratio is determined to ascertain the soundness of the long-term

financial policies of the company.

The ratio indicates the proportion of owner’s stake in business. Excessive liabilities

tend to cause insolvency. The ratio indicates the extent to which the firm depends

upon outsiders for its existence. It tells the owners the extent to which they can gain

benefits or maintain control with a limited investment.

The greater the ratio higher is the risk to the

lenders and vice versa.

YEAR TOTAL DEBT OWNER EQUITY RATIO

2007-2008 365.72 251.66 1.45

2008-2009 374.11 312.99 1.19

2009-2010 308.95 354.81 0.87

2010-2011 342.41 396.89 0.86

2011-2012 269.87 408.69 0.66

In 2007-08 the ratio was 1.45 which continuously declined for all the above period

and was at 0.66 in the year 2011-12. Decrease in the ratio is mainly due assets being

financed more by shareholders funds then by external equities. Total debt decreased

by 21% from 2009-10 to 2011-12 while owner’s equity increased in the same period

leading to fall in debt equity ratio by 23%.

The larger the ratio, the more is the amount of risk assumed by creditors, and the

claims of the creditors against the assets of the firm.

As the ratio has decreased in case of LG Electronics it is a good sign for the

company.

2. PROPRIETORY RATIO=OWNERS EQUITY/TOTAL ASSET

It establishes relationship between the

proprietor’s funds and the total tangible

assets. It measures the conservatism of

capital structure and shows the extent of

shareholders funds in total assets employed in

the business. The ratio focuses the attention

on the general financial strength of the

enterprise. The ratio is of particular

importance to the creditors who can find out

the proportion of shareholders fund in the

total asset employed in the business. A high

ratio will indicate a relatively little danger to

the creditors etc. in case of winding up of the

business. A low proprietary ratio indicates

greater risk to the creditors since in the event

of losses a part of their money may be lost. A

ratio below 50% may be alarming for the

creditors.

YEAR OWNER EQUITY TOTAL ASSET RATIO

2007-2008 251.66 512.08 0.49

2008-2009 312.99 582.41 0.53

2009-2010 354.81 543.24 0.65

2010-2011 396.89 544.69 0.72

2011-2012 408.69 537.54 0.76

In 2007-08 the ratio was 0.49 which increased continuously and was at 0.76 in the

year 2011-12

The increase in the ratio was due to increase in owner’s equity as a result of

increase in Reserves & Surplus. The positioned has improved which means

relatively higher degree of security for the company. An enterprise is considered

financially weak if it has relatively small investment in firm in comparison to

creditors. A low proprietary ratio would indicate a relatively larger degree of

security for the company.

For LG Electronics owner’s equity in total asset has increased.

It is a good sign for the Company

3. SOLVENCY RATIO=EXTERNAL EQUITY/TOTAL ASSET

The ratio of external equity to total asset is a variant of the proprietary ratio. This

ratio measures the proportion of the firm’s assets that are financed by creditors. To

the creditors, a low ratio would ensure greater security for extending credit to the

firm.

YEAR EXTERNAL EQUITY TOTAL ASSET RATIO

2007-2008 365.72 512.08 0.71

2008-2009 374.11 582.41 0.64

2009-2010 308.95 543.24 0.56

2010-2011 342.41 544.69 0.62

2011-2012 269.87 537.54 0.50

In 2007-08 the solvency ratio was at .71, which reduced in 2008-09/2009-2010

In 2010-11 the ratio increased to .62 from .56 in 2009-10 due to increase in the

amount of External debt by 11% while total asset increased marginally

In 2011-12 the ratio was .50 reduced from .62 as the external debt reduced by

21% while total asset reduced by only 1%.

External equity in total asset has decreased. A high ratio indicates high risk to

lenders and vice versa.

Since the ratio has decreased it is a good sign for the company.

4. FIXED ASSET TO NET WORTH= FIXED ASSET/NET WORTH

Fixed asset to net worth indicates the percentage contributed by owners to

the value of fixed assets. The financial experts are of the opinion that in

manufacturing concerns, the investment in Plant should be made out of equity rather

than borrowed capital, therefore a ratio of 1:1 is considered desirable.

