A Study on Financial Performance Using Ratio Analysis at Emami Ltd free essay sample

The study is made to evaluate the financial position, the operational results as well as financial progress of a business concern. This study explains ways in which ratio analysis can be of assistance in long-rang planning, budgeting and asset management to strengthen financial performance and help avoid financial difficulties. The study not only throws on the financial position of a firm but also serves as a stepping stone to remedial measures for Emami Limited. This project helps to identify and give suggestion the area of weaker position of business transaction in â€Å"EMAMI LTD†. LIST OF TABLES Table NoName of TablesPage No. 5. 1Current Ratio27 5. 2Quick ratio 29 5. 3Cash ratio31 5. 4Average Collection Period34 5. 5Inventory Turnover Ratio35 5. 6Working Capital Turnover Ratio37 5. 7Fixed Assets Turnover Ratio39 5. 8Proprietary Ratio42 5. 9Debt to Equity Ratio43 5. 10Interest Coverage Ratio45 5. 11Gross Profit Ratio48 5. 12Net Profit Ratio49 5. 13Return on Investment 51 5. 14Return on Equity53 5. 15Return on Total Assets55 5. 16Comparative Balance Sheet as on 31st March 2001– 200258 5. 17Comparative Balance Sheet as on 31st March 2002– 200360 5. 18Comparative Balance Sheet as on 31st March 2003– 200462 5. 9Comparative Balance Sheet as on 31st March 2004– 200564 5. 20Comparative Balance Sheet as on 31st March 2005– 200666 LIST OF CHARTS Chart No. Name of ChartsPage No. 5. 1Current Ratio28 5. 2Quick ratio 30 5. 3Cash ratio32 5. 4Average Collection Period34 5. 5Inventory Turnover Ratio36 5. 6Working Capital Turnover Ratio38 5. 7Fixed Assets Turnover Ratio40 5. 8Proprietary Ratio42 5. 9Debt to Equity Ratio44 5. 10Interest Coverage Ratio46 5. 11Gross Profit Ratio48 5. 12Net Profit Ratio50 5. 13Return on Investment 52 5. 14Return on Equity54 5. 15Return on Total Assets56 CHAPTER I INTRODUCTION 1. 1 COMPANY PROFILE 1. 1. 1 HISTORY OF THE COMPANY: Emami, which started as a cosmetics manufacturing company in the year 1974, advancing with increased momentum has expanded into Emami Group of Companies of today. Even though cosmetics and toiletries continue to be the main thrust area, the other companies in the Emami Group are performing equally brilliantly. From health care institution to medicines, from real estate to retailing and, from paper to writing instruments, Hospital, Emami is creating one success story after another. 1. 1. 2 Vision and Mission : Vision A company, which with the help of nature, caters to the consumers’ needs and their inner cravings for dreams of better life, in the fields of personal and health care, both in India and throughout the world. Mission †¢To sharpen consumer insights to understand and meet their needs with value-added differentiated products which are safe, effective fast. †¢To integrate our dealers, distributors, retailers and suppliers into the Emami family, thereby strengthening their ties with the company. †¢To recruit, develop and motivate the best talents in the country and provide them with an environment which is demanding and challenging. To strengthen and foster in the employees, strong emotive feelings of oneness with the company. †¢ To uphold the principals of corporate governance and move towards decentralization to generate long term maximum returns for all stake owners. †¢To contribute whole heartedly towards the environment and society and to emerge as a m odel corporate citizen. 1. 1. 3 Values: Respect for people: We treat individuals with dignity and respect. We continue to be honest, open and ethical in all our interactions with dealers, distributors, retailers, suppliers, shareholders, customers and with each other. Consumers delight: We maximizing that our business can succeed only if we can create and keep customers. We manufacture products that offer value for money, which are differentiated and deliver safe, effective and fast solutions. Integrity: People at every level are expected to adhere to the highest standards of business ethics. Anything less is unacceptable. Our ethical conduct transcends beyond policies. It is ingrained in our corporate tradition that is transferred from one generation of employees to another. We comply with applicable government laws and regulations in the geographies where we are present. Quality: We are committed to excellence in everything we do. Our credo: There is always a better way- We must think creatively, continuously innovate and pursue new ideas to achieve uncommon solutions to common problems. Teamwork: Teamwork is the cornerstone of our business that helps deliver value to our customers. We work together across titles, job responsibilities and organizational structure to share knowledge and expertise. The right environment: It is our responsibility to create an environment that helps employees realize their full potential. Leadership: We recognize that we can be a leading company through active delegation and by creating leaders at every level of the organisation. Community development: We continue to contribute to the communities in which we operate and address social issues responsibly. Our products are safe to make and use. We conserve natural resources and continue to invest in a better environment. Transparency and shareholder value: We are committed to be driven by our conscience and regulatory standards, to deliver value to our shareholders, commensurate with our management and financial strength. Board of Directors The efficient functioning of this reputed company rests with the following personalities. Shri R S Agarwal, Chairman Shri R S Goenka, Director Shri Sushil Kr. Goenka, Managing Director Shri A V Agarwal, Director Shri Mohan Goenka, Director Shri H V Agarwal, Director Shri Viren J Shah, Director Shri K K Khemka, Director Shri S N Jalan, Director Shri Vaidya S Chaturvedi, Director Shri K N Memani, Director Shri S K Todi, Director Management team †¢Smt. P. Sureka, Brand Director †¢Shri Manish Goenka, Brand Director †¢Shri Prasant Goenka, Brand Director †¢Shri Dhiraj Agarwal, Media Director †¢Shri Hari Gupta, President – Sales Shri Ashok Dasgupta, President – Operation †¢Shri R. D. Daga, Chief of Legal Affairs †¢Shri R. K. Surana, Sr. V. P. – Purchase Development †¢Shri N. H. Bhansali, Sr. V. P. – Finance †¢Shri S. Rajagopalan, Sr. V. P. – Production †¢Shri R. C. Gattani – Sr. V. P. – Proje cts Development †¢Shri D. Poddar, V. P. – Co-ordination †¢Shri A. B. Mukherjee, V. P. – Logistics †¢Shri A. Ghose, V. P. – Ayurvedic Division †¢Shri A. K. Rajput, V. P. –Operations †¢Shri S. Grover, V. P. – Rural Marketing †¢Shri S. K. Mandal, G. M. – Systems †¢Shri Vimal Kr. Pande, G. M. – Sales †¢Shri P. N. Balakrishnan, G. M. –Technical †¢Shri A. K. Joshi, Company Secretary †¢Shri H. K. Goenka, G. M. – Works †¢Dr. Neena Sharma, G. M. – Ayurveda (RD) †¢Shri Raj Kr. Gupta, G. M. – Purchase †¢Shri T. R. Rajan, G. M. – Production †¢Ms. Ratna Sinha – Head HR The most fascinating fact about the team is that though individual member of the team functions independently and professionally in their own areas but actually they are very closely knit by a bond of fellow feeling. All the members of the Emami team happily co-exist as if family members. 1. 1. 4 Profile of the Organization: Emami Limited is in the business of manufacturing personal, beauty and health care products. The company manufactures herbal and Ayurvedic products through the use of modern scientific laboratory practices. This blend enables the company to manufacture products that are mild, safe and effective. The companys product basket comprises over 20 products, the major being Boroplus Antiseptic Cream, Navratna Oil, Boroplus Prickly Heat Powder, Sona Chandi Chyawanprash and Amritprash, Mentho Plus Pain Balm, Fast Relief, Golden Beauty Talc, Madhuri Range of Products and others. The products are sold across all states in India and in countries like Nepal, Sri Lanka, the Gulf countries, Europe, Africa and the Middle East, among others. . 