1
INTRODUCTION
The study of financial statement is prepared for the purpose of
presenting a periodical review or report by the management of and deal
with the state of investment in business and result achieved during the
period under review. They reflect the financial position and operating
strengths or weaknesses of the concern by properly establishing
relationship between the items of the balance sheet and remove
statements.
Financial statement analysis can be under taken either by the
management of the firm or by the outside parties. The nature of analysis
defers depending upon the purpose of the analysis. The analyst is able to
say how well the firm could utilize the resource of the society in
generating goods and services. Turnover ratios are the best tools in
deciding these aspects.
Hence it is overall responsibility of the management to see that the
resource of the firm is used most efficiently and effectively and that the
firm’s financial position is good. Financial statement analysis does
indicate what can be expected in future from the firm.
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Significance of Ratio Analysis:
The significance of Ratio Analysis lies in the fact that it presents
facts on a comparative basis and enables the drawing of inferences
regarding the performance of a firm. The use is not confined the finance
managers alone. They are different parties interested in the ratio analysis
for knowing the financial position of a firm for different purpose. The
suppliers of goods on credit, banks, financial institutions, investors,
shareholders and the management all make use of ratio analysis as a tool
of evaluating the financial position and the performance of a firm.
3
NEED FOR THE STUDY
1. The project work is done for analyzing the financial position of the
Visakhapatnam Port Trust. The analysis of the financial position
gives a better picture of the financial position of the organization in
order to take better decisions.
2. Ratio analysis guides the board and management to pursue
objectives that are in the interests of the company and share
holders and facilitates effective monitoring thereby promoting
optimal use of financial reserves more efficiently.
3. The study is also beneficial to employees and offers motivation by
sharing how they are contributing for the company growth.
4. The investors who are interest in the investing the company’s share
will also get benefited by going through the study and can easily
take a decision whether to invest or not in the company shares.
5. This study is also beneficial to top management of the company by
providing relevant information regarding important aspects like
liquidity, leverage, activity and profitability.
4
OBJECTIVES OF THE STUDY
The present study has been undertaken with the following objectives.
1. To study the growth and development of Visakhapatnam Port
Trust.
2. To study the trends in finance and analyze various elements in
financial analysis.
3. To evaluate the financial position of Visakhapatnam Port Trust.
4. To calculate and estimate the important financial ratios as a part of
financial analysis in Visakhapatnam Port Trust.
5. To offer suggestions to improve financial position of the company.
6. To study the financial strengths and weaknesses of the firm.
5
METHODOLOGY OF THE STUDY
Information of the present study has been collected from secondary
sources of data.
• SECONDARY SOURCES:
 Data was collected from documents, records and files of the company.
 Data was gathered from the annual reports of the company.
 Data was collected from company website.
6
LIMITATIONS OF THE STUDY
The project work has been undertaken with almost accurate data
but the following aspects can be termed as the limitations of the project
work.
The limitations include:
 During the period of analysis, the company’s current financial
information was not available.
 The study is limited to the five years review period from 2003-2008.
 Visakhapatnam Port Trust is a service-oriented organization. So
various interpretations may not hold good.
 Time is one of the limiting factors of the study. The duration of the
training is only 7 weeks which is too short to study the organization.
7
INDUSTRY PROFILE
INTRODUCTION:
Ports are commonly known as places of safe shelter with necessary
infrastructure for the purpose of the trade. In the view there are airports
and seaports. Seaports are gateways to the world. Seaport is essential link
in the international maritime transport chain. Seaports play a very
important role in country’s growth. At present over 80% of all
international trade goes by sea.
In the case of developing courtiers like ours there is imperative
need for growth of foreign trade, certain important equipment has to be
imported to earn foreign exchange to buy machinery and equipment.
Thus international trade is the principal generator of economic
growth. Growth occurs when trade increases, while growth itself creates
more trade. In this international trade, seaports a have to function
efficiently with least cost to ensure the transfer of cargo between inland
and maritime transport and also allow goods to flow in and out of the
country as quick as possible. Thus, seaports and our ports also in the
essential link in the international maritime transport chain.
Ports are meant to provide sea borne vessels, some basic services
such as harbor or berth facilities for the ships and launching facilities for
the passengers and cargo. Apart from this, ports provide cranes,
warehouses, labor for cargo handling and transport. Thus today ports
become a very complex organization.
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Meaning and definition of Port:
Port- A transshipment point between sea and surface transport and an
entry and exit for import and export trade play as unique role in the
country’s transport system.
CLASSIFICATION OF PORTS:
Ports in India are classified into three categories.
• Major Ports
• Intermediate Ports
• Minor ports
 Major Ports:
Technically speaking, a major port is the one which handles not
less than half a millions of cargo annually and which posses labor and
other facilities to receive ships of 4000 foot and more.
 Intermediate Ports:
This type of port is the one, which handles not less than 1500
toners of cargo annually and is independent from the point of view of
passengers of traffic defense and customs.
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 Minor Ports:
A minor port in the one which handles not less than 500 toners of
cargo annually and which is not considered from any other point of view
is termed as minor port. Major ports are governed by the Major Ports Act
1963 and the Indian Ports Act 1908. The chairman of each major port
trust is appointed by the Central Government besides, Chairman, the port
trust board comprises of Deputy Chairman, representatives of Customs,
Railways, Defense, State Government, Ship owners, shippers etc., all
members of the board other than chairman and Deputy Chairman are part
time members. Our country is having a coast line of about 6000 Kms. and
the major ports and the minor ports are situated along the coast line and at
sea, islands. There are 12 major ports and 163 minor ports and
intermediary ports.
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ABOUT MAJOR PORTS IN INDIA
Major ports situated on the west coast:
S.No
1
2
3
4
5
6
Name of the Port
Bombay Port Trust
Kandla Port Trust
Jawaharlal Nehru Port Trust
New Mangalore Port Trust
Mormu Goa Port Trust
Cochin Port Trust
State
Maharashtra
Gujarat
Maharashtra
Karnataka
Goa
Kerala
Year of
establishment
1875
1955
1987
1974
1961
1930
Major ports situated on the east coast:
S.No
1
2
3
4
5
6
Name of the Port
Calcutta Port Trust
Paradip Port Trust
Chennai Port Trust
Tuticorin Port Trust
Visakhapatnam Port Trust
Ennore Port Ltd
State
West Bengal
Orissa
Tamilnadu
Tamilnadu
Andhra Pradesh
Tamilnadu
Year of
establishment
1893
1966
1916
1974
1933
2002
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Mumbai Port:
This port is established in 1875 in Maharashtra state. It is a leading
Indian port. It i a commercial gateway and premier port of India. Bombay
Port is a Tully ink great multipurpose port capable of handling dry nulls,
co-author food grains state.
Kandla Port Trust:
This port is established in 1955 and geographically situated in
Gujarat state. It is “Sea areas of north west India.” This port has the
special feature of highest productivity rates among India’s ports.
Jawaharlal Nehru Port Trust:
There is another port trust in New Bombay. It is an international
trade partner the most modern port of India with fully automatic and
computer controlled facilities for handling in-port of day bulk cargo and
import and export of containers of cargo and machines.
New Mangalore Port Trust:
This port is established in 1974. This is also called as the gateway
of Karnataka situated on the west coast of India.
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Mormu Goa Port Trust:
This Port is established in 1962. This is the gateway of Golden
Goa. Mormu Goa Port is the local point of Goa’s rich maritime
transitions.
Cochin Port Trust:
This port was established in 1930 at Willing Ton Island. This is
leading port on the West Coast of India. The port has the following
facilities i.e., berthing facilities in the placid back water throughout the
year.
Calcutta Port Trust:
This port is established in 1893 in West Bengal. Calcutta port was
contributed to India’s economic development. Traditionally Calcutta port
has been a terminal port; vessels bang imports to Calcutta and after
necessary repairs if any undertaken take first lead of cargo export.
Paradip Port Trust:
This port is established in the year 1966 in Cuttack of Orissa State.
The port has four general cargo berths. Merchandised iron ore handling
plant with wagon tipplers and a cap tine berth for handling raw material
for fertilizer plant located closely.
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Chennai Port Trust:
This port is established in 1976 in Madras at Tamil Nadu State.
This is eastern gateway of India. A port with two modern floating dry
docks providing under water repairs to vessels in Anchorage.
Tuticorn Port Trust:
This is established in 1976. The port has too many features i.e., the
ideal position for your Extracting business needs, no congestion no ideal
man or delay here because work bustle on every pier documentation
producer facilities formalities smoothed and accelerated.
