Liquidity ratios its me
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13-Sep-2014 -
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Transcript of Liquidity ratios its me
Financial statement analysis of Modern Collection pvt. ltd.
Through ratio analysis
LIQUIDITY RATIOCURRENT RATIO
Current Assets Current ratio = ------------------------- Current Liabilities
Year Current Assets Current Liabilities Current Ratio
2006-2007 24678965 21128392 1.16
2007-2008 21588683 11339964 1.90
2008-2009 20683915 25537988 0.80
ANALYSIS The current ratio decreased to 1.16 in the year 2006-2007 , and again it is increased to 1.90 in 2007-2008, later it is again fallen down to 0.80. This shows that there is no improvement in the short-term solvency of the company for the year 2008-2009.
Current Ratio0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
22006-20072007-20082008-2009
INTERPRETATION: Due to instability in the rate of ratios, it shows that there is no improvement in the short-term solvency of the company for the year 2008-2009.
ACID TEST RATIO Liquid Assets Acid test ratio = ---------------------------- Current liabilities
Year Liquid assets Current liabilities Liquid ratio
2006-2007 23362359 21128392 1.10
2007-2008 15428377 11339964 1.36
2008-2009 16701025 25537988 0.65
ANALYSIS The liquid ratio is decreased to 1.10 in the year 2006-2007 , and again it is increased to 1.36 in the year 2007-2008. This further confirms that there are fluctuations in the short-term liquidity .
Liquid ratio0
0.2
0.4
0.6
0.8
1
1.2
1.42006-20072007-20082008-2009
INTERPRETATION: This further confirms that there are fluctuations in the short-term liquidity of the company. This is mainly because of low realization of sundry debtors and an in increase in quick assets and decrease in cash and bank.
SOLVENCY RATIODEBT-EQUITY RATIO
Total debts Debt-Equity ratio = ---------------------- Equity
Year Total debt Equity Debt-Equity Ratio
2006-2007 24812845 28416205 0.87
2007-2008 15626471 28057713 0.56
2008-2009 14358681 30391887 0.47
ANALYSIS Debt equity ratio is 0.87 in 2006-2007 and it is decreased to 0.56 in the year 2007-2008 though it was decreased to 0.47 in the year 2008-2009. This shows that there is improvement in the long-term solvency position of the company.
GRAPH SHOWING DEBT-EQUITY RATIO
Debt-Equity Ratio0
0.10.20.30.40.50.60.70.80.9
2006-20072007-20082008-2009
INTERPRETATION:It indicates the relative proportions of capital contribution by creditors and shareholders.
PROPRIETORY RATIO
EquityProprietory Ratio = ----------------------
Total Asset
Year Equity Total Assets Proprietory Ratio
2006-2007 28416205 53229050 0.53
2007-2008 28057713 43684184 0.64
2008-2009 30391887 44750568 0.67
ANALYSIS This ratio is decreased in the year 2006-2007 to 0.53 when compared to 2005-2006 and further increased to 0.67 in the year 2008-2009 when compared to 2007-2008. this shows that there is an increase in the long-term solvency of the business.
TABLE SHOWING PROPRIETORY RATIO
Proprietory Ratio0
0.10.20.30.40.50.60.7
2006-20072007-20082008-2009
INTERPRETATION:This shows that there is an increase in the long-term solvency of the business. It shows proprietor have invested their portion to the growth and welfare of the company.
FIXED ASSETS TO NETWORTH RATIO
Fixed Assets (After depreciation)Fixed assets to Net ---------------------------------------------worth Ratio = Shareholder’s funds
Year Fixed Asset Net worth Fixed assets to
Net worth Ratio
2006-2007 6079307 28416205 0.21
2007-2008 5378748 28057713 0.19
2008-2009 7775901 30391887 0.25
ANALYSISThe ratio of fixed assets to net worth ratio is found to be fluctuating in the year 2006-2007 and 2007-2008. But it is slightly increased in the year 2008-2009 to 0.25.
TURNOVER RATIOINVENTORY TURNOVER RATIO
SalesStock Turnover Ratio = ----------------
Inventory
Year Sales Inventory Stock turnover
Ratio
2006-2007 483975 21 22444998 2.15
2007-2008 62649553 17500270 3.57
2008-2009 90124231 29520878 3.05
ANALYSIS Inventory turn over ratio has decreased to 2.15 in the year 2006-2007 when compared to 2005-2006 and again increased in the year 2007-2008 to 3.57 but in the year 2008-2009 it shows a fall that is 3.05.
