Ratio, Financial position, creditors | My Assignment Tutor

22ISSN 2348-7852 (Print) | ISSN 2348-7860 (Online) ijre.orgIJRE | Vol. 03 No. 05 | May 2016A Ratio Analysis of Sri Sai Ltd: A Case StudyDr.Seema Shokeen, Faculty, Maharaja Surajmal Institute,Affiliated to Guru Gobind Singh Indraprastha University,New Delhi, IndiaAbstract:A “ratio” is distinct as the indicated quotient of twomathematical terms and as the association among two ormore things. In financial analysis, a ratio is used as astandard for evaluating the financial position andperformance of a firm. Ratio analysis involves evaluationfor a useful interpretation of the financial statements. Singleratio in itself does not specify favorable or unfavorablecondition. This paper is a small attempt to study the RatioAnalysis of Sri Sai Ltd. The paper is divided into twosections. First is the calculation of Liquidity and Activityratios to check the financial position and evaluate theefficiency of the firm in utilizing its assets and the second isto study of the performance of the Company by comparingratio of three years.Key Words: Ratio, Financial position, creditors,Profitability, LeverageIntroduction:- A „ratio‟ is defined as the indicatedproportion of two mathematical terminology and as therelationship among two or more things. In Financialanalysis, a ratio is used as point of reference for evaluatingthe financial situation and performance of a firm. Ratioshelp to sum up large quantities of financial data and to buildqualitative judgment about the firm‟s financial performance.Ratio analysis involves comparison for a useful explanationof the financial statements. Single ratio in itself does notindicate favorable or unfavorable condition. In this casestudy we analysis ratio of three years i.e 2013,2014 1nd2015.Therefore in this paper it is compared with: Past ratios, i.e. ratios calculated from the precedentfinancial statements of the similar company. Projected ratios, i.e., ratios developed using thepredictable, Performa, financial statements of thesame firm.Since liquidity ratios and Activity ratios help to measure thefirm‟s ability to meet current obligations and firm‟scompetence in utilizing its assets respectively, these twohave been used.Objectives:1. To analysis the financial performance of the Sri SaiLtd by comparing liquidity ratios of last three years2. To study the efficiency of firm in utilizing its assetsby comparing activity ratios of last three yearsResearch Methodology:-The study is qualitative study based on secondary data.RESEARCH PROBLEMThe research is precisely based on the need of theascertainment and measurement with the proper evaluationof the current position of Sri Sai Ltd .The evaluation of theperformance of the SRI SAI LTD. is considered through theratio analysis. The purpose of the research is to find out theliquidity position, inventory turnover; leverage position withthe effect of its determinants. The research is also to find outthe Sri Sai Ltd‟s ability to pay off its creditors. The financialactivities are a matter of analysis with the help of the ratioanalysis which provides the way to make useful comparisonamong two determinants or the activity. It is also toconfigure the level of the inventory to determine its usagecapacity and its turnover, too. and also to determine eachand every aspect of the financial position of the SRI SAILTD.TYPES OF RATIO:-Ratios, as tools for establishing true profitability andfinancial position of a company, may be classified as underbut in the given case study I am focusing only on the tworatios analysis i.e liquidity and activity ratiosResearch Design : Research design used the is exploratoryresearch design.DATA ANALYSISCalculation of RatiosLiquidity RatiosLiquidity ratios calculate the facility of the firm to meet itscurrent obligations. It is necessary to hit a correct balancebetween high liquidity and be short of of liquidity. A highdegree of liquidity means that a firm‟s finance will bewithout need attached up in current assets. Whereas lack ofliquidity, implies breakdown of a business to meet itsobligations due to lack of adequate liquidity.The ratios, which are used for the analysis of Sri Sai Ltd‟sliquidity position in this case study , are: Current Ratio Quick Ratio1) Current ratioCurrent ratio is calculated by dividing current assets bycurrent liabilities:Current ratio = Current AssetsCurrent Liabilities23ISSN 2348-7852 (Print) | ISSN 2348-7860 (Online) ijre.orgIJRE | Vol. 03 No. 05 | May 2016 year2012-132013-142014-15Current Ratio0.920.840.81 2012-13 2013-14 2014-15Significance:- As a conservative rule a current ratio of 2 to1 or extra is considered satisfactory because in a worsesituation, even if the worth of current assets turn into half,the firm will be able to meet its obligation. Current ratiorefers to the margin of safety for creditors therefore upperthe current ratio, the better the margin of safety.Comment:-From the above table it can be interpreted thatSri Sai Ltd‟ liquidity position is more or less constant .Quick RatioQuick ratio establishes a correlation between quick or liquidassets as well as current liabilities. An asset is liquid if it canbe converted into cash immediately or practically soonwithout a loss of value. Inventories are considered to be lessliquid therefore for finding quick ratio they are deductedfrom current assets.Quick Ratio = Current Assets – InventoryCurrent Liabilities Year2012-132013-142014-15Quick ratio0.740.750.63 2012-13 2013-14 2014-15Significance: Generally, the quick ratio of 1:1 is measuredto be acceptable. Quick ratio therefore more exact test ofliquidity than the current ratio as well as, when used jointlywith current ratio, it gives a superior picture of short termmonetary position of the firm.Comment:-Sri Sai Ltd‟ quick ratio in the current year hasdecreased in comparison to previous year. Although quickratio is more acute test of liquidity than current ratio, yet itshould be used carefully as all debtors might not be liquidand cash may be straight away desired to pay operatingexpenses.Activity RatiosActivity Ratios are used to assess the competence withwhich the firm manages and