Visakhapatnam Port Trust:
This is a natural port. The port has the specific features of quick
turn round of ships better labour productivity, coast affective cargo
handling fast clearance of easiest better ideas trials relation, exemption of
levy on export cargoes local point of Goa’s rich maritime treaties.
Ennore Port Ltd:
Newly constructed port. Main activities in the port are been
privatized.
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MAIN SOURCES OF REVENUE
Port mainly derives their revenue from cargo handling in
their port areas, charges on the ships visiting areas and other related
charges.
Main Sources of Revenue from Cargo Traffic:
• Wharf age and cargo related charges
• Cranes hire charges
• Rentals from warehouse
• Demurrage charges
• Charges for providing rail and transport, for the cargo movement
and
providing water facilities for the visiting ship
Main Sources for Revenue from Ship Traffic:
• Port dues
• Pilotige
• Berth hire
• Survey and measuring fees
• Ship repair in dock area, charges for water supply
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HISTORY OF VISAKHAPATNAM PORT TRUST
The Visakhapatnam port trust is one of the 12 major ports in the
country and was constructed during the British regime from 1921-1923.
When the port administration was under the control at Bengal and Nagpur
railways. This port was commissioned in the year 1933 with the name of
VISKHAPATNAM PORT TRUST and the first passenger ship
‘S.S.JALADURGA’ enters the port on 7thOctober 1933.
It was a major port in 1933 itself. This port is public service
oriented organization the principle activity of the port is to handle import
and export cargo from the ship at the port. It is the first leading major
country; iron ore handling plant was installed in the year 1965.
The iron ore is loaded into the ship at the rate of
8000 tons per hour. The port has its own railway system about 200 Kms
length from movement of wagon from the port to different directions.
According to the law under the Act, the central
Government has constituted the Board of trustees to the major ports in
1964 at the first instance these boards came under the control of ministry
of Transport Government by major port trusts in 1964. Now there are 12
major port trusts under the ministry of surface transports are governed by
Major Port Trust Act 1963.
The need for development of a port in this natural way felt by the
British rule as far as 1858 and the first detailed report was published in
1877. However, this proposal was temp frozen, due to the advent of the
First World War.
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During 1822, Bengal Nagpur railway revived the proposal of
Col.Cartwright Reida of British Admiral for the constructions of an inner
Harbor at the mouth of the river Meghadrigedda. The actual construction
commenced only in 1927 and the port which was only a road stead port
till than, was opened to ocean traffic on 7 th October 1933 with the arrival
of a passenger vessel ‘S.S.JALADURGA’. His Excellency Lord
Wellington formally inaugurated the port, the then vice Roy and
Governor General of India on 19th December 1933. The SAGA of the
construction of the harbors by particular forming of entrance channel by
sinking of two old ships “JANUS AND WELLESDON” to form
breakwater instead of building a wall in the sea were all fetes in
engineering and are subjects of discussion even today Mr.W.C.Ash and
Mr.D.B.Ratternberry were the engineers who played preeminent role in
constructing this beautiful harbors. The port was constructed at a cost of
Rs. 378 Lakhs and when it was opened it consisted of there berths and
handled 1.3 lakh tones of traffic.
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LOCATION:
Visakhapatnam port, one of the 12 major ports of India, is ideally
located in the State of Andhra Pradesh at a latitude of 17.41’N and
longitudinal of 83.18’E on the shores of Bay of Bangal, 780 kms, from
Chennai and 880 kms from Calcutta. The VISKHAPATNAM PORT
TRUST has occupied a total area of 10394, acres in which 741 acres is of
water spread, 9591 acres is of land area and 62 acres of area reclaimed.
NATURAL HARBOUR:
Visakhapatnam is a natural harbour in the sense that it is
surrounded by a chain of hills providing a safe anchor to ships. Notable
among the chain of hills in Dolphin’s Nose, a rocky hill in the southern
anchor, which regard to providing protection from Cyclones which
strikes East Coast during May/November normally.
GROWTH OF THE PORT:
Planned development of the port started with the commencement
of our country’s five-year plans. Hugs investments were made during
different five-years plan periods for providing more facilities, such as,
construction of additional berths, modernization of cargo of cargo
handling facilities, development of transit shed, ware house, open
stacking spaces, development of road and rail network
to meet the
increased requirement of the trade. Thus with a humble beginning
Visakhapatnam has carved the place of prestige, in the realm of ports by
having a number of development.
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In the first five-year plan, four along side berth were constructed
and cargo-handling facilities were strengthened. During second five-year
plan, two oil berths were commissioned for the benefit of oil refinery.
During third and fourth five-year plans, mechanized ore handling, plant,
for export of iron ore, was commissioned in 1965. Further, two more
quay berths to handle bulk cargoes and specialized further berth to handle
raw materials for the use of M/s C.F.L were commissioned. Besides the
above, argumentation, certain other infrastructural facilities like widening
and depending of entrance channel, procurement of higher capacity cargo
handling equipment and reorganization of railway system were also taken
up.
During fifth five-year plan for export of large quantities of iron ore
to Japan , and outer habour was constructed to accommodate large
vessels such as 1,50,000 D.W.T at a cost of Rs. 110 crores and iron ore
loading facilities were augments to load iron ore at a rate of 8,000 T.P.T
In sixth and seventh five-year plans, oil mooring was developed to
accommodate large crude carriers and off shore tanker terminal for
accommodating crude carriers and off shore tanker terminal for
accommodating crude carriers of1, 50,000 D.W.T. was directed discharge
facilities at a very high rater per hour from the ship to refinery was
commissioned a general cum bulk cargo berth was also commissioned in
1985.
During eighth plan, in the outer harbour the country’s biggest and
most modern fishing harbour to accommodate 96 trawlers and 300
mechanized boats has been developed in three phases. Visakhapatnam
port started with traffic level of 1.3 lakh tones in 1933-34 witness a
phenomenal growth of 34.5 million tones in 1996-97.
The development schemes included in 9th plan are construction of
4 multipurpose berth in north of modern arm of inner harbour at a cost of
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Rs.120 crores and development of railway system etc. the total out lay
projected for 9th plan for Visakhapatnam Port Trust is about Rs 1178
crores.
To have further development, port has drawn up a perspective plan
for capacity augmentations and organizational efficiency enhancement in
pursuances of the above; it has been taken for development of container
of port railway infrastructures etc., with such as growth handle 47 million
tons of cargo. Thus, the port initially conceived as an outlet, for the
export of minerals has transformed itself into the “Gateway of Trade
through Est. Coast”. The Visakhapatnam one of the finest and fast
developing port in India is poised to step into 21st century, at its pinnacle.
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HARBOUR FACILITIES IN VISAKHA PATNAM PORT TRUST:
The port has three harbours, known as inner harbour, outer harbour
and fishing harbour.
INNER HARBOUR:
The inner harbour has an entrance channel which consists of 3
navigatable arms. The northern arm which is main commercial arm of the
port with 15 quay berths and one mooring a western arm which is used by
Hindustan Shipyard, Hindustan Petroleum Corporation and two oil
refinery berths using by India Oil Corporations and fertilized birth for use
of Coromandel Fertilizers.
OUTER HARBOUR:
The outer harbour has been commissioned from Dec 1976 and it
has 2 berths for iron ore carriers which can accommodate 2 ships of size
1.2 lakh D.W.T. a general Gon-cum-bulk Cargo Berth (GCB) and an Off
Shore oil Tanker Terminal (OSTT) which can accommodate tankers and
container terminal.
FISHING HARBOUR:
The VSP fishing harbour adjacent to the outer harbour to the outer
harbour was commissioned in 1978. It can accommodate 56 trawlers. As
by product of outer harbour a modern fishing harbour has come into
existence. The protected water basis in the fishing harbour in 24 hectors
with a draft of 75mts.
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ORGANIZATIONAL STRUCTURE OF VISAKHAPATNAM
PORT TRUST
V.P.T. is managed by a board of trustees constructed under the
Major Port Trust Act 1963. The Port Trust Board constitute of a
chairman; a Deputy Chairman.
Trustees appointed by the government of India are shown below:
 Chairman
 Deputy chairman
 Trustee representing the ministry of shipping
 Trustee representing the Indian railways
 Trustee representing the department of customs
 Trustee representing other interests
 Trustees
representing
the Visakhapatnam
Management
association(Shippers)
 Trustee representing the labour unions
 Trustee representing the state Govt. of A.P.
 Trustee representing the Hindustan Petroleum Corporation
Ltd., Visakhapatnam.