YEAR FIXED ASSET NET WORTH RATIO

2007-2008 238.51 251.66 0.94

2008-2009 250.83 312.99 0.80

2009-2010 242.86 354.81 0.68

2010-2011 244.42 396.89 0.61

2011-2012 204.65 408.69 0.50

In the year 2007-08 the ratio was .94, which decreased to .80 mainly due to

increase in Net Worth as a result of increase in PAT from 50.10crore to 73.43crore a

rise of 55%. An ideal ratio is considered to be1: 1

LG Electronics has achieved this ideal ratio. It is a good sign for the company.

5. INTEREST COVERAGE RATIO=EBIT/FIXED INTEREST

CHARGES

This ratio is also called times interest earned

ratio and it measures the ability of the firm to

pay the fixed interest liabilities. The higher

the ratio, better it is both for the firm and for

the lenders. For the firm the probability of

committing defaults is reduced and for the

lenders the firm is considered less risky.

YEAR EBIT FIX.INT.CHARGES RATIO

2007-2008 84.07 32.47 2.58

2008-2009 106.40 25.11 4.23

2009-2010 114.77 29.66 3.86

2010-2011 99.47 23.94 4.15

2011-2012 112.62 17.08 6.59

In the year 2007-08 the ratio was 2.58, which increased to 4.23 as a result of

decrease in Fixed Interest Charges which reduced to 3.86 due to rise in the fixed

interest charges from 25.11crore to 29.66crore. For the next two years the ratio

increased as a result of fall in the interest charges and was at 6.59 in the year 2011-

12.

As the ratio in case of LG Electronics has increased it is a good sign for the

company.

Loan funds 2007-08 =294.93 2008-09 =289.02 2009-10 =196.09

2010-11 =213.16 2011-12 = 110

It is seen that though the loan funds had decreased from 289crore in 2011-2012 to

196crore in 2009-2010 the Fixed interest charges has increased from 25.11crore to

29.66crore. This is due to the fact that a debt burden was paid off in the month of

March for which interest was paid for the whole year.

(d) PROFITABILITY RATIOS

1.GROSS PROFIT RATIO= (GROSS PROFIT/NET SALES) *100

It is also called as average mark up ratio. The Gross Profit is the difference between

sales revenue and the cost of generating those sales. Therefore, the gross profit

amount and the gross profit ratio depend upon the relationship between selling price

and cost of production including direct expenses. The gross profit ratio reflects the

efficiency with which it produces/purchases goods. The gross profit ratio should be

analyzed and studied as a time series.

YEAR G.PROFIT NET SALES RATIO

2007-2008 419.70 914.77 45.88

2008-2009 485.61 1042.58 46.57

2009-2010 558.44 1166.46 47.87

2010-2011 573.91 1163.19 49.33

2011-2012 616.35 1232.29 50.01

The Gross profit ratio for the company is on an increase mainly due to the

continuous increase in the Gross profit, which is mainly due to the increase in sales

as a percentage of direct expenses is more.

A gross profit ratio of 50% means that on every 1-rupee sale, the firm is earning a

gross profit of 50paise.

This ratio indicates the degree to which the selling price of goods per unit may

decline without resulting in losses from operations to the firm.

NET PROFIT RATIO=(NET PROFIT/NET SALES)*100

Net profit is the revenue over expenses in a particular accounting year. It is the net

result of the working of the company during a particular year. This ratio is widely

used as measure of overall profitability and is very useful to proprietors.

It measures the efficiency of management in generating additional revenue over

and above the total cost of operations. It measures the overall efficiency in

manufacturing, administrative, selling and distributing the product.

YEAR N.PROFIT NET SALES RATIO

2007-2008 50.10 914.77 5.47

2008-2009 77.43 1042.58 7.42

2009-2010 77.92 1166.46 6.67

2010-2011 64.44 1163.19 5.53

2011-2012 85.10 1232.29 6.90

Net profit ratio in the year 2007-08 was 5.47, which increased to 7.42 in the year

2008-09 because of 54% increase in Net Profit

In 2009-10 the ratio fell to 6.67 because Net profit increase by less than 1% while

sales increased by 12%

In 2010-11 the ratio further fell to 5.53 as a result of decrease in net profit by 17%

In 2011-12 the ratio increased because of rise in net profit by 32%

Since the ratio has increased it is considered a good sign for the company.