1. 5 Manufacturing: Emami’s products are manufactured in Kolkata, Puducherry, Guwahati and Mumbai. The company commenced operations at its fully automated manufacturing unit in Amingaon, Guwahati in 2003-04. 1. 1. 6 Network: The companys dispersed manufacturing facilities are complemented with a strong product throughput, facilitated by a robust distribution network of over 2100 direct distributors and 3. 9 lakhs retail outlets. With a view to reach its products deeper into the country, direct selling has been extended to rural villages. As a result, rural sales increased substantially in 2003-04 compared to the previous year. Emami is headquartered in Kolkata. The companys branch offices are located across 27 cities in India. 1. 1. 7 Promoters: Emami is promoted by Shri R. S. Agarwal and Shri R. S. Goenka, Kolkata based industrialists. Emami’s shares are listed on the Calcutta Stock Exchange, Bombay Stock Exchange and National Stock Exchange. 1. 1. 8 IT BACKBONE INTEGRATED INFORMATION TECHNOLOGY An efficient information technology network is necessary for a dynamic FMCG company where the market demands change faster than perhaps in any other industry. At Emami, the integration of information technology transpires on a continuous basis. This ensures that the company responds to changing market place realities faster than its competitors and that its products reach retail shelves just when they are required. In turn, this enhances brand loyalty and retains customers. A successful implementation of the ERP in the offices, factories and depots increased the company’s overall efficiency. It enabled single-point data entry and multi-point information access. The status of raw materials, packing materials, finished goods, indents and sales information gets constantly updated through ERP. This has become possible due to the Point to Point Leased Line connections. As Emami is growing rapidly, the augmented business requirement calls for a Standard ERP system. This would provide Real-Time information to the Management, which would facilitate to take quick decision. The information could also be available through email and Mobile phones. So Emami would be implementing a Standard ERP system very shortly. Sales Forecasting, Demand Planning, Process Management, Supply Chain Management, Primary and Secondary Sales, I-Supplier, I-Expenses, I-Sales will be an integral part of the Standard ERP system. Emami adopts the latest Technology for IT and communication system. 1. . 9 SALES AND DISTRIBUTION NETWORK Our Marketing Distribution Network: Wide, penetrative and all encompassing. That is how Emami has planned its distribution network. The success of Emami has been largely due to its superior products that have reached the consumers even in the remotest regions of the country and abroad. Current Distribution Infrastructure: ?5 Regions ?25 Depots / CF A gents ?2,182 Direct Distributors ?899 Distributors for Rural Coverage ?Over 3,86,940 Retail outlets Distribution Network Four Mother depots †¢Kolkata †¢Vijayawada †¢Delhi †¢Nagpur 1. 1. 10 INTERNATIONAL MARKETING DIVISION Vision: To contribute profitably to the growth of the company, representing it with pride across the globe, with a single-minded focus and dedication to establishing and building global brands. Global Presence of Emami: Over the last 7 years, Emami’s presence has increased from merely few countries in CIS to over 50 countries spanning across SAARC, Gulf, CIS, North America, Europe and Africa. The company now is shifting its focus from broad basing (entering new markets) to increasing the number of successful products in existing markets to improve upon its operational efficiency. Product Portfolio: The Product Portfolio can be broadly divided into three Umbrellas’. †¢Emami – The products under this Umbrella Brand promise care for the skin. The range consists of Skin care, Hair care, Dental care Men’s care products. †¢Himani – Products under this Umbrella Brand promise cure. The range consists of OTC medicines. †¢Ayucare – A range of new Life style enhancing products comprising of Single ingredient herbs, food supplements, Neem Aloe Vera range, Ayurvedic tea, Massage oil, Essential oils blends. †¢Emma – This range comprises of customized products as per the specific needs put-up by the consumer. Typically these are all mass marketed products sold to price conscious buyers. The range presently consists of Creams, Lotions Shampoos. Future Strategy: Company’s business plan for International market comprises of the following key factors. †¢Investment in potential markets for key Brands leading to Higher Possibility of Returns in terms of Turnover and Market Development in the long run. †¢Adding new products for various key markets. †¢Customization of product offerings under the same brand – clubbing of familiar products under the same brand. Manufacturing facilities in High Tariff markets to make prices more consumer-friendly. †¢Acquisition – In certain markets, company may consider buying existing brands instead of trying to build one. Brand Building Activities: Company spends on Media (TV and/or Press) Advertising in select countries in CIS, SAARC, Indo-China and USA, Australia UK. All the markets are supported with POPs, Displays and other promotional material as per the requirement. 1. 2 INTRODUCTION TO THE STUDY Financial Management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. Though it was a branch of economics till 1890 as a separate or discipline it is of recent origin. Financial Management is concerned with the duties of the finance manager in a business firm. He performs such varied tasks as budgeting, financial forecasting, cash management, credit administration, investment analysis and funds procurement. The recent trend towards globalization of business activity has created new demands and opportunities in managerial finance. Financial statements are prepared and presented for the external users of accounting information. As these statements are used by investors and financial analysts to examine the firm’s performance in order to make investment decisions, they should be prepared very carefully and contain as much investment decisions, they should be prepared very carefully and contain as much information as possible. Preparation of the financial statement is the responsibility of top management. The financial statements are generally prepared from the accounting records maintained by the firm. Financial performance is an important aspect which influences the long term stability, profitability and liquidity of an organization. Usually, financial ratios are said to be the parameters of the financial performance. The Evaluation of financial performance had been taken up for the study with â€Å"EMAMI LIMITED† as the project. Analysis of Financial performances are of greater assistance in locating the weak spots at the Emami limited eventhough the overall performance may be satisfactory. This further helps in ?Financial forecasting and planning. ?Communicate the strength and financial standing of the Emami limited. ?For effective control of business. CHAPTER – II REVIEW OF LITERATURE . 