 Trustee representing the Natural Mineral Development
 Corporation Ltd.
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ORGANIZATION STRUCTURE
An organization is the structural relation between the various
factors in an enterprise. Organization structure are designed to overcome
the limitation of people and to create an environment in which men’s
energies will be released to concentrate on the works at building,
maintaining at a structure of a working relationship in order to
accomplish the objectives of the enterprises.
Organization at the same time denotes both structure and a process.
As a structure organization is the structure relationship among various
related departments, organization is the process at harmony co-ordination
of individual effort for the accomplishment of set predetermined goals.
The major ports are under the direct administration control of Central
Government. The port is administered by the 18 Board of Trustees under
the Major Port Trusts Act, 1963 assisted in day-to-day administration by
the heads of department. Previously, the Port Trustee
Number was 18, but in 1984, the number was reduced to 13 with
the amendment of Major Port Trust Act, 1963.
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The ministry of Shipping & Transport Government of India
consisted the following Trustees.
 Chairman;
 One Trustee is representing the Customs Department;
 One Trustee is representing the Indian Railway;
 One Trustee is representing the State Government;
 One Trustee is representing the Central Government;
 One Trustee is representing the Defence;
 One Trustee is representing the Labour;
 One Trustee is representing the steamship owner’s Association;
 One Trustee is representing the A.P Chairman of Commerce;
 One Trustee is representing the Visakhapatnam Chamber of
Commerce;
 One Trustee is representing the HPCL.
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ACITIVITIES OF VARIOUS DEPARTMENTS
1. ADMINISTRATIVE DEPARTMENTS:
Secretary leads the administrative department. The administrative
department functions are to implement the rule and regulation and to
scrutinize the various decision of the Board. The other
functions are
dealing with the legal & vigilance matters and co-ordination Public
relations information and publication and Guest House administration.
2. PERSONNEL DEPARTMENT:
Personal Department is headed by the Manager (operation) and
concerned with Personal Management, Industrial Relations, Labour
Welfare and Training.
3. CIVIL ENGINEERING DEPARTMENT:
The Civil Engineering Department is under the charge of Chief
Engineer, who is assisted by two Deputy Chief Engineer and five
Executive Engineers. The Department is in charge of capital and
revenue works. It also attends to water supply, maintained and upkeep
of port building and structure on permanent way. The Chief Engineer is
the in charge of the ports estate and is assigned to the Estate Manager
for lease of Port lands, collection of land revenue , vacation of
unauthorized occupants of port Land and building, land survey also
comes under the purview of this Department.
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4. MECHANICAL ENGINEERING DEPARTMENT:
The Mechanical Engineering Department is under the control of
Chief Mechanical Engineer. He is in charge of the Port Workshop, Dry
Dock, supply of electricity in the Port, upkeep, maintenance and running
of all plants, machinery and equipment including cranes, craft and
flotilla of the Plant Manager.
The
Mechanical
Engineering
Department
also
attends
the
constructions of small craft, if necessary and erection of plant and
equipment connected with day-to-day working of the Port. The
Mechanical Engineering Department include maintenance and repair of
Mechanical and electrical appliances.
5. MARINE DEPARTMENT:
The Marine Department is under the charge of DEPUTY
Conservator, who is assisted by the Harbour Master, the Dredging
superintendent, Dock Masters and Pilots. This department looks after
the maintains of navigable depths in the port, dredging operations, pilot
age and shifting and movement of vessel in the port. The control over
port’s so far as the dockside is concerned (dredges, tugs, launches, fire
float, barges etc,).Rests in Dy.Conservator, Marine survey comes under
the control of Dy.Conservator. Conservator, who is also the safety
officer of the port.
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6. ACCOUNTS DEPARTMENT:
The accounts department is under the control of Financial Advisor
and Chief Accounts Officer. This department is in charge of the Receipts
and expenditure of the various departments of the port and ensure about
the financial prosperity of the day-to-day transactions of the port and the
proper observation of rules relating to financial and service matters. The
financial adviser is also the cheque drawing authority for the port trust
and is responsible for drawl and disbursement of money. The financial
adviser and chief accounts officers (FA&CAO) is concerned with
preparation of the annual reports, internal audit, costing and management
accountancy. He is also required to advise the board on financial matters.
7. TRAFFIC DEPARTMENT:
The Traffic Department is under the charge of the traffic manager
who controls cargo handling by sea or land within the port. It deals with
the matters relating with the allotment of berths to ships in the port,
import and export cargos, supply of cranes, lease of covered and open
storage spaces, assessment and collection of landing and shipping fees
and other dues as per Port’s schedule of charges. Besides the Traffic
Manager is in-charge of the railway working in the Port and the labour
handling cargo including ores. The Watch & Ward section is also under
this control assisted by security and intelligence officer. The other
functions of the management of the Traffic Department are labour
deployment, commercial transactions and general planning.
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8. RESEARCH & PLANNING DEPARTMENT
The Research & planning Department is under the charge of the
Director, who is assisted by the Dy. Director. This department is created
with the objected of giving advice to the Port Trust on matters of
involving economics and statistics. It provides the necessary data as and
when required and conducted the students that are necessary
for
planning development and operation of the Port on the rational
economics basis. The function includes management information
systems, project formulations, evolution monitoring forecasting traffic
analysis, trade promotion, a data processing and publicity. The Research
& Planning Department gives suggestions for improving the trade.
9. MATERIAL DEPARTMENT:
The Material Management Department is under the change of chief
materials Manager. The Chief Material Manager, who is assisted by the
materials Managers is responsible for the procurement, maintains,
stocking and distribution of different items of stores and materials
required for constructional works. He is primary custodian of all stores
for the Port and the account. He is responsible for disposal of various
surplus unserviceable materials of the port. The Chief materials Manager
procure material, which are needed for day-to-day and ensuring them on
requisition including pins, stationary etc.
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10. MEDICAL DEPARTMENT:
Chief Medical officer is in the charge of Medical Department who
is assisted by 6 senior medical officers who are assisted by 15 medical
officers and 6 lady doctors. All matters concerned with medical facilities
to workers can be done through this medical department. The Chief looks
after the Port Hospital and dispensaries.
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RATIO ANALYSIS
INTRODUCTION:
As observed a basic limitation of the traditional financial
statement comprising the balance sheet and the profit and loss account is
that they do not give all the information related to the financial operation
of the firm. Nevertheless, they provide some extremely useful
information to the extent that the balance sheet mirrors the financial
position on a particular date in terms of the profit and loss account
shows the results of operations during a certain period in terms of the
revenues obtained and the cost incurred during the year. Therefore,
much can be learnt about a firm from a careful examination of its
financial statements as invaluable documents/performance analysis. Users
of financial statements can get further insight about financial strengths
and weakness of the firm if they properly analyze information reported in
these statements. Management should be particularly interested in
knowing financial weakness of the firm to take suitable corrective action.
The plans of the firm should be laid down in view of the firm’s financial
strengths and weaknesses. Thus, financial analysis is the starting point for
making plans, before using any sophisticated forecasting and planning
procedures. Understanding the past is a pre-requisite for anticipating the
future.
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Ratio analysis is a widely –used tools of financial analysis. It is
defined as the systematic use of ration to interpret the financial statements
so that the strengths and weaknesses of the firm as well as its historical
performance and current financial condition can be determined. Ratio
analysis is a powerful tool of financial analysis. A ratio is defined as the
indicated quotient of two mathematical expressions and as the
relationship between two or more things.
CLASSIFICATION OF RATIOS:
The use of ratio analysis is not confined to financial manager only.
They are different parties interested in the ratio analysis for knowing the
financial position of a firm for different purposes. In view of various
users of ratios, there many types, which can be calculated from the
information given in the financial statements. The particular purpose of
the user determines the particular ratios that might be used for financial
analysis.
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Ratios can be classified as follows.
Ratios
Traditional Classification
1. Balance Sheet
Ratios
2. Profit and loss
A/c ratios
3. Composite
/Mixed ratios
Functional classification
1. Liquidity ratios
2. Leverage ratios
3. Activity ratios
4. Profitability ratios
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Functional classification in view of financial management
Liquidity ratios
Current ration
Liquid ratio
Debtor’s
turnover ration
Creditors
turnover ratio
Inventory
Turnover ratio
Long term solvency
ratio
Debt equity ratio
Debt to total
capital ratio
Interest
coverage ratio
Cash flow/debt
Profitability ratio
Gross profit ratio
Operating ratio
Operating profit ratio
Net profit ratio
Expense ratio
Return on
investment
Return on capital
Return on equity
capital
Earnings per share
Price earning ration
Activity
ratio
Inventory
turnover ratio
Debtors
turnover ratio
Fixed assets
turnover ratio
Total asset
turnover ratio
Working capital
turnover ratio
Capital
employed
turnover
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Traditional classifications:
 Balance sheet ratios:
Balance sheet ratios deal with the relationship between two
balances sheet items.