GRAPH SHOWING INVENTORY TURNOVER RATIO
Stock turnover Ratio0
0.5
1
1.5
2
2.5
3
3.5
42006-20072007-20082008-2009
INTERPRETATION:From the above table, its shown the adequacy of goods available to sell in comparison to the actual sale order. Running out of stock due to low inventory (high turnover) may indicate future shortages. It also identifies of poor management.
DEBTORS TURNOVER RATIO Credit SalesDebtors Turnover Ratio = ------------------------ Average Debtors
Year Credit Sales Debtors Debtors
Turnover
Ratio
2006-2007 48397521 11818945 4.09
2007-2008 62649553 4174430 15.0
2008-2009 90124131 5947413 15.15
ANALYSIS The debtors turn over ratio has decreased to 4.09 in the year 2006-2007 and again has increased to 15.15 in the year 2008-2009.
GRAPH SHOWING DEBTORS TURNOVER RATIO
Debtors Turnover Ratio0
2
4
6
8
10
12
14
162006-2007
2007-2008
2008-2009
INTERPRETATION: This shows that the company is running out of cash shortage. Since credit facilities are provided to debtors, it has lead to less avoid of competitors.
DEBT COLLECTION PERIOD DebtorsDebt collection period = ---------------- * 365 days
Credit Sales
Year Debtors Credit Sales Debt collection
Ratio
2006-2007 11818945 48397521 89 Days
2007-2008 4174430 62649553 24 Days
2008-2009 5947413 90124131 24 Days
ANALYSIS The debt collection period ratio remains constant in the 2007-2008 and 2008-2009 but has increased in the year 2006-2007 to 89 days .
GRAPH SHOWING DEBT COLLECTION PERIOD RATIO
Debt collection Ratio0
10
20
30
4050
60
70
8090
2006-2007
2007-2008
2008-2009
INTERPRETATION:
The debt collection period ratio has increased to 89 days in the year 2006-2007. but has remained constant in the future i.e,24 days. Hence it shows that the company has been extending its credit facilities to customer to avoid competition.
CREDITORS TURNOVER RATIOcredit purchases
Credit Turnover Ratio = ------------------------------------- average creditors
Year Credit purchase Creditors Creditors turn
over Ratio
2006-2007 25501189 12827919 1.98
2007-2008 32984848 7452623 4.42
2008-2009 69718267 20032834 3.48
ANALYSIS The creditors turnover ratio has decreased to 1.98 in 2006-2007 again it is increased to 4.42 in 2007-2008 but again there is slight fall in the year 2008-2009 to 3.48.
GRAPH SHOWING CREDITORS TURNOVER RATIO
Creditors turn over Ratio0
0.51
1.52
2.53
3.54
4.52006-20072007-20082008-2009
INTERPRETATION:There has been a decline in creditors turn over ratio in 2006-2007 but a rise in next year and again a decline in 2008-2009
FIXED ASSETS TURNOVER RATIO SalesFixed assets turnover ratio = ------------------
Fixed Asset
Year Sales Fixed Assets Fixed assets turn
over Ratio
2006-2007 48397521 6079307 7.96
2007-2008 62649553 5378248 11.64
2008-2009 90124131 7775901 11.59
ANALYSIS Fixed assets turnover ratio is 7.96 in the year 2006-2007 and more or less remains constant in the years 2007-2008 and 2008-2009 with slight variations standing at 11.64 and 11.59.
GRAPH SHOWING FIXED ASSETS TURNOVER RATIO
Fixed assets turn over Ratio0
2
4
6
8
10
122006-20072007-20082008-2009
INTERPRETATIONS:There is a an increase in fixed asset turnover ratios from year 2006-2007 and it remains almost the same for two year 2007 to 2009.
PROFITABILITY RATIOSGROSS PROFIT RATIO
Gross profitGross profit ratio = ------------------ * 100
Sales
Year Gross
profit
Sales Gross
profit Ratio
2006-2007 ------------- 48397521 --------
2007-2008 3711530 62649553 5.92%
2008-2009 2736963 90124131 3.03%
ANALYSIS Gross profit ratio has increased in the year 2007-2008 to 5.92% having no profits in the year 2006-2007 and shows a fall in 2008-2009 to 3.03%.