3. OPERATIN MARGIN=PBDIT/SALES PBDIT-OTHER INCOME

The Operating Profit refers to the pure operating profits of the firm i.e. the profit

generated by the operation of the firm and hence is calculated before considering any

financial charges, non operating income/loss and tax liability etc. The OP ratio shows

the percentage of pure profit earned on every 1 rupee of sale made. OP ratio would be

less than the Gross Profit ratio as Selling and Administrative Expenses, Financial

Expenses; Depreciation charges are deduced to arrive at OP. The OP ratio in

conjunction with the gross profit ratio depicts whether changes in the profitability of

the firm are caused by changes in the manufacturing efficiency or administrative

efficiency.

YEAR PBDIT SALES OPERATING MARGIN

2007-2008 80.23 914.77 8.77

2008-2009 93.51 1042.58 8.96

2009-2010 118.42 1166.46 10.15

2010-2011 106.58 1163.19 9.16

2011-2012 126.35 1232.29 10.25

In the year 2007-08 and 2008-09 the operating margin improved marginally

But in the year 2004-05 the margin rose to 10.15 from 8.96 in 2008-09 due to increase

in PBDIT

The margin declined to 9.16 in the year 2010-11 due to fall in PBDIT

The margin again improved in 2011-12 to 10.25 due to better figure of PBDIT.

4. EARNING PER SHARE=PAT/NO. OF SHARES

This is a well-known and widely used indicator of the profitability because it can

be easily compared to the previous EPS figures and the EPS figures of other

companies. The aim of every company should be wealth maximization or to

increase the earnings of the shareholders. The EPS helps in determining the

Market Price of the Equity Share of the Company. A comparison of EPS of the

company with another will also help in deciding whether the equity share capital is

being effectively used or not. It also helps in estimating the company’s capacity to

pay dividend to its equity shareholders.

YEAR PAT NO. OF SHARES EPS

2007-2008 50.10 28,50,89,501 1.76

2008-2009 77.43 28,52,14,832 2.71

2009-2010 77.92 28,52,14,832 2.73

2010-2011 64.44 28,53,66,429 2.26

2011-2012 85.10 28,56,62,514 2.98

The EPS has increased from the year 2007-08 to 2008-09 but in the year 2010-11

the EPS Fell from 2.73 in 2010-11 to 2.26 due to fall in the PAT

In 2011-12 the EPS increased to 2.98 due to increase in PAT by 32%.

The increase in the EPS is a good sign for any company as it increases the

confidence of the equity shareholders on the company.

It is a good sign for LG Electronics .

5. DIVIDEND PER SHARE (DPS)

= TOTAL PROFITS DISTRIBUTED

NUMBER OF SHARES

Sometimes the equity shareholders may not be interested in the EPS but in the return,

which they are actually receiving from the firm in form of dividends. The amount of

profits distributed to share holders per share is known as DPS.

YEAR DIVIDEND DECLARED NO. OF SHARES DPS

2007-2008 1425.45 28,50,89,501 0.5

2008-2009 2851.28 28,52,14,832 1.0

2009-2010 2852.14 28,52,14,832 1.0

2010-2011 1427.47 28,53,66,429 0.5

2011-2012 4000.52 28,56,62,514 1.4

Dividend per share in 2007-2008 was Rs.5, which was increased to Rs.10 in the

year 2008-09 and remained same for the next year

In the year 2010-11 the DPS fell to Rs.5 as PAT reduced during this period

In 2011-12 the DPS was again at Rs.14 due to increase in PAT.

It is a good sign for the company as well as for the shareholders as the DPS have

increased.

6. DIVIDENED PAYOUT RATIO = DPS/EPS

This is the ratio between the DPS and the EPS of the firm, i.e. it refers to the

proportion of EPS that has been distributed by the company as dividend.