 Profit and loss account or Revenue/Income statements ratios:
These ratios deal with the relationship between two profit and loss
account items. The items should belong to the same profit and loss a/c.
 Composite or Mixed ratios:
These ratios exhibit the relation between a profit and loss a/c or
income statement item and a balance sheet item.
Functional classification:
 Liquidity ratios:
These are the ratios which measure the short term solvency or
financial position of a firm. These ratios are calculated to comment upon
the short term paying capacity of a concern or the firm’s ability to meet
its current obligations.
 Long term solvency and leverage ratios:
These ratios convey a firm’s ability to meet the interest costs and
payments schedules of its ling term obligations. These ratios measure the
34
contribution of financing by owners as compared to financing by
outsiders.
 Activity ratios:
These ratios are calculated to measure the efficiency with which
the resources of a firm have been employed. These ratios are also called
turnover ratios, because they indicated the speed with which assets are
being turned over into sales.
 Profitability ratios:
These ratios measure the results of business operations or overall
performance and effectiveness of the firm.
TYPES OF RATIOS:
Several ratios, calculated from the according 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-term and long-term creditors, owners and management. Short-term
creditor 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 and profitability of the firm.
Similarly, owners concentrate on the firm’s profitability and financial
conditions. Management 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 profitable. In view of the requirements of the
35
various users of ratios, we may classify them into the following four
important categories:
 LIQUIDITY RATIOS
 LEVERAGE RATIOS
 ACTIVITY RATIOS
 PROFITABILITY RATIOS
LIQUIDITY RATIOS
It is extremely essential for a firm to be able to meet its obligations
as they become due. Liquidity ratios measure the firm’s ability to meet
current obligations.
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 obligation
provided quick measures of liquidity. A firm should ensure that it does
not suffer from lack of liquidity, will result in a poor creditworthiness,
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 idea
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 or lack of its, are:
1. CURRENT RATIO
2. QUICK RATIO
3. CASH RATIO
36
37
CURRENT RATIO:
The current ratio is calculated by dividing current assets by current
liabilities.
Current Assets
CURRENT RATIO
=
Current Liabilities
Current assets include cash and those assets, which can be
converted into cash within a year, such as marketable securities, debtors
and inventories. Prepaid expenses are also including in current assets as
they represent the payments that will not be made by the firm in future.
Current liabilities include creditors, bill payable, accrued expenses, shortterm bank loan, and income tax liability and long-term debt maturing in
the current year.
The current ratio is a measure of the firm’s short-term
solvency. The higher the current ratio, the large is the amount of rupees
available per rupee of current liability, the more is the firm’s ability to
meet the current obligations and the greater is the safety of funds of shortterm creditors.
QUICK RATIO:
The quick ratio is calculated by dividing quick assets by quick
liabilities.
Quick assets
QUICK RATIO =
Quick liabilities
38
Quick assets or liquid assets mean those assets, which are
immediately convertible into cash without much loss. All current assets
expect prepaid expenses and inventories are categorized in liquid assets.
Quick liabilities means those liabilities, which are payable within a short
period. Normally, bank overdraft and cash credit facility, if they become
permanent mode of financing are in quick liabilities.
As this ratio concentrates on cash, marketable securities and
receivables in relation to current obligation, it provides a more
penetrating measure of liabilities.
CASH RATIO:
The cash ratio is calculated by dividing cash + marketable
securities by current liabilities.
Cash + Marketable Securities
CASH RATIO =
Current liabilities
Since each cash is liquid asset, a financial analyst may examine
cash ratio and its equivalent to current liabilities. Trade investment or
marketable securities are equivalent of cash therefore; they may be
included in the composition of cash ratio.
39
LEVERAGE RATIOS
The short-term creditors like bankers and suppliers of raw material
are more concerned with the firm’s current debt-paying ability. On the
other, long-term creditors like debenture holders, financial institutions
etc., are more concerned with the firms long-term financial strength. In
fact, a firm should have strong short-term as well as long-term financial
position. To judge the long term financial position of the firm, financial
leverage, or capital structure, ratios are calculated. These indicate mix of
funds provided by owners and lenders, as a rule, there should be an
approximate mix of debt and owner’s equity in financing the firm’s
assets.
The manager in which assets are financed has a number of
implications. First, between debt and equity, debt is more risky from the
firm’s point of view. The firm has a legal obligation to pay interest on
debt holders, irrespective of the profits made or losses incurred by the
firm. If the train firm fails to debt holders in time, they can take legal
action against it to get payment and in extreme cases, can force the firm
into liquidation.
Secondly, use of debt is advantageous for shareholders in two ways:
a. They can retain control of the firm with a limited stake and.
b. Their earnings will be magnified, when the earns a rat of return on
the total capital employed higher than the interest rate on the
borrowing funds. The process of magnifying the shareholders
return with debt is called financial advantage or financial gearing
or trading on equity.
40
Advantage ratio may be calculated from the balance sheet to determine
the proportion of debt in total financing. Many variations of these ratios
exist but all these ratios indicate the same thing-the thing extent to which
the firm has relied on debt in financing assets. Leverage ratios are also
computed from the profit and loss items by determining the extent to
which operating profits are sufficient to cover the fixed charges.
DEBT-EQUITY RATIO:
The relationship describing the lender contribution for each rupee
of the owner’s contribution is called DEBT-EQUITY RATIO.
DEBT-EQUITY RATIO is directly computed by the following formula.
DEBT
DEBT-EQUITY RATIO =
EQUITY
41
PROPRIETARY RATIO:
This ratio states relationship between share capital and total assets.
Proprietor’s equity represents equity share capital, preference share
capital, reserves, and surplus. The latter ratio is also called capital
employed to total assets.
EQUITY SHARE CAPITAL
PROPRIETORY RATIO =
TOTAL TANGIBLE ASSETS
(OR)
PROPRIETARY EQUITY
TOTAL TANGIBLE ASSETS
INTEREST COVERAGE RATIO:
This ratio indicates the extent to which earnings can decline
without resultant financial hardship to the firm because of its inability to
meet annual interest coast. For example, coverage of 5 times means that
as fall earnings up to (1/5th) level would be tolerable, as earnings to
service interest on debt capital would be sufficiently available. This ratio
measured as follows:
EARNING BEFORE INTEREST
&
TAXES (DEBIT)
INTEREST COVERAGE RATIO =
INTEREST CHARGES
42
FIXED ASSETS TO NET WORTH:
This ratio indicates the extent to which Equity capital is invested in the
net fixed assets. It is expresses as follows:
FIXED ASSETS
FIXED ASSETS TO NET WORTH
=
NET WORTH
NET WORTH is represented by Equity share capital plus reserves and
surplus. If the fixed assets are more than the net worth, difficulties may
arise, as the depreciation will reduce profit. This also means that creditors
have contributed to fixed assets. The higher this ratio, the less will be the
protection to creditors. If this ratio is too high, the firm may find it
handicapped, as too much capital is tied up in fixed assets but not
circulating.
43
ACTIVITY RATIOS
Funds creditors and owners are invested in various assets to generate
sales and profit and profits. The better the management of asset, the large
the amount of sales. Activity ratios are employed to evaluate the
efficiency with which the firm managers and utilizes its assets. These
ratios are also called turnover ratios because they indicate the speed with
which assets are being covered or turned over into sales. Activity ratio,
thus involve as 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
assets utilization.
INVENTORY TURNOVER RATIO:
Inventory turnover ratio indicates the efficiency of the firm in
producing and selling its products. It is calculated by dividing cost of
goods sold by the average inventory.
The average inventory is the average of opening and closing
balance of inventory.
In a manufacturing, company inventory of finished goods is used to
calculate inventory turnover.