GRAPH SHOWING GROSS PROFIT RATIO
Gross profit Ratio0
0.01
0.02
0.03
0.04
0.05
0.06 2006-2007
2007-2008
2008-2009
INTERPRETATION: This shows that the gross profit relate to sales is average and the profit standpoint is that the firm be able to generate adequate profit on each unit of sales.
NET PROFIT RATIO. Net profitNet profit ratio = ------------------- * 100
Sales
Year Net profit Sales Net profit
Ratio
2006-2007 ----------- 48397521 -------
2007-2008 ----------- 62649553 -------
2008-2009 2334174 90124131 2.6%
ANALYSIS The net profit ratio has decreased in the year 2008-2009 to 0.02% having no profit in the immediate previous years . This shows there is decline in the profitability of the company
GRAPH SHOWING NET PROFIT RATIO
Net profit Ratio0
0.000020.000040.000060.000080.0001
0.000120.000140.000160.000180.0002 2006-2007
2007-20082008-2009
INTERPRETATION:It is shown that net profit ratio is low which would indicate some mismanagement in the areas ex cluding production. This shows there is decline in the profitable of the company.
OPERATING RATIO
Operating costOperating ratio = ------------------------ * 100 Sales
Year Operating
cost
Sales Operating
Ratio
2006-2007 15647946 48397521 32.33%
2007-2008 11102218 62649553 18%
2008-2009 21072481 90124131 23.38%
ANALYSISThe operating ratio in the year 2005-2006 increased to 32.33% . But it is increased in the year 2007-2008 to 23.38% when compared to that of 17.72% in the year 2006-2007. So this is the reason for decline in the net profit of the company
GRAPH SHOWING OPERATING RATIO
Operating Ratio0.00%5.00%
10.00%15.00%20.00%25.00%
30.00%35.00%
2006-20072007-20082008-2009
INTERPRETATION: There was an increase in operating ratio in 2006-2007 and decline in 2007-2008 and a slight increase in 2008-2009.
RETURN ON CAPITAL EMPLOYED Net profit before tax
Return on capital employed = ----------------------------- * 100 capital employed
Year Profit before
tax
Capital
employed
Return on
capital employed
2006-2007 -106398 53229050 -------
2007-2008 3711530 43684184 8.5%
2008-2009 2736963 44750568 6.1%
ANALYSIS The return on capital employed ratio shows nil return on capital employed in the year 2006-2007 because of losses incurred by the company in that year. In the next year it reaches to 8.5% which is 6.1% more when compared to the one in the year 2008-2009 .
GRAPH SHOWING RETURN ON CAPITAL EMPLOYED
Return on capital employed0
0.010.020.030.040.050.060.070.080.09
2006-2007
2007-2008
2008-2009
INTERPRETATION: Capital employed is strong in 2007 & 2008 and its decline in 2008 & 2009
EARNING PER SHARE (EPS):
Year Number of
equity shares
Profit after
tax
Earnings
per share
2006-2007 15000 ----------- --------
2007-2008 15000 ----------- --------
2008-2009 15000 2334174 156
ANALYSIS: The earnings per share have increased to 156 in the year 2008-2009 when compared to all the remaining previous year’s earnings per share.
Net profit after tax – preference dividendEarning per share= -------------------------------------------------------------
no. of equity shares
GRAPH SHOWING EARNING PER SHARE (EPS)
Earnings per share0
20406080
100120140160 2006-2007
2007-20082008-2009
INTERPRETATION: From the above table, it can easily understood that the company EPS is steadily progressed. The share capital of the company has increased without the proportionate increase in the net income.
CONCLUSION1.In spite of incurring losses ,it has successfully managed to overcome this by making profits in future, which is a good sign of prosperity to the company.
2.The long-term solvency position of the company has shown a recurrent increase.
3.The sales of the company has increased in the year 2008-2009 which indicates that the foreign companies are well satisfied with the company’s product, which is a good sign to company’s prosperity.
SUGGESTIONS1.Modern Collections should make proper financial planning so that the available funds are utilized in more efficient and effective manner.2.The company must try to maintain its short-term liquidity position, by investing only in those investments, which are easily convertable into cashThe company should reduce the idle capacity in order to increase the efficiency in the operations.3.Modern Collections must take immediate measures to reduce the length of the Operating cycle
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