YEAR DPS EPS RATIO

2007-2008 0.5 1.76 28.4

2008-2009 1.0 2.71 36.9

2009-2010 1.0 2.73 36.6

2010-2011 0.5 2.26 22.2

2011-2012 1.4 2.98 46.9

As the percentage of DP ratio has increased it is a good sign for the shareholders,

whose earnings are increasing.

EXPENSES RATIO

The expense ratios are the measure of cost control and are computed by establishing

relationship between different expense items and the sales. In a firm total expense

can of operations can be subdivided into.

(A) Cost of Goods Sold

(B) Total Material Cost

(C) Selling and Administrative Expenses

(D) Advertisement Expenses

(E) Employee cost ratio

(F) Return on owner’s equity

(G) Return on capital employed

(A) COST OF GOOD SOLD RATIO

=(CST.OF GOODS SOLD/NET SALES)*100

This ratio measures the percentage of sales that is being spent on the producing

the goods for sale. It takes into account the Direct Expenses.

YEAR CST OF GOODS SOLD NET SALES RATIO

2007-2008 495.07 914.77 54.11

2008-2009 556.97 1042.58 53.44

2009-2010 608.02 1166.46 52.12

2010-2011 589.28 1163.19 50.66

2011-2012 624.22 1232.29 50.65

The cost of goods sold ratio has decreased continuously from 54.11 in 2007-08

To 50.65 in 2011-12. The company is spending less on direct expenses but still the

sales are increasing which is good for the company.

It is complimentary of gross profit ratio. If cost of goods sold were 50%, gross profit

would be 50%.

(B) TOTAL MATERIAL COST RATIO

= (MATERIAL COST/NET SALES)*100

It measures the amount spent on material

(Direct) for producing goods, that is contributing

to Sales.

YEAR MATERIAL COST NET SALES RATIO

2007-2008 458.49 914.77 50.10

2008-2009 526.94 1042.58 50.54

2009-2010 538.47 1166.46 46.16

2010-2011 515.61 1163.19 44.32

2011-2012 521.18 1232.29 42.29

As the ratio is on a fall, it is a very good sign for the company, as the sales are

increasing more in relation to the amount spent on Material.

(C) SELLING & ADMINISTRATIVE RATIO

= (SELLING & ADMINISTRATIVE RATIO/NETSALES)*100

It measures the amount that the company is spending on selling its product.

It takes into account all the indirect expenses.

YEAR EXPENSES NET SALES RATIO

2007-2008 258.95 914.77 28.30

2008-2009 292.08 1042.58 28.01

2009-2010 339.72 1166.46 29.11

2010-2011 364.57 1163.19 31.34

2011-2012 386.27 1232.29 31.34

The ratio is showing an increasing trend, which is not good for the company.

The company is spending more on selling and administration but the returns in form of

sales are not increasing in relation to the spending.

The company should have a check on the indirect expenses, it has to find out the item

of expenses which is not given returns in a Positive manner.

(D) ADVERTISEMENT EXPENSES RATIO

= (ADVERTISEMENT COST/NET SALES)*100

This ratio measure the amount spent on

advertisement and publicity and the

percentage it is contributing to sales.

YEAR ADV. EXP. NET SALES RATIO

2007-2008 114.34 914.77 12.49

2008-2009 120.01 1042.58 11.51

2009-2010 146.07 1166.46 12.52

2010-2011 154.45 1163.19 13.27

2011-2012 159.96 1232.29 12.98

Since the ratio has decreased it is considered a good sign for the company as,

though the advertisement expenditure has increased by 4%. Advertisement expenses

as a percentage of sales have decreased.

However the company has to keep a check on this expense as out of total selling and

administrative expense the company is spending around 40% on Advertisement

expenses.

(E) EMPLOYEE COST RATIO

= (EMPLOYEE COST/NET SALES)*100

This ratio measure the amount spent on

Employees wages and salaries and the

percentage it is contributing to sales.

YEAR EMP. COST NET SALES RATIO

2007-2008 54.88 914.77 5.91

2008-2009 63.13 1042.58 6.05

2009-2010 77.69 1166.46 6.66

2010-2011 84.48 1163.19 7.26

2011-2012 93.81 1232.29 7.61

As the ratio is increasing it is a good sign for the company as it is looking after the

employees’ welfare by increasing their salaries. Also it would motivate the

employees.