Cost of goods sold
INVENTORY TURNOVER RATIO
=
Average inventory
44
DEBTORS TURNOVER RATIO:
A firm sells good for cash and credit. Credit is used marketing tool by a
number of companies. When the firm extends credits to its customers,
debtors (accounts receivable) are created in the firm’s accounts. The
debtors are expected to be converted in to cash over a short period and,
therefore, are included in current assets. The liquidity position of the firm
depends on the quality of debtors largely. Financial analysis applies
infrastructure ratios to judge the quality or liquidity of debtors. It
includes:
 Debtor’s turnover
 Collection period and
Credit sales
DEBTORS COLLECTION PERIOD RATIO =
Avg.Accounts Receivable
45
DEBTORS COLLECTION PERIOD RATIO:
This ratio indicates the extent to which the debts have been
collected in time. The debt collection period indicates the average debt
collection period. This ratio is a good indicator to the lenders of the firm,
because it explains to them whether their borrower is collecting from its
debt in time. An increase in this period indicates blockage of funds in
debtors.
Months/Day (in a year)
DEBTORS COLLECTION PERIOD RATIO =
Debtors turn over
(OR)
Debtors X Months/Days (in a
year)
Sale
WORKING CAPITAL TURNOVER RATIO:
Working capital turnover ratio indicates the velocity of the
utilization of net working capital. This ratio indicates the number of times
the working capital is turned over in the course of a year. This ratio
measures the efficient utilization.
Of working capital and low ratio indicates otherwise.
Nevertheless, very high working capital turnover ratios are not a good
sanitation for any firm and hence care must be taken while interpreting
the ratio. Making of comparative and trend analysis can at least use this
46
ratio for different firms in the same industry and for various periods. This
can be calculated as follows.
Sales
WORKING CAPITAL TURNOVER RATIO =
Net working Capital
NET WORKING CAPITAL = Current Assets – Current Liabilities
(Excluding Short-term bank borrowings)
PROFITABILITY RATIOS
A Company should earn profits to survive and grow over a long period.
Profits are essential, but it would be wrong to assume that every action
initiated by management of a company should be aimed at maximizing
profits, irrespective of social consequences.
Profit is the difference between revenues and expenses over a
period of time (usually a year). Profit is the ultimate output of a company
and it will have no future if it fails to make sufficient profits. Therefore
the financial manager should continuously evaluate to the efficiency of
the measure the operating efficiency of the company. Besides
management of the company, creditors want to get interest and repayment
of principle regularly. Owners want to get a required rate of return on
their investment. This is possible only when the company earns enough
profits.
 PROFITABILITY IN RELATION TO SALES
47
 PROFITABILITY IN RELATION TO INVESTMENT
PROFITABILITY RATIOS IN RELATION TO SALES
1. GROSS PROFIT MARGIN
2. NET PROFIT RATIO
3. CASH MARGIN
4. OPERATING MARGIN
GROSS PROFIT MARGIN:
Gross profit margin reflects the efficiency with which the
management products each unit product. This ratio indicates the average
spread between the cost of goods sold and the sales revenue. When we
subtract the gross profit margin from 100% we obtain the ratio of cost of
goods to sales. Both this shows profits relative to sales after the
dedication of production costs, and indicates the relation between
production costs and selling price. A high gross profit margin relative to
the industry average implies that the firm is able to produce at relatively
lower cost.
A high gross profit margin ratio is a sign of good management. A
gross margin ratio may increase due to any of the following factors.
Higher sales prices, cost of goods sold remaining constant, lower cost of
goods sold, sales prices remaining constant, a combination of variations
in sales prices remaining constant, a combination of variations in sales
price and costs, the margin widening, and increases in the proportionate
volume of higher margin items. The analysis of these factors will reveal
to the management that how a depressed gross profit margin can be
improved.
48
A low gross profit margin may reflect higher cost goods sold due
to the firm’s inability to purchase raw materials at favorable terms,
inefficient utilization of plant and machinery, resulting in higher cost of
production. The ratio will also be low due to fall in prices in the market,
or market reduction in selling price by the firm in an attempt to obtain
large sales volume the cost of goods sold remaining unchanged. The
financial manager must be able to detect the causes of a falling gross and
initiator action to improve the situation.
Sales –Cost of goods sold
(Or)
Gross profit
GROSS PROFIT MARGIN RATIO
=
Sales
NET PROFIT MARGIN RATIO:
Net profit is obtained when operation expenses, interest and taxes
are subtract from the gross profit.
If the non-operating income figure is substantial, it may be
excluded from pat to see profitability arising directly from sales. Net
profit margin ratio establishes a relationship between net profit and sales
and indicated management’s efficiency in manufacturing, administering
and selling the products. This ratio is the overall measure of the firm’s
ability to turn each rupee sales into net profit. If the net margin is
inadequate, the firm will fail to achieve satisfactory return on
shareholder’s funds.
49
This ratio also indicates the firms capacity withstand adverse
economic conditions. A firm with a high net margin ratio would be in an
advantageous position to survive in the face of falling selling prices,
rising costs of production or declining demands for the product. It would
really be difficult for a low net margin firm to withstand these adversities.
Similarly, a firm higher net profit margin can make better use of
favorable conditions such as rising selling prices; falling in costs of
production or increasing demand for the product. Such a firm will be able
to accelerate its profits at a faster rate than a firm with a low net profit
margin will.
An analyst will be able to interpret the firm’s profitability more
meaningfully if he/she evaluates both the ratios-gross margin and net
margin –jointly. To illustrate, if the gross profit margin has increased
over years, but the net profit margin has either remained constant or
declined or has not increased as fast as the gross margin this implies that
the operating expenses
relative to sales have been increasing. The
increasing expenses should be identified and controlled. Gross profit
margin may decline due to fall in sales price or increase in the cost of
production.
Profit after tax
NET PROFIT MARGIN RATIO =
Sales
50
CASH MARGIN RATIO:
Cash profit excludes depreciation. It means net profit after interests
and taxes but before depreciation. This ratio indicates the relationship
between the profit, which accrues in cash and sales. Greater percentage
indicates better position and vice-versa as it shows the correct profit
earned by the firm.
Cash profit
CASH MARGIN RATION =
X 100
Sales
OPERATING MARGIN RATIO:
Operating margin ratio is also known as operating net profit ratio.
It is the ratio of operating profit to sales. This ratio establishes the
relationship between the total cost incurred and sales. Operating profit is
the net profit after depreciation but before interests and taxes. The
purpose of computing this ratio is to find out the overall operational
Efficiency of the business concern. It measures the constant this ratio is
expressed as operating profit to sales.
This ratio is expressed as operating profit to sales
Operating profit
OPERATING MARGIN RATIO: =
X 100
Sales
51
PROFITABILITY RATIOS IN RELATION TO INVESTMENT:
1. RETURN ON INVESTMENT
2. RETURN ON NET WORTH
3. RETURN ON CAPITAL
4. RETURN ON GROSS BLOCK
1. RETURN ON INVESTMENT:
The term investment refers to total assets. The funds employed in
net assets are known as capital employed. Net assets equal net fixed
assets plus current assets minus current liabilities excluding bank loans.
Alternatively, capital employed in equal to net worth plus total debt.
The conventional approach of calculating return on investment
(ROI) is to divide PAT by investment. Investment represents pool of
funds supplied by shareholders and lenders, while PAT represents
residual income of shareholders; therefore, is conceptually unsound to
use PAT is affected by capital structure. It is therefore more appropriate
to use one of the following measures of ROI for comparing the operating
efficiency of firms.
EBIT (1-T)
ROI = ROTA =
Total Assets
EBIT (1-T)
ROI =RON =
NET Assets
52
Where ROTA and RONA respectively return on total assets and return on
net assets.
RONA is equivalent of Return on Capital Employed.
2. RETURN ON NET WORTH:
NET WORTH is also known proprietors Net Capital Employed.
The Return should be calculated with reference to profits belongings to
shareholders, and therefore, profit shall be Net profit after interest and
tax. The profit for this purpose will include even non-trading profit. This
is given as follows.
Net profit after interest & tax
RETURN ON NET WORTH =
x 100
Shareholders funds
3. RETURN ON CAPITAL:
The ROCE is the second type of ROI. The term capital employed
refers to long-term funds supplied by the creditors and owners of the
fund. It can be computed in two ways. First, it is equal to non-current
liabilities (long-term liabilities) plus owner’s equity
Alternatively, it is equivalent to Net working Capital plus fixed
Assets. Thus, the capital employed provides a basis to test the
profitability related to the source of long-term funds. A comparison of
this ratio with similar firms, with the industry average and overtime
would provide sufficient insight onto how efficiency the long-term funds
of owners and creditors are being used. The higher the ratio, the more
efficient is the use of capital employed.