utilizes its assets. These ratiosare also known as turnover ratios as they point out the pacewith which the firm manages and utilizes its assets.Activity ratios, which are used to analyze Sri Sai Ltdeffectiveness in Asset utilization, are: Inventory Turnover Debtor Turnover Net Assets Turnover Current Asset Turnover Creditor TurnoverInventory TurnoverIt indicates the competence of the firm in producing andselling its manufactured goods. It is considered by dividingSales by average inventory. In a manufacturing corporationinventory of finished goods is use to compute inventoryturnover.SalesInventory Turnover =Average Inventory year2012 -132013-142014-15Inventoryturnover1.661.711.45 2012-13 2013-14 2014-1524ISSN 2348-7852 (Print) | ISSN 2348-7860 (Online) ijre.orgIJRE | Vol. 03 No. 05 | May 2016Significance:-This ratio indicates whether or not the supply has beenproficiently utilized. It shows the rapidity with which thesupply is rotated into sales. The superior the ratio, theimproved it is, since it indicates that the stock is sellingquickly. In industry where stock turnover is high goods canbe sold at small margin of earnings and yet then theprofitability can be higher.Comments:-Sri Sai Ltd Inventory turnover ratio of the company is firstclass it means that there is proper outflow of the supply andpossessions do not stay behind in the godown for a extendedtimeDebtors Turnover RatioDebtors‟ turnover indicates the number of times debtors‟turnover every year. Higher the value of Debtors turnover,the more well-organized is the management of credit. Theliquidity point of the firm depends on the excellence of thedebtors to a great extent. Two ratios being used in the reportto analyze liquidity of debtors are: Debtors Turnover Collection PeriodDebtors Turnover =Net credit salesAverage debtor year2012 -132013-142014-15Debtorsturnover4.464.043.85 2012-13 2013-14 2014-15Net Assets Turnover RatioA firm‟s ability to produce a large volume of sales for aknown sum of net assets is the most significantcharacteristic of its operating performance. Unutilized orunderutilized assets raise the firm‟s require for expensivefinancing as well as expenses for maintenance and upkeep.Net assets turnover is calculate by separating sales by netassets. Net assets turnover =SalesNet Assets year2012-132013-142014-15NAT1.121.341.22 2012-13 2013-14 2014-15Significance: This ratio is of particular importance inindustrialized concerns where the investment in assets isquite high. This ratio reveals how successfully the assets arebeing utilized, compared with previous year.Comment:- Sri Sai Ltd‟ net assets turnover has increased in2013-14 but in 2014-15 it show decrease in compare toprevious year. The net assets turnover of 1.22 implies that itis producing Rs. 1.22 sales for one rupee of capitalemployed.It should be interpreted cautiously because the denominatorof the ratio includes fixed assets net of depreciation. Thusold assets with lesser book value might generate aambiguous impression of high turnover without anyimprovement in sales.Fixed Assets and net working capital turnover ratioThis ratio shows the efficiency with which the firm isutilizing its current assets. It indicates how efficientlycurrent assets have been used in achieving the sales. Fixed Assets Turnover =SalesCapital Assets year2012-132013-142014-15Fixed assets turnoverratio2.642.622.21 COMMENT: a high fixed turnover ratio indicates efficientutilization of fixed assets in generating sales.Sri Sai Ltd,here, ensuring it efficiently.Net working capital turnover ratioNet working capital turnover ratio = Sales / NetWorking Capital25ISSN 2348-7852 (Print) | ISSN 2348-7860 (Online) ijre.orgIJRE | Vol. 03 No. 05 | May 2016 year2012 -132013-142014-15Net working capitalturnover ratio13.0011.1910.51 2012-13 2013-14 2014-15Comment:-Interpreting the reciprocals of these ratios SriSai Ltd need Rs 2.64 investments in current assets forgenerating a sale of one rupee.In case of working capital turnover Sri Sai Ltd hassignificantly improved. It needs Rs 2.21 of net current assetsfor generating sale of one rupee which has increase from Rs2.64 in 2013-14.Creditors turnover ratioCreditors turnover = Net credit purchaseAverage Creditors Year201220132014C.T0.370.520.46 2012-13 2013-14 2014-15COMMENT: Sri Sai Ltd‟s credit turnover ratio is inincrease in 2013-14 as compare to preceding year which isgood for the company. Because in this year the time periodof payment is greater but the ratio is going to decrease in2013-14 as compare to previous year.FINDINGSBased on the attempt made on collection of data (i.e.Primary and secondary data)through the possible sources viz.Annual report, books, ete from the secondary source of datacollection.The findings of my research and efforts are as follows: Sri Sai Ltd‟s liquidity position is more or lessconstant. Sri Sai Ltd‟ quick ratio in the present year hasdecreased in comparison to previous year.Although quick ratio is more penetrating test ofliquidity than current ratio, yet it should be usedcarefully as each and every one debtors may not beliquid and money may be straight away needed topay operating expenses. Sri Sai Ltd Inventory turnover ratio of the companyis good it means that there is proper outflow of thestock and goods do not stay behind in the godownfor a long time. The debtors turnover ratio for the year 2013 is 4.46and is lower than 2013. Likewise the collectionperiod has also increased which is not a goodindication. The shorter the average collection period, the betterthe quality of debtors, since a short collectionperiod implies prompt payments by debtors.Although Sri Sai Ltd has a zero debt credit policybut through channel finance facility by means ofHundi it is giving credit up to 90 days, comparingthis with the average collection period, itscollection and credit efficiency appears to besatisfactory. The Sri Sai Ltd‟s ability to produce a large volumeof sales for a given amount of net assets is themainly significant aspect of its operatingperformance. Sri Sai Ltd‟ net assets turnover has increased in2012 but in 2013 it show decrease in compare toprevious year. The net assets turnover of 1.22implies