1 Financial statements Analysis: The financial statements provide some extremely useful information to the extent that the balance sheet mirrors the financial position on a particular date in terms of the structure of assets, liabilities and owners’ equity, and so on and the profit an loss account shows the results of operations during a certain period of time in terms of the revenues obtained and the cost incurred during the year. Thus, the financial statements provide a summarized view of the financial position and operations of a firm. Therefore, much an be learnt about a firm from a careful examination of its financial statements as invaluable documents performance reports. The analysis of financial statements is thus, an important aid to financial analysis. The focus of financial analysis is on key figures in the financial statements and the significant relationship that exists between them. The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm’s position and performance. The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusion. In brief, the financial analysis is the process of selection, relation and evaluation. 2. 2 Ratio Analysis: Ratio analysis is a widely-use tool of financial analysis. It can be used to compare the risk and return relationships of firms of different sizes. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weakness of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items and variables. These ratios are expressed as (i) percentages, (ii) fraction and (iii) proportion of numbers. These alternative methods of expressing items which are related to each other are, for purposes of financial analysis, referred to as ratio analysis. It should be noted that computing the ratios does not add any information not already nherent in the above figures of profits and sales. What the ratio do is that they reveal the relationship in a more meaningful way so as to enable equity investors, management and lenders make better investment and credit decisions. 2. 3 TYPES OF RATIOS: 2. 3. 1 Liquidity Ratios: The importance of adequate liquidity in the sense of the ability of a firm to meet current/short-term obligations when they become due for payment can hardly be overstresses. In fact, liquidity is a prerequisite for the very survival of a firm. The short-term creditors of the firm are interested in the short-term solvency or liquidity of a firm. The short-term creditors of the firm are interested in the short-term solvency or liquidity of a firm. But liquidity implies from the viewpoint of utilization of the funds of the firm, that funds are idle or they earn very little. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required for efficient financial management. The liquidity ratios measures the ability of a firm to meet its short-term obligations and reflect the short-term financial strength and solvency of a firm. A. Current Ratio: The current ratio is the ratio of total current assets to total current liabilities. It is calculated by dividing current assets by current liabilities: Current assets Current Ratio = ________________ Current liabilities The current assets of a firm, as already stated, represent those assets which can be, in the ordinary course of business, converted into cash within a short period of time, normally not exceeding one year and include cash and bank balances, marketable securities, inventory of raw materials, semi-finished (work-in-progress) and finished goods, debtors net of provision for bad and doubtful debts, bills receivable and prepaid expenses. The current liabilities defined as liabilities which are short-term maturing obligations to be met, as originally contemplated, within a year, consist of trade creditors, bills payable, bank credit, provision for taxation, dividends payable and outstanding expenses. B. Quick Ratio The liquidity ratio is a measure of liquidity designed to overcome this defect of the current ratio. It is often referred to as quick ratio because it is a measurement of a firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. Thus, it is a measure of quick or acid liquidity. The acid-test ratio is the ratio between quick assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. Quick assets Quick Ratio = ____________________ Current liabilities The term quick assets refers to current assets which can be converted into cash immediately or at a short notice without diminution of value. Included in this category of current assets are ( i ) cash an bank balance ; (ii) short-term marketable securities and (iii) debtors/receivables. Thus, the current which are included are: prepaid expenses and inventory. The exclusion of expenses by their very nature are not available to pay off current debts. They merely reduce the amount of cash required in one period because of payment in a prior period. C. Cash Ratio: This ratio is also known as cash position ratio or super quick ratio. It is a variation of quick ratio. This ratio establishes the relationship absolute liquid asserts and current liabilities. Absolute liquid assets are cash in hand, bank balance and readily marketable securities. Both the debtors and bills receivable are excluded from liquid assets as there is always an uncertainty with respect to their realization. In other words, liquid assets minus debtors and bills receivable are absolute liquid assets. In this form of formula: Cash in hand at bank + Marketable securities Cash Ratio = ________________________________________ Current liabilities 2. 3. 2 Activity Ratios: Activity ratios are concerned with measuring the efficiency in asset management. These ratios are also called efficiency ratios or asset utilization ratios. The efficiency with which the assets are used would be reflected in the speed and rapidity with which assets are converted into sakes. The greater is the rte of turnover or conversion, the more efficient is the utilization of asses, other thongs being equal. For this reason, such ratios are designed as turnover ratios. Turnover is the primary mode for measuring the extent of efficient employment of assets by relating the assets to sales. An activity ratio may, therefore, be defined as a test of the relationship between sales and the various assets of a firm. A. Average collection period: In order t know the rate at which cash is generated by turnover of receivables, the debtors turnover ratio is supplemented by another ratio viz. average collection period. The average collection period states unambiguously the number of days’ average credit sales tied up in the amount owed by the buyers. The ratio indicates the extent to which the debts have been collected in time. In other words, it gives the average collection period. Prompt collection of book debts will release such funds which may, then, put to some other use. The ratio may be calculate by 360 days Average collection period = _____________________ Debtors turnover ratio B. Inventory Turnover Ratio: This ratio indicates the number of times inventory is replaced during the year. It measures the relationship between the cost of goods sold and the inventory level. The ratio can be computed in Cost of goods sold Inventory Turnover Ratio = ___________________ Average Inventory The average inventory figure may be of two types. In the first place, it may be the monthly inventory average. The monthly average can be found by adding the opening inventory of each month from, in case of the accounting year being a calendar year, January through January an dividing the total by thirteen. If the firm’s accounting year is other than a calendar year, say a financial year, (April and March), the average level of inventory can be computed by adding the opening inventory of each month from April through April and dividing the total by thirteen. This approach has