53
NET PROFIT AFTER TAX/EBIT
ROC =
X 100
Average Total Capital Employed
4. RETURN ON GROSS BLOCK:
This ratio establishes a relationship between net profit and gross
fixed assets. This ratio emphasizes the profit on investment in fixed
assets. This is express as follows:
Net Profit
RETURN ON GROSS BLOCK =
X 100
Gross Block
NET PROFIT is profit before Tax. Gross Block means Gross Fixed assets
i.e., fixed assets before deducing depreciation.
54
IMPORTANCE OF RATIO ANALYSIS
As a tool of financial management, ratios are of crucial
significance. The importance of ratio analysis lies in the fact that is
presents facts on a comparative basis and the enables the drawing
inference regarding the performance of a firm. Ratio analysis is relevant
in assessing the performance of a firm in respect to the following aspects.
1. Liquidity position
2. Long-term solvency
3. Operational efficiency
4. Overall profitability
5. Inter-firm comparison, and
6. Trend analysis
1. Liquidity position:
With the help of ratio analysis can be regarding the liquidity
position of a firm. The liquidity position of a firm would be satisfactory if
it is able to meet its current obligations when they become due. A firm
can be said to have the ability to meet its short-term liabilities if it has
sufficient liquid funds to pay the interest on its short-maturing debt
usually within a year as well as to repay the principal. This ability is
reflected in the liquidity ratio of a firm. The liquidity ratios are
particularly useful in credit analysis by banks and other suppliers of
short-term loans.
55
2. Long-term solvency:
Ratio analysis is equally useful for assessing the long-term
financial viability of a firm. This aspect of the financial position of a
borrower is of concern to the long-term creditors, security analysts and
the present and potential owners of a business. The long-term solvency is
measured by the leverage/capital structure and profitability ratios, which
focus on earning power and operating efficiency. Ratio analysis reveals
the strength and weakness of a firm in this respect. The leverage ratios,
for instance, will indicate whether a firm has a reasonable proportion of
various sources of finance or if it is heavily loaded proportion of
various sources of finance or if it is heavily loaded with debt in which
case its solvency is exposed to serious strain. Similarly, the various
profitability ratios which case its solvency is exposed to serious strain.
Similarly, the various profitability ratios would reveal whether or not the
firm is able to offer adequate return to its consistent with the risk
involved.
3. Operational efficiency:
Another dimension of the usefulness of the ratio analysis, relevant
from the viewpoint of management, is that it throws light on the degree of
efficiency in the management and utilization of its assets. The various
activity ratios measure this kind of operational efficiency.
56
4. Overall profitability:
Unlike the outside parties, which are interested in one aspect of
financial position of a firm, the management is constantly concerned
about the over-all profitability of the enterprises. That is, they are
concerned about the ability of the firm to meet its short-term as well as
long-term obligations to its creditors, to ensure a reasonable return to its
owners to its owners and secure optimum utilization of the assets of the
firm. This is possible if an integrated view is taken and the entire ratios
are considered together.
5. Inter-firm comparison:
Ratio analysis not only throes light on the financial
position of affirm but also serves as a stepping –stone to remedial
measures. This is made possible due to inter-firm comparison and
comparison with industry averages. A single figure of a particular ratio is
meaningless unless it is related to some standard or norm. One of the
popular techniques is to compare the ratios of a firm with the industry
average. An inter-firm comparison would demonstrate the firm’s position
via-its competitors.
6. Trend analysis:
Finally, ratio analysis enables a firm to consider the time
dimension. In other words, whether the financial position of firm is a
improving or deteriorating over the years. This is made possible by the
use of trend analysis. The significance of a trend analysis of ratios lies in
the fact that the analysis can know the direction of movement is, whether
the movement is favorable or unfavorable. For example, the ratio may be
low as compared to the norm but the trend may be upward. On other
hand, though the present level may be satisfactory but the trend may be a
declining one.
57
LIMITATIONS OF RATIO ANALYSIS:
Ratio Analysis is a widely used tool of financial analysis. Yet, it
suffers from various limitations. The operational implication of this is
that while using ratios, the conclusions should not be taken on their face
value. Some of the limitations, which characterize ratio analysis, are;
 Difficulty in comparison
 Impact of inflation, and
 Conceptual Diversity
1. Difficulty in comparison:One serious limitation of ratio analysis arises out of the difficulty
associated with their comparability. One technique that is employed is
inter-firm comparison. Nevertheless, such comparison is vitiated by
different procedures adopted by various firms.
Difference in basis of inventory valuation (eg:-last in first out,
average cost and cost);
Different depreciation methods (i.e. straight line Vs written down
basis);
Estimated working life of assets, particularly of plant and
equipment;
Amortization of deferred revenue expenditure such as preliminary
expenditure and discount on issue of shares.
58
Capitalization of lease Treatment of extraordinary items of income and
expenditure; and so on Secondly apart from different accounting
procedures, companies may have different accounting procedures,
implying differences in the composition of assets, particularly current
assets. For these reasons, the ratio of two firms may not be strictly
comparable.
2. Impact of inflation:
The second major limitation of the ratio analysis is a tool of
financial analysis is associated with price level changes. This infact is a
weakness of the traditional financial statements, which are based on
historical cost. An implication of this feature of the financial statements
as regards ratio analysis is that assets acquired at different periods are, in
effect, shown at different prices in the balance sheet, as they are not
adjusted for changes in the price level. As a result, ratio analysis will not
yield strictly comparable and therefore, dependable results.
3. Conceptual Diversity:The factor that influence the usefulness of ratios is that there is
difference of opinion regarding the various concepts used to compute the
Ratios. There is always room for diversity of opinion as to what
constitutes shareholders equity, debt, assets, and profit and so on
Finally, ratios are only a post-mortem analysis of what has
happened between two balance sheet dates. For one thing, the position in
the interim period is not revealed by ratio analysis. Moreover, they give
no clue about the future. In brief, ratio analysis suffers from serious
limitations. The analyst should not be carried away by it’s over simplified
59
nature, easy computation with high degree of precision. The reliability
and signification attached to ratios will largely depended upon the quality
of data on which they are based. They are as good as the data itself.
Nevertheless, they are an important tool of financial analysis.
Precautions for use of ratios:
The calculation of ratios may not be a difficult task but their use is
not easy. The information on which these are based on the constraints of
financial statements, objectives for using them, the caliber of the analyst,
etc, are important factors, which influence the use of ratios. Following
guidelines/factors may be kept in mind interpreting various ratios.
The reliability of ratio is linked to the accuracy of information in
financial statements. Before calculating ratios one should see whether
proper concepts and conventions are used for preparing financial
statements of not. Competent auditors should properly audit the
statements.
The purpose of the user is also important for the analysis of
ratios. A creditor, a banker, an investor, a shareholder, all has different
objects for Studying ratios. The purpose (or) object for which ratios are
required to be studied should always be kept in mind for studying various
ratios. Different objects may require the study of different ratios. Another
precaution in ratio analysis is the proper selection of appropriate ratios.
The ratios should match the purpose for which these are required.
Calculating a large number or ratios without determining their need in the
present context may confuse the thing used instead of solving them. Only
those ratios should be selected which can throw proper light on the matter
to be discussed.
60
Unless otherwise the ratios calculated are compared with, certain
standards one will not be reach at conclusions. These standards may be a
rule of thumb as in current ratio (2:1), may be industry standards, may be
projected ratios etc, the comparison of calculated ratios with the standard
will help the analyst in forming his opinion about financial situation of
the concern. The ratios are only the tools of analysis but their
interpretation will depend upon the caliber and competence of the analyst.
He should be familiar with various financial statements and the
signification of changes etc. A wrong interpretation may create havoc for
the concern since wrong conclusions may bad to wrong decisions. The
utility of ratios is linked with expertise of the analyst.
The ratios are only guidelines for the analyst; he should not base
his decisions entirely on them. He should study any other relevant
information, situation in the concern, genera economic environment etc.,
before reaching financial conclusions.
The study of ratios in isolation may not always prove useful. The
interpretation should use the ratios as guide and may try to solicit any
other relevant information which helps is reaching a correct decision.
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STUDY OF RATIO ANALYSIS IN
VISAKHAPTNAM PORT TRUST
CURRENT RATIO:
The current ratio is calculated by dividing current assets by current
liabilities, as a conventional role Current ratio of 2:1 or more is
considered to be satisfactory.
Current assets = debtors, cash, inventory, bills receivable short turn
investments
Current liabilities = Short term bank loan, creditors bills, payable,
provisions, bank over draft.