(F) RETURN ON OWNER’S EQUITY=(PAT/OWNER’S EQUITY)*100

(RETURN ON NET WORTH)

The ROE examines profitability from the perspective of the equity investors by

relating profits available for the equity shareholders with the book value of the

equity investment. The ROE indicates as to

how the firm has used well the funds of the

owners.

YEAR PAT OWNER’S EQUITY RATIO

2007-2008 50.10 251.66 19.90

2008-2009 77.43 312.99 24.73

2009-2010 77.92 354.81 21.96

2010-2011 64.44 396.89 16.23

2011-2012 85.10 408.69 20.82

In the year 2007-08 the ratio was 19.90 that rose to 24.73 in the year 2008-09 due to

increase in the amount of PAT by 35%.

In the year 2009-10 the ratio decreased as PAT increased by only 0.49 Crore while

owner’s equity rose by 44 Crore

In 2010-11 the ratio further declined mainly due to decrease in PAT, by 17%

In 2011-12 the ratio improved due to increase in PAT by 32%.

(G) RETURN ON CAPITALEMPLOYED/ASSET =PAT + INTEREST/

CAPITAL EMPLOYED

One of the most widely used ratios is the return on Capital Employed/Assets. Since

assets are used to generate income, the higher the income, the more productive assets

were during the period. The return on Capital Invested is a concept that measures the

Profit that a firm earns on investing a Unit of Capital. The inclusion of interest is

conceptually sound because total assets have been financed from the pool of funds

supplied by creditors and owners.

YEAR PAT + INT. CAP. EMPLOYED RATIO

2007-2008 82.57 556.43 14.8

2008-2009 102.54 609.05 16.8

2009-2010 107.58 558.30 19.2

2010-2011 88.38 613.53 14.4

2011-2012 102.18 521.09 19.6

Return on capital employed is the Testimony of a Companies continuous effort to

effectively utilize its Assets. There was a continuous improvement in this ratio for

LG Electronics, but during the year 2010-11 due to fall in PAT and investment in

Capital Employed increased, the Ratio fell to 14.4 from 19.2

The ratio improved as investment in Capital Employed decreased from 613.53 to

521.09 mainly because the company was able to decrease the amount of loan funds

by around 50%.

The increase in the Ratio is a good sign for the Company.

FINDINGS

After interpretation of financial ratios of 5 years of LG the project can be summarized as follows:

1. The corporation operates very efficiently as it can be seen from the various ratios as calculated above like Net profit ratio, Return on equity , Book value per share and so on.

2. LG has got a very sound working capital management particular cash and debtors.

3. The liquidity position of the corporation is very safe which can be easily judged from the interpretation of liquidity ratios like current ratio, quick ratio and absolute ratio. This means that LG is in a quite credit worthy position.

4. LG has a sound capital and asset base which also indicates that it is in a position to clear all its current liabilities. Infact it has become a debt free company.

5. LG has no short term securities during the past five years.

6. Liquidity ratios have continuously gone under various fluctuations in the last five

years. How ever the ratios are more than the industry standard. This indicates excess

cash is maintained in the organization.

7. Turnover ratios are also in line with the standards.

Suggestions

The company has a good record of quality of goods in the market with best of my

enquiry and investigations.

They should see that the debtors should be collected with in a specified time by the

company. So, that they can discharge some of its creditors or current liabilities and

avoid payment of interest.

Ratio analysis are immensely helpful in making a comparative of the financial

statement for several years.

The company financial position is very secure. It is observed that

most of the ratios are as per the industry standard.

Company adopts proper inventory control techniques to properly

management inventory.

BIBLIOGRAPHY

FINANCIAL MANAGEMENT CHANDRA PRASANNA

FINANCIAL AND COST

ACCOUNTING DR. S.N.MAHESHWARI

MANAGEMENT ACCOUNTING M.A. SAHAF

NON EXECUTIVE FINANCE ANALYSIS P CHANDRA

ANNUAL REPORTS OF LG ELECTRONICS INDIA LTD.

INTERNET