the advantage of being free from bias as it smoothens out the fluctuations in inventory level at different periods. This is particularly true of firms in seasonal industries. However, a serious limitation of this approach is that detailed month-wise information may present practical problems of collection for the analyst. Therefore, average inventory may be obtained by using another basis, namely, the average of the opening inventory may be obtained by using another basis, namely the average of the opening inventory and the closing inventory. C. Working Capital Turnover Ratio: This ratio, should the number of times the working capital results in sales. In otherwords, this ratio indicates the efficiency or otherwise in the utilization of short tern funds in making sales. Working capital means the excess of current over the current liabilities. In fact, in the short run, it is the current liabilities which play a major role. A careful handling of the short term assets and funds will mean a reduction in the amount of capital employed, thereby improving turnover. The following formula is used to measure this ratio: Sales Working capital turnover ratio = _____________________ Net Working Capital D. Fixed Assets Turnover Ratio: As the organisation employs capital on fixed assets for the purpose of equipping itself with the required manufacturing facilities to produce goods and services which are saleable to the customers to earn revenue, it is necessary to measure the degree of success achieved in this bearing. This ratio expresses the relationship between cost of goods sold or sales and fixed assets. The following is used for measurement of the ratio. Sales Fixed Assets Turnover =________________ Net fixed assets In computing fixed assets turnover ratio, fixed assets are generally taken at written down value at the end of the year. However, there is no rigidity about it. It may be taken at the original cost or at the present market value depending on the object of comparison. In fact, the ratio will have automatic improvement if the written down value is used. It would be better if the ratio is worked out on the basis of the original cost of fixed assets. We will take fixed assets at cost less depreciation while working this ratio. 2. 3. 3 Financial Leverage (Gearing) Ratios The long-term lenders/creditors would be judge the soundness of a firm on the basis of the long-term financial strength measured in terms of its ability to pay the interest regularly as well as repay the instalment of the principal on due dates or in one lump sum at the time of maturity. The long term solvency of a firm an be examined by using leverage or capital structure ratios. The leverage or capital structure ratios may be defined as financial ratios which throw light on the long-term solvency of a firm as reflected in its ability to assure the long-term lenders with regard to (i) periodic payment of interest during the period of the loan and (ii) repayment of principal on maturity or in predetermined instalments at due dates. A. Proprietary Ratio: This ratio is also known as ‘Owners fund ratio’ (or) ‘Shareholders equity ratio’ (or) ‘Equity ratio’ (or) ‘Net worth ratio’. This ratio establishes the relationship between the proprietors’ funds and total tangible assets. The formula for this ratio may be written as follows. Proprietors’ funds Proprietary Ratio = _____________________ Total tangible assets Proprietors funds mean the sum of the paid-up equity share capital plus preference share capital plus reserve and surplus, both of capital and revenue nature. From the sum so arrived at, intangible assets like goodwill and fictitious assets capitalized as â€Å"Miscellaneous expenditure† should be deducted. Funds payable to others should not be added. It may be noted that total tangible assets include fixed assets, current assets but exclude fictitious assets like preliminary expenses, profit loss account debit balance etc. B. Debt to Equity Ratio The relationship between borrowed funds and owner’s capital is a popular measure of the long-term financial solvency of a firm. The relationship is shown by the debt-equity ratios. This ratio reflects the relative claims of creditors and shareholders against the assets of the firm. The relationship between outsiders’ claims and owner’s capital can be shown in different ways and, accordingly, there are many variants of the debt-equity ratio. Total debt Debt to Equity Ratio = ____________ Total equity The debt-equity ratio is, thus, the ratio of total outside liabilities to owners’ total funds. In other words, it is the ratio of the amount invested by the owners of business. C. Interest Coverage Ratio It is also known as ‘time interest-earned ratio’. This ratio measures the debt servicing capacity of a firm insofar as fixed interest on long-term loan is concerned. It is determined by dividing the operating profits or earnings before interest and taxes (EBIT) by the fixed interest charges on loans. Thus, EBIT Interest Coverage Ratio =_______________ Interest charges It should be noted that this ratio uses the concept of net profits before taxes because interest is tax-deductible so that tax is calculated after paying interest on long-term loan. This ratio, as the name suggests, indicates the extent to which a fall in EBIT is tolerable in that the ability of the firm to service its interest payments would not be adversely affected. For instance, an interest coverage of 10 times would imply that even if the firm’s EBIT were to decline to one-tenth of the present level, the operating profits available for servicing the interest on loan would still be equivalent to the claims of the lendors. On the other hand, a coverage of five times would indicate that a fall in operating earnings only to upto one-fifth level can be tolerated. Form the point of view of the lenders, the larger the coverage, the greater is the ability of the firm to handle fixed-charge liabilities and the more assured is the payment of interest to tem, However, too high a ratio may imply unused debt capacity. In contrast, a low ratio is a danger signal that the firm is using excessive debt and does not have to offer assured payment of interest to the lenders. 2. 3. 4 Profitability Ratios The main object of a business concern is to earn profit. A company should earn profits to survive and to grow over a long period. The operating efficiency of a business concern is ultimately adjudged by the profits earned by it. Profitability should distinguished from profits. Profits refer to the absolute quantum of profit, whereas profitability refers to the ability to earn profits. In other words, an ability to earn the maximum from the maximum use of available resources by the business concern is known as profitability. Profitability reflects the final result of a business operation. Profitability ratios are employed by the management in order to assess how efficiently they carry on business operations. Profitability is the main base for liquidity as well as solvency. Creditors, banks and financial institutions are interest obligations and regular and improved profits enhance the long term solvency position of the business. A. Gross Profit Margin The gross profit margin is also known as gross margin. It is calculated by dividing gross profit by sales. Thus, Gross profit Gross Profit Margin = ________________ *100 Sales Gross profit is the result of the relationship between prices, sales volume and cost. A change in the gross margin can be brought about by changes in any of these factors. The gross margin represents the limit beyond which fall in sales price are outside the tolerance