Current Assets
Current Ratio =
Current Liabilities
(In Crores)
Year
Current Assets
Current
liabilities
Ratio
2002-03
25283.77
16961.54
1.49:1
2003-04
20563.57
16375.71
1.26:1
2004-05
23174.08
15995.13
1.45:1
2005-06
34132.38
32320.68
1.06:1
2006-07
39866.35
35419.47
1.13:1
2007-08
81879.46
78575.95
1.04:1
62
CURRENT RATIO
90000
80000
70000
60000
50000
Current Assets
40000
Current liabilities
30000
20000
10000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
The ideal ratio for current ratio is 2:1 as the norm in the industry.
However Visakhapatnam port trust is not involved in any manufacturing
activity and concerned with providing service in order to increase the
imports and exports. Hence the ratio according for Visakhapatnam port
trust i.e. 1.419 to 1.13 is found to be satisfactory.
63
2. QUICK RATIO:
This 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.
Quick Assets
Quick Ratio =
Quick Liabilities
Quick Assets
=
Current Assets – Inventory
Current Assets
=
Debtors, cash, inventory, bills receivable short
term investments.
Inventory is nothing but stock.
(In Crores)
Current
Year
Quick assets
2002-03
24011.00
16961.54
1.42:1
2003-04
19501.93
16375.71
1.19:1
2004-05
22342.23
15995.13
1.40:1
2005-06
33553.73
32320.68
1.04:1
2006-07
39143.09
35419.47
1.11:1
2007-2008
81031.40
78575.95
1.03:1
liabilities
Quick ratio
64
QUICK RATIO
90000
80000
70000
60000
50000
Quick assets
Current liabilities
40000
30000
20000
10000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
Quick ratio is the ratio of quick assets to current liabilities. A ratio
of 1:1 for quick assets and current liabilities is considered as idle. A very
high quick ratio is also not advisable as funds can be more profitability
employed. Higher the ratio higher the short term solvency of the firm.
65
DEBT-EQUITY RATIO:
Debt- equity ratio can be computed by dividing total debt by total
owner’s equity.
Total debt
=
debentures, bank loan, current liabilities,
outsiders funds
Total owners equity =
share holders fund investment, equity share
capital, preference share capital reserves & surplus
Total debt
Debt –Equity Ratio
=
Total owners equity
(In Crores)
Year
Total debt
Owners equity
Ratio
2002-03
4213.54
90401.62
0.05:1
2003-04
2016.51
99607.36
0.02:1
2004-05
1798.61
102097.29
0.02:1
2005-06
1594.61
119817.58
0.01:1
2006-07
1416.61
123873.44
0.01:1
2007-08
1299.01
152099.21
0.008:1
66
DEBT-EQUITY RATIO
160000
140000
120000
100000
Total debt
80000
Owners equity
60000
40000
20000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
The ideal ratio of Debt-Equity ratio is 1:2.Visakhapatnam port trust is not
Having any outside debt except from Government of India. The ratio is
ranging from 0.05 to 0.01 which can be said good.
67
Fixed Assets To Net Worth Ratio:
Fixed assets to net worth ratio can be computed by dividing fixed assets
by net worth
Net worth = share holders fund investment, equity share capital,
preference share capital reserves & surplus
Fixed assets
Fixed assets to net worth ratio =
Net worth
(In Crores)
Year
Fixed assets
Net worth
Ratio
2002-03
64375.85
90401.62
0.71:1
2003-04
64039.71
99607.36
0.64:1
2004-05
68664.97
102097.29
0.67:1
2005-06
71680.82
119817.58
0.60:1
2006-07
69635.54
123873.44
0.56:1
2007-08
69258.05
152099.01
0.45:1
68
FIXED ASSETS TO NET WORTH RATIO
160000
140000
120000
100000
Fixed assets
Net worth
80000
60000
40000
20000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTEPRETATION:
From the above graph it can be interpreted that the ratios has been
decreasing from 2002-03 to 2006-07.
The reasons for decrease in the ratio from 2002-03 to 2006-07 is
due to Visakhapatnam port trust investing the available surpluses in the
current assets and meeting the past liabilities like pension funds etc.
69
PROPRIETARY RATIO:
This Ratio has been calculated by considering owners equity and
Total assets.
Owner’s equity
Proprietary ratio
=
Total assets
Owners equity = share holders fund investment, equity share capital,
preference share capital reserves & surplus.
(In Crores)
Year
Owners equity
Total assets
Ratio
2002-03
90401.62
156887.35
0.58:1
2003-04
99607.36
101623.87
0.98:1
2004-05
102097.29
103894.90
0.98:1
2005-06
119817.58
121412.20
0.99:1
2006-07
123873.44
137269.35
0.90:1
2007-08
152099.21
153398.22
0.99:1
70
PROPRIETARY RATIO
180000
160000
140000
120000
100000
Owners equity
Total assets
80000
60000
40000
20000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
The purpose of the ratio is to indicate what position of assets is
financed by the share holders. A ratio of 1 indicates that entity is a debt
less one and totally is funded by equity. A high proprietary ratio indicates
the strong Financial position of the organization.
The ratio in Visakhapatnam port trust is ranging from 98 to 99%.
However there was a decrease in the ratio during 2006-07 in mainly
providing a pension fund.
71
EXTERNAL EQUITIES TO TOTAL ASSETS RATIO:
External equities to total assets ratio can be computed by
dividing External equities by total assets.
External equities
External equities to total assets =
Total assets
Long term debt obtaining from Government was taken as External equity.
(In Crores)
Year
External
equities
Total assets
Ratio
2002-03
4213.54
156887.35
0.03:1
2003-04
2016.51
101623.87
0.02:1
2004-05
1797.61
103894.90
0.02:1
2005-06
1594.61
121412.20
0.01:1
2006-07
1416.61
137269.35
0.01:1
2007-08
1299.01
1533.22
0.008:1
72
EXTERNAL EQUITIES TO TOTAL ASSETS RATIO
180000
160000
140000
120000
100000
External equities
Total assets
80000
60000
40000
20000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
From the above graph it can be interpreted that for the past four
years, the ratio indicates that the credit is used to a satisfactory level up to
2002-03 is constant. But for the years 2006-07, the investment in total
assets is less than earlier.
73
DEBTOR’S TURNOVER RATIO:
Debtor’s turnover ratio can be computed by dividing sales
by average debtors.
Sales
Debtor’s turnover ratios =
Average debtors
Here, in VPT sales are considered as operating income.
Operating debtors + closing debtors
And average debtors =
2
(In Crores)
Ratios
Year
Sales
Average debtors
2002-03
42756.45
12033.63
3.55
2003-04
45428.69
9367.15
4.85
2004-05
50187.40
8075.44
6.21
2005-06
52845.78
8323.34
6.35
2006-07
53374.60
8222.95
6.44
2007-08
38259.87
6034.68
6.33
74
DEBTOR’S TURNOVER RATIO
60000
50000
40000
Sales
30000
Average debtors
20000
10000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
Debtor’s turnover ratio indicates the number of times the debtors
turned each year. A high turnover indicates an efficient credit
management system and the company is able to convert its receivables
into cash.
From the above graph it can be interpreted that the ratio has been
increasing for the past five years i.e. 2002-07.
75
AVERAGE COLLECTION PERIOD:
Average collection period can be computed by using the following
formula.
Day in a year
Average collection period
=
Debtor’s turnover ratio
(In Crores)
Average Collection
Period
Year
No. of Days in a
year
Debtors turnover
ratio
2002-03
365
3.55
103
2003-04
365
4.85
75
2004-05
365
6.21
59
2005-06
365
6.34
58
2006-07
365
6.49
56
2007-08
365
6.41
57
76
AVERAGE COLLECTION PERIOD
400
350
300
250
No. of Days in a year
200
Debtors turnover ratio
150
100
50
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
From the above graph it can be observed that the collection period
is in decreasing stage during last four years. So the collection of the
economy is satisfactory.
77
FIXED ASSETS TURNOVER RATIO:
Fixed assets turnover ratio can be computed by dividing net sales by
fixed assets.
Net Sales
Fixed assets turnover ratio =
Fixed assets
Here Net Sales = Operating income
(In Crores)
Ratio
Year
Sales
Fixed assets
2002-03
42756.45
64375.85
0.66
2003-04
45428.69
64039.71
0.71
2004-05
50187.40
68664.97
0.73
2005-06
52845.78
71680.82
0.74
2006-07
53374.60
69635.54
0.77
2007-08
56542.43
69258.05
0.81
78
FIXED ASSETS TURNOVER RATIO
80000
70000
60000
50000
Sales
40000
Fixed assets
30000
20000
10000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
The fixed assets turnover ratio indicates the number of times
fixed assets has been fixed over. The highest the ratio the more efficient
has been the utilization of fixed assets. On the other hand a low turnover
ratio might be an indication of over capitalization or inefficient use of
fixed assets.
From the above graph it can be interpreted that the ratio has
been increasing for the past five years i.e. 2002-07.It indicates that the
company is having more efficiency to utilize fixed assets.
79
GROSS PROFIT RATIO:
Gross profit ratio can be computed by dividing gross profit by sales.
Gross profit
Gross profit ratio =
X 100
Sales
(In Crores)
Year
Gross profit
Sales
Ratio
2002-03
20988.12
42756.45
49.09%
2003-04
23303.57
45428.69
51.30%
2004-05
27834.39
50187.40
55.46%
2005-06
28535.65
52845.78
54.00%
2006-07
28995.76
53374.60
54.33%
2007-08
28609.32
56542.43
50.59%
80
GROSS PROFIT RATIO
60000
50000
40000
Gross profit
30000
Sales
20000
10000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
It reveals the result of trading operation of the business. It
measures the efficiency of production as well as pricing. There is no ideal
or standard gross profit ratio. The higher the ratio is the better the
performance of the business.
From the above graph it can be interpreted that the ratio has been
increasing for the years 2002-05 but it has decreased in the years 200507.
81
NET PROFIT RATIO:
This ratio has been calculated by considering net profit and sales.
Net Profit
Net profit ratio =
X 100
Sales
(In Crores)
Ratio
Year
Net profit
Sales
2002-03
5756.60
42756.45
13.46%
2003-04
7781.24
45428.69
17.12%
2004-05
1047.90
50187.40
2.09%
2005-06
15515.51
52845.78
29.36%
2006-07
12187.90
53374.61
22.83%
2007-08
11143.66
56542.43
19.70%
82
NET PROFIT RATIO
60000
50000
40000
Net profit
Sales
30000
20000
10000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
This ratio establishes relationship between sales and net profit and
it indicates the management efficiency in manufacturing, administrating
and selling the products.
From the above graph it can be interpreted that the ratio has
been increasing for the years 2002-06 and it has decreased to 22.83% in
the year 2006-07.
83
OPERATING RATIO:
Operating ratio can be computed by dividing operating expenditure by
operating Sales.
Operating expenditure
Operating Ratio =
X 100
Operating Sales
(In Crores)
Year
Operating
expenses
Net sales
Ratio
2002-03
21768.33
42756.45
50.91%
2003-04
22125.19
45428.69
48.70%
2004-05
22353.07
50187.45
44.53%
2005-06
24310.13
52845.78
46%
2006-07
24378.84
53374.61
45.67%
2007-08
27933.32
56542.43
49.40%
84
OPERATING RATIO
60000
50000
40000
Operating expenses
Net sales
30000
20000
10000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
.
From the above graph it can be interpreted that the ratio has been
decreased from the years 2002-03 to 2006-07.This indicates that the firm
is having a good operating ratio.
85
RETURN ON TOTAL ASSETS RATIO:
Return on total assets ratio can be computed by dividing net
profit by total assets.
Net profit
Return on Total Assets Ratio :
X 100
Total Assets
(In Crores)
Ratio
Year
Net profit
Total assets
2002-03
5756.60
156887.35
3.67%
2003-04
7781.24
101623.87
7.65%
2004-05
1047.90
103894.90
1.01%
2005-06
1551.55
121412.20
12.77%
2006-07
12187.90
137269.50
8.84%
2007-08
11143.66
153398.22
7.26%
86
RETURN ON TOTAL ASSETS RATIO
180000
160000
140000
120000
100000
Net profit
Total assets
80000
60000
40000
20000
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
INTERPRETATION:
From the above graph it can be interpreted that the ratio has
increased from 2002-03 to 2003-04 the ratio is 3.67% to 7.66%, again the
ratio is increased. The main ratio for decrease in ratio during 2004-05 to
2006-07 is mainly due to creation of liability towards pension fund by
Rs.180.00 crores and Rs. 32.50 crores respectively.
87
SUMMARY
Visakhapatnam Port Trust is a successful service oriented
Government undertaking organization whose main operation is to provide
means of transportation for trade and commerce through seaways through
its efficient and effective operations and also due to the advantage of
being in a market where there is no competitions, it is in a position to
earn satisfactory returns. The objective and the policies of a public sectors
enterprise and are different for any private organization. The public sector
enterprise has to meet the requirement as mentioned by different related
and unrelated public and private sectors.
The involvement of private participation in the cargo operation is
very much restricted. But the recent liberalization has paved a way for the
entrance of private entrepreneurs. Till now all the equipment is owned,
operated and maintained by the ports themselves. The recent introduction
of privatization involves the entry of the private activities like
construction of berths, operations and maintenance of terminals etc.,
Major policies like pricing and wage policy are under the control of the
government. Visakhapatnam Port Trust also conducts feasibility studies
and also estimates various costs involved in any type of expenditure.
88
FINDINGS
A ratio is a widely used tool of financial analysis. A ratio
reflects the financial position of the company to the users such as
management creditors and inventors. The ratios which are calculated to
evaluate the financial position of Visakhapatnam Port Trust are broadly
classified in to liquidity, leverage, and profitability and activity ratios.
The study conducted at VPT depicts that it has been
performing well in terms of liquidity, leverage, profitability and activity.
1.
The liquidity ratios of Visakhapatnam Port Trust is satisfactory at
present i.e., 2006-2007 but it is above the requirements during the years
2002-2003 and 2003-2004.
2.
The leverage ratios of Visakhapatnam Port Trust show that the firm
has favorable ratios for the year 2003-2008 under analysis during the
years. In the present year there is less financial risk.
3.
The activity ratios had shown that the Visakhapatnam Port Trust is
having efficient credit management system. The company is able to
convert its receivables into cash.
4.
The activity ratios of Visakhapatnam Port Trust have also shown
that the collection period is satisfactory.
5.
The profitability ratios had shown that the overall performance of
Visakhapatnam Port Trust is in a satisfactory position.
6.
The average collection period has been decreased from 103 to 56
during 2002 to 2007.
89
SUGGESTIONS
1. The performance of VISKHAPATNAM PORT TRUST regarding
the traffic handled, labor productivity and the performance of ships is
good. However, more facilities are yet to be provided to meet the
requirements of increased traffic.
2. In order to give quick delivery of unloaded ships coming into the
port it has to increase the operating efficiency with high technological
developments.
3. The liquidity position of VISKHAPATNAM PORT TRUST is
satisfactory at present. It is above the requirements during the years
2003 and 2004 as depicted by the Current and Quick ratio. It is better
to maintain at the present position.
4. So arriving at a conclusion and giving suggestion regarding the
performance of such an organization is very sensitive activity. The
performance of VPT regarding the traffic handled, labor productivity
and the performance of ships is good. However, more facilities are yet
to be provided to meet the requirements of increased traffic.
5. The major financial activities of V.P.T. are capital expenditure.
The role of the government in this aspect should not be ignored; there
is a need on the part of the Govt. to cut short time involved in
sanctioning the projects. The financial position of Visakhapatnam port
Trust is very good over the five years. Day by day it is going on
increasing
the
operating
efficiency
with
high
technological
90
developments in order to give quick delivery of unloaded ships
coming into the port.
OBJECTIVES OF THE STUDY
The present study has been undertaken with the following objectives.
1. To study the growth and development of Visakhapatnam Port Trust.
2. To study the trends in finance and analyze various elements in
financial analysis.
3. To evaluate the financial position of Visakhapatnam Port Trust.
4. To calculate and estimate the important financial ratios as a part of
financial analysis in Visakhapatnam Port Trust.
5. To offer suggestions to improve financial position of the company.
6. To study the financial strengths and weaknesses of the firm.
91
METHODOLOGY OF THE STUDY
Information of the present study has been collected from secondary
sources of data.
• SECONDARY SOURCES:
 Data was collected from documents, records and files of the company.
 Data was gathered from the annual reports of the company.
 Data was collected from company website.
92
BIBLIOGRAPHY
Financial Management
I.M.Pandey
Management Accounting
M.A.Shuvaff
Financial Management
M.Y.Khan
Financial Management
Prasanna Chandra
Financial Management
S.K.Gupta & R.K. Sharma
Visakhapatnam Port Trust
Administrative Reports
For the years
(2002-07)
Annual Reports of Visakhapatnam Port Trust for 5 years
Web Site:
www.vpt.com