limit. Further, the gross profit ratio/margin can also be used in determining the extent of loss caused by theft, spoilage, damage, and so on in the case of those firms which follow the policy of fixed gross profit margin in pricing their products. A high ratio of gross profit to sales is a sign of good management as it implies that the cost of production of the firm is relatively low. It may also be indicative of a higher sales price without a corresponding increase in the cost of goods sold. It is also likely that cost of sales might have declined without a corresponding decline in sales price. Nevertheless, a very high and rising gross margin may also be the result of unsatisfactory basis of valuation of stock, that is, overvaluation of closing stock and/or undervaluation of opening stock. A relatively low gross margin is definitely a danger signal, warranting a careful and detailed analysis of the factors responsible for it. The important contributory factors may be (i) a high cost of production reflecting acquisition of raw materials and other inputs on unfavorable terms, inefficient utilization of current as well as fixed assets, and so on; and (ii) a low selling price resulting from severe competition, inferior quality of the product, lack o f demand, and so on. A through investigation of the factors having a bearing on the low gross margin is called for. A firm should have a reasonable gross margin to ensure adequate coverage for operating expenses of the firm and sufficient return to the owners of the business, which is reflected in the net profit margin. B. Net Profit margin: It is also known as net margin. This measures the relationship between net profits and sales of a firm. Earnings after interest and taxes Net Profit Margin =______________________________ *100 Net Sales A high net profit margin would ensure adequate return to the owners as well as enable a firm to withstand adverse economic conditions when selling price is declining, cost of production is rising and demand for the product is falling. A low net profit margin has the opposite implications. However, a firm with low profit margin can earn a high rate of return on investment if it has a higher turnover. This aspect is covered in detail in the subsequent discussion. The profit margin should, therefore, be evaluated in relation to the turnover ratio. In other words, the overall rate of return is the product of the net profit margin and the investment turnover ratio. Similarly, the gross profit margin and the net profit margin should be jointly evaluated. C. Return on Investment: The basic objective of making investments in any business is to obtain satisfactory return on capital invested. The nature of this return will be influenced by factors such as, the type of the industry, the risk involved, the risk of inflation, the comparative rate of return on gilt-edged securities and fluctuations in external economic conditions. For this purpose, the shareholders can measure the success of a company in terms of profit related to capital employed. The return on capital employed can be used to show the efficiency of the business as a whole. The overall performance and the most important, therefore, can be judged by working out a ratio between profit earned and capital employed. The resultant ratio, usually expressed as a percentage, is called rate of return or return on capital employed to express the idea, the purpose is to ascertain how much income the use of Rs. 100 of capital generates. The return on â€Å"capital employed† may be based on gross capital employed or net capital employed. The formula for this ratio may be written as follows. Operating profit Return on Investment =_________________ Capital Employed D. Return on Equity (ROE) This is also known as return on net worth or return on proprietors’ fund. The preference shareholders get the dividend on their holdings at a fixed rate and before dividend to equity shareholders, the real risk remains with the equity shareholders. Moreover, they are the owners of total profits earned by the firms after paying dividend on preference shares. Therefore this ratio attempts to measure the firm’s profitability in terms of return to equity shareholders. This ratio is calculated by dividing the profit after taxes and preference dividend by the equity capital. Thus Net profit after taxes and preference dividend Return on Equity =__________________________________________ Equity capital E. Return on Total Assets This ratio is also known as the profit-to-assets ratio. This ratio establishes the relationship between net profits and assets. As these two terms have conceptual differences, the ratio may be calculated taking the meaning of the terms according to the purpose and intent of analysis. Usually, the following formula is used to determine the return on total assets ratio. Net profit after taxes and interest Return on Total Assets =_________________________________ *100 Total assets 2. 4 Comparative Balance sheet: Comparative balance sheets as on two or more different dates can be used for comparing assets, liabilities, capital and finding out any increase or decrease in those items. In the words of Foulke â€Å"comparative balance sheet analysis is the study of the trend of the same items, group of items and computed items in two or more balance sheets of the same business enterprise on different dates†. Such analysis often yields valuable information as regards progress of business concern. While the single balance sheet represent balances of accounts drawn at the end of an accounting period, the comparative balance sheet represent not nearly the balance of accounts drawn on two different dates, but also the extent of their increase or decrease between these two dates. The single balance sheet focuses on the financial status of the concern as on a particular date, the comparative balance sheet focuses on the changes that have taken place in one accounting period. The changes are the direct outcome of operational activities, conversion of assets, liability and capital form into others as well as a various interactions among assets, liability and capital. 2. 5 Tips to improve your financial health. Author: Bill Hudley Spend less money, or save more money or do both. If the annual income does nothing more than remain constant, your financial condition will improve. The above statement may sound come across as flippant, but it’s a fact of life, regardless. Needless to say we all have different personalities and different responses to needs and desires in life. A very important yardstick, in my view, is the growth rate of personal assets. If you sit down to all of the savings accounts, investment accounts and properly values and the total value is greater than the same time of the previous year, it stands to improve that the financial health in tact and possibly improved. 2. 6 Steps to Improve Financial Performance Author: Terry Peltes Given the challenges facing physicians, successful practices must take proactive steps to combat negative trends and improve their overall financial performance. To improve practice operations, processes can be streamlined to reduce costs; productivity improvements can be implemented by physicians and employees to increase revenue; a reporting structure can be created that allows for better decision making by physicians and employees; and a rewards system can be implemented to recognize hard-working employees. To determine how you can improve your medical practices performance, consider the following management procedures. 1) Internal Cost Reduction Strategies Cost reduction strategies focus on reducing the internal costs generated by medical services provided to the marketplace. ) External Cost Reduction Strategies These strategies include the cost of services purchased from outside consultants or vendors. 3) Asset and Credit Management Strategies These strategies ensure that you are getting the most value from the resources invested in your practice. 4) Personnel Resources When managed properly, personnel costs and productivity can have a s ubstantial impact on practice profitability. 5) Management Reporting The use of timely, relevant, properly formatted reports to manage your practice cannot be overstated. This is a crucial link between setting inancial and operational goals and managing the practice to achieve them. 6) Revenue Enhancement Physicians can improve their financial performance by improving their ability to negotiate favorable managed care contracts and reducing practice expenses as a percentage of revenue. 2. 7 Excellence in Financial Management Author: Matt H. Evans Ratio analysis can be used to determine the time required to pay accounts payable invoices. If the average number of days is close to the average credit terms, this may indicate aggressive working capital management; i. e. using spontaneous sources of financing. However, if the number of days is well beyond the average credit terms, this could indicate difficulty in making payments to creditors. 2. 8 Analyze Investments Quickly With Ratios Author: Jonas Elmerraji The information you need to calculate ratios is easy to come by: Every single number or figure you need can be found in a companys financial statements. Once you have the raw data, you can plug in right into your financial analysis and put those numbers to work for you. Everyone wants an edge in investing but one of the best tools out there frequently is frequently misunderstood and avoided by new investors. When you understand what ratios tell you, as well as where to find all the information you need to compute them, theres no reason why you shouldnt be able to make the numbers work in your favor. CHAPTER – III OBJECTIVES 3. 1 Primary Objective: To evaluate the financial efficiency of â€Å"EMAMI LIMITED†. 3. 2 Secondary Objectives: i. To analyse the liquidity solvency position of the firm. ii. To study the working capital management of the company. iii. To understand the profitability position of the firm. iv. To assess the factors influencing the financial performance of the organisation. . To understand the over all financial position of the company. CHAPTER – IV RESEARCH METHODOLOGY 4. 1 METHODOLOGY: The project evaluates the financial performance one of the company with help of the most appropriate tool of financial analysis like ratio analysis and comparative balance sheet. Hence, it is essentially fact finding study. 4. 2 Primary Data: Primary data is the fi rst hand information that is collected during the period of research. Primary data has been collected through discussions held with the staffs in the accounts department. Some types of information were gathered through oral conversations with the cashier, taxation officer etc. 4. 3 Secondary Data: Secondary data studies whole company records and company’s balance sheet in which the project work has been done. In addition, a number of reference books, journals and reports were also used to formulate the theoretical model for the study. And some information were also drawn from the websites. 4. 4 Tools used in analysis: †¢Ratio analysis †¢Comparative balance sheet 4. 5 Period of study: The study covers the period of 2001-2002 to 2005-2006 in Emami Limited. CHAPTER – V DATA ANALYSIS AND INTERPRETATION . 1 FINANCIAL PERFORMANCE EVALUATION USING RATIO ANALYSIS Ratio analysis is a powerful tool of financial analysis. A ratio is defined as â€Å"The Indicated Quotient of Two Mathematical Expressions† and as â€Å"The Relationship between Two or More Things†. In financial analysis, a ratio is used as a benchmark for evalu ating the financial position and performance of firm. The absolute accounting figures reported in the financial statement do not provide a meaningful understanding of the performance and financial position of a firm. The relationship between two accounting figures, expressed mathematically is known as a financial ratio. Ratios help to summaries large quantities of financial data and to make qualitative about the firm’s financial performance. 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. 5. 1. 1 Significance of Using Ratios: The significance of a ratio can only truly be appreciated when: 1. It is compared with other ratios in the same set of financial statements. 2. It is compared with the same ratio in previous financial statements (trend analysis). 3. It is compared with a standard of performance (industry average). Such a standard may be either the ratio which represents the typical performance of the trade or industry, or the ratio which represents the target set by management as desirable for the business. 5. 2 Types of Ratios 5. 2. 1 Liquidity Ratios †¢Liquidity refers to the ability of a firm to meet its short-term financial obligations when and as they fall due. †¢The main concern of liquidity ratio is to measure the ability of the firms to meet their short-term maturing obligations. Failure to do this will result in the total failure of the business, as it would be forced into liquidation. A. Current Ratio The Current Ratio expresses the relationship between the firm’s current assets and its current liabilities. Current assets normally include cash, marketable securities, accounts receivable and inventories. Current liabilities consist of accounts payable, short term notes payable, short-term loans, current maturities of long term debt, accrued income taxes and other accrued expenses (wages). Current assets Current Ratio = ________________ Current liabilities Significance: It is generally accepted that current assets should be 2 times the current liabilities. In a sound business, a current ratio of 2:1 is considered an ideal one. If current ratio is lower than 2:1, the short term solvency of the firm is considered doubtful and it shows that the firm is not in a position to meet its current liabilities in times and when they are due to mature. A higher current ratio is considered to be an indication that of the firm is liquid and can meet its short term liabilities on maturity. Higher current ratio represents a cushion to short-term creditors, â€Å"the higher the current ratio, the greater the margin of safety to the creditors†. Table: 5. ] CURRENT RATIO YearCurrent Ratio Rs. in lakhsCurrent Liabilities Rs. in lakhs Ratio 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 20069956. 81 8825. 79 9726. 73 9884. 64 11949. 47775. 49 644. 26 1154. 12 1501. 76 3905. 4512. 83 13. 69 8. 43 6. 56 3. 06 Interpretation: As a conventional rule, a current ratio of 2:1 is considered satisfactory. This rule i s base on the logic that in a worse situation even if the value of current assets becomes half, the firm will be able to meet its obligation. The current ratio represents the margin of safety for creditors. The current ratio has been decreasing year after year which shows decreasing working capital. From the above statement the fact is depicted that the liquidity position of the Emami limited is satisfactory because all the five years current ratio is not below the standard ratio 2:1. Chart no. : 5. 1 CURRENT RATIO B. Quick Ratio Measures assets that are quickly converted into cash and they are compared with current liabilities. This ratio realizes that some of current assets are not easily convertible to cash e. g. inventories. The quick ratio, also referred to as acid test ratio, examines the ability of the business to cover its short-term obligations from its â€Å"quick† assets only (i. e. it ignores stock). The quick ratio is calculated as follows Quick assets Quick Ratio = ____________________ Current liabilities Significance: The standard liquid ratio is supposed to be 1:1 i. e. , liquid assets should be equal to current liabilities. If the ratio is higher, i. e. , liquid assets are more than the current liabilities, the short term financial position is supposed to be very sound. On the other hand, if the ratio is low, i. . , current liabilities are more than the liquid assets, the short term financial position of the business shall be deemed to be unsound. When used in conjunction with current ratio, the liquid ratio gives a better picture of the firm’s capacity to meet its short-term obligations out of short-term assets. Table: 5. 2 QUICK RATIO YearQuick Assets Rs. in lakhsCurrent Liab ilities Rs. in lakhs Ratio 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 20066918. 43 4848. 16 6629. 47 6210. 06 8287. 01775. 49 644. 26 1154. 12 1501. 76 3905. 458. 92 7. 52 5. 74 4. 13 2. 12 Interpretation: As a quick ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. It is a more rigorous and penetrating test of the liquidity position of a firm. But the liquid ratio has been decreasing year after year which indicates a high operation of the business. From the above statement, it is clear that the liquidity position of the Emami limited is satisfactory. Because the entire five years liquid ratio is not below the standard ratio of 1:1. Chart no. : 5. 2 QUICK RATIO C. Cash ratio: This is also known as cash position ratio or super quick ratio. It is a variation of quick ratio. This ratio establishes the relationship between absolute liquid assets and current liabilities. Absolute liquid assets are cash in hand, bank balance and readily marketable securities. Both the debtors and the bills receivable are exclude from liquid assets as there is always an uncertainty with respect to their realization. In other words, liquid assets minus debtors and bills receivable are absolute liquid assets. The cash ratio is calculated as follows Cash in hand at bank + Marketable securities Cash Ratio = ________________________________________ Current liabilities Significance: This ratio gains much significance only when it is used in conjunction with the first two ratios. The accepted norm for this ratio is 50% or 0. 5:1 or 1:2(i. e. ,) Re. 1 worth absolute liquid assets are considered adequate to pay Rs. 2 worth current liabilities in time as all the creditors are not expected to demand cash at the same time and then cash may also be realized from debtors and inventories. This test is a more rigorous measure of a firm’s liquidity position. This type of ratio is not widely used in practice. Table: 5. 3 CASH RATIO YearCash in Hand at Bank Rs. in lakhsCurrent Liabilities Rs. in lakhs Ratio 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 2006130. 54 141. 15 46. 11 34. 43 82. 12775. 49 644. 26 1154. 12 1501. 76 3905. 450. 17 0. 22 0. 04 0. 02 0. 02 Interpretation: The acceptable norm for this ratio is 50% or 1:2. But the cash ratio is below the accepted norm. So the cash position is not utilized effectively and efficiently. Chart no. : 5. 3 CASH RATIO 5. 2. 2 Activity Ratio: If a business does not use its assets effectively, investors in the business would rather take their money and place it somewhere else. In order for the assets to be used effectively, the business needs a high turnover. Unless the business continues to generate high turnover, assets will be idle as it is impossible to buy and sell fixed assets continuously as turnover changes. Activity ratios are therefore used to assess how active various assets are in the business. A. Average Collection Period: The average collection period measures the quality of debtors since it indicates the speed of their collection. †¢The shorter the average collection period, the better the quality of debtors, as a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firm’s credit terms and policy to judge its credit and collection efficiency. †¢An excessively long collection period implies a very liberal and inefficient credit and collection performance. †¢The delay in collection of cash impairs the firm’s liquidity. On the other hand, too low a collection period is not necessarily favorable, rather it may indicate a very restrictive credit and collection policy which may curtail sales and hence adversely affect profit. 360 days Average collection period = _____________________ Debtors turnover ratio Significance: Average collection period indicates the quality of debtors by measuring the rapidity or slowness in the collection process. Generally, the shorter the average collection period, the better is the quality of debtors as a short collection period implies quick payment by debtors. Similarly, a higher collection period implies as inefficient collection performance which, in turn, adversely affects the liquidity or short term paying capacity of a firm out of its current liabilities. Moreover, longer the average collection period, larger is the chances of bad debts. Table: 5. 4 AVERAGE COLLECTION PERIOD Year DaysDebtors Turnover Ratio Rs. in lakhs Days 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 2006360 360 360 360 3604211. 03 3100. 98 4405. 70 3524. 79 3667. 520. 09 0. 12 0. 08 0. 10 0. 10 Interpretation: The shorter the collection period, the better the quality of debtors. Since a short collection period implies the prompt payment by debtors. Here, collection period decrease from 2003-2004 and increased slightly in the year 2005-2006. Therefore the average collection period of Emami ltd for the five years are satisfactory. Chart no. : 5. 4 AVERAGE COLLECTION PERIOD B. Inventory Turnover Ratio: This ratio measures the stock in relation to turnover in order to determine how often the stock turns over in the business. It indicates the efficiency of the firm in selling its product. It is calculated by dividing he cost of goods sold by the average inventory. Cost of goods sold Inventory Turnover Ratio = ___________________ Average Inventory Significance: This ratio is calculated to ascertain the number of times the stock is turned over during the periods. In other words, it is an indication of the velocity of the movement of the stock during the year. In case of decrease in sales, this ratio will decrease. This serves as a check on the control of stock in a business. This ratio will reveal the excess stock and accumulation of obsolete or damaged stock. The ratio of net sales to stock is satisfactory relationship, if the stock is more than three-fourths of the net working capital. This ratio gives the rate at which inventories are converted into sales and then into cash and thus helps in determining the liquidity of a firm. Table: 5. 5 INVENTORY TURNOVER RATIO YearCost of goods sold Rs. in lakhsAverage Inventory Rs. n lakhs Ratio 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 200611209. 73 11939. 46 13708. 36 12609. 33 17543. 713732. 19 3508. 00 3537. 44 3385. 92 3668. 523. 0 3. 4 3. 88 3. 72 4. 78 Interpretation: A higher turnover ratio is always beneficial to the concern. In this the number of times the inventory is turned over has been increasing from one year to another year. This incr easing turnover indicates immediate sales. And in turn activates production process and is responsible for further development in the business. This indicates a good inventory policy of the company. Thus the stock turnover ratios of Emami Limited, for the five years are satisfactory. Chart no. : 5. 5 INVENTORY TURNOVER RATIO C. Working capital turnover ratio: This ratio shows the number of times the working capital results in sales. In other words, this ratio indicates the efficiency or otherwise in the utilization of short term funds in making sales. Working capital means the excess of current assets over current liabilities. In fact, in the short run, it is the current assets and current liabilities which pay a major role. A careful handling of the short term assets and funds will mean a reduction in the amount of capital employed, thereby improving turnover. The following formula is used to measure this ratio: Sales Working capital turnover ratio = _____________________ Net Working Capital Significance: This ratio is used to assess the efficiency with which the working capital has been utilized in a business. A higher working capital turnover indicates either the favorable turnover of inventories and receivables and/or the inadequate of net working capital accompanied by low turnover of inventories and receivables. A low ratio signifies either the excess of net working capital or slow turnover of inventories and receivables or both. This ratio can at best be used by making of comparative and trend analysis for different firms in the same industry and for various periods. Table: 5. 6 WORKING CAPITAL TURNOVER RATIO YearSales Rs. in lakhsNet Working Capital Rs. in lakhs Ratio 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 200618262. 60 19808. 5 21612. 94 21885. 20 30087. 569181. 32 8181. 53 8572. 61 8382. 88 8044. 021. 99 2. 42 2. 52 2. 61 3. 74 Interpretation: The Working Capital Turnover Ratio is increasing year after year. It can be noted that the change is due to the fluctuation in sales or current liabilities. These higher ratio are indicators of lower investment of working Capital and more profit. Thus, Working Capital Turnover ratios for the five years are satisfactory. Chart no. : 5. 6 WORKING CAPITAL TURNOVER RATIO D. Fixed Assets Turnover Ratio: The fixed assets turnover ratio measures the efficiency with which the firm has been using its fixed assets to generate sales. It is calculated by dividing the firm’s sales by its net fixed assets as follows: Sales Fixed Assets Turnover =________________ Net fixed assets Significance: This ratio gives an ideal about adequate investment or over investment or under investment in fixed assets. As a rule, over-investment in unprofitable fixed assets should be avoided to the possible extent. Under-investment is also equally bad affecting unfavorably the operating costs and consequently the profit. In manufacturing concerns, the ratio is important and appropriate, since sales are produced not only by use of working capital but also the capital invested in fixed assets. An increase in this ratio is the indicator of efficiency in work performance and a decrease in this ratio speaks of unwise and improper investment in fixed assets. Table: 5. 7 FIXED ASSETS TURNOVER RATIO Year Sales Rs. in lakhsNet Fixed Assets Rs. in lakhs Ratio 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 200618262. 60 19808. 50 21612. 94 21885. 20 30087. 5625169. 20 23599. 92 23293. 33 21863. 99 20245. 480. 73 0. 84 0. 93 1. 00 1. 49 Interpretation: The fixed assets turnover ratio is increasing year after year. The overall higher ratio indicates the efficient utilization of the fixed assets. Thus the fixed assets turnover ratio for the five years are satisfactory as such there is no under utilization of the fixed assets. Chart no. : 5. 7 FIXED ASSETS TURNOVER RATIO 5. 2. 3 Financial Leverage (Gearing) Ratios †¢The ratios indicate the degree to which the activities of a firm are supported by creditors’ funds as opposed to owners. †¢The relationship of owner’s equity to borrowed funds is an important indicator of financial strength. †¢The debt requires fixed interest payments and repayment of the loan and legal action can be taken if any amounts due are not paid at the appointed time. A relatively high proportion of funds contributed by the owners indicates a cushion (surplus) which shields creditors against possible losses from default in payment. A. Proprietary Ratio: This ratio is also known as ‘Owners fund ratio’ (or) ‘Shareholders equity ratio’ (or) ‘Equity ratio’ (or) ‘Net worth ratio’. This ratio establishes the relationship between the proprietors’ fund and total tangible assets. The formula for this ratio may be written as follows. Proprietors’ funds Proprietary Ratio = _____________________ Total tangible assets Significance: This ratio represents the relationship of owner’s funds to total tangible assets, higher the ratio or the share of the shareholders in the total capital of the company, better is the long term solvency position of the company. This ratio is of importance to the creditors who can ascertain the proportion of the shareholders’ funds in the total assets employed in the firm. A ratio below 50% may be alarming for the creditors since they may have to lose heavily in the event of company’s liquidation on account of heavy losses. Table: 5. 8 PROPRIETARY RATIO YearProprietors Fund Rs. in lakhsTotal Tangible Assets Rs. in lakhs Ratio 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 200627653. 24 27629. 57 27906. 09 31683. 74 33521. 6335932. 12 33237. 8 33710. 84 37139. 68 40904. 750. 77 0. 83 0. 83 0. 85 0. 82 Interpretation: This ratio is particularly important to the creditors and it focuses on the general financial strength of the business. A ratio of j50% will be alarming for the creditors. As such the proprietary ratio of the five years is above 50%. Therefore it indicates relatively little danger to the creditors, etc. And a better performance of the company. Chart no. : 5. 8 PROPRIETARY RATIO B. Debt to Equity ratio This ratio indicates the extent to which debt is covered by shareholders’ funds. It reflects the relative position of the equity holders and the lenders and indicates the company’s policy on the mix of capital funds. The debt to equity ratio is calculated as follows: Total debt Debt to Equity Ratio = ____________ Total equity Significance: The importance of debt-equity ratio is very well reflected in the words of Weston and brigham which are reproduced here: â€Å"Debt-equity ratio indicates to what extent the firm depends upon outsiders for its existence. For the creditors, this provides a margin of safety. For the owners, it is useful to measure the extent to which they can gain the benefits of maintaining control over the firm with a limited investment:† The debt-equity ratio states unambiguously the amount of assets provided by the outsiders for every one rupee of assets provided by the shareholders of the company. Table: 5. 9 DEBT TO EQUITY RATIO YearTotal Debt Rs. in lakhsTotal Equity Rs. in lakhs Ratio 2001 – 2002 2002 – 2003 2003 – 2004 2004 – 2005 2005 – 20067241. 39 4628. 27 4221. 63 3474. 18 3216. 6727653. 24 27629. 57 27906. 09 31683. 74 33521. 630. 26 0. 17 0. 15 0. 11 0. 10 Interpretation: The debt to equity ratio is decreasing year after year. A low debt equity ratio is considered favorable from management. It means greater claim of shareholders over the assets of the company than those of creditors. For the company also, the servicing of debt is less burdensome and consequently its credit standing is not adversely affected. Therefore debt to equity ratio is satisfactory to the company. Chart no. : 5. 9 DEBT TO EQUITY RATIO C. Interest coverage ratio The times interest earned shows how many times the business can pay its interest bills from profit earned. Present and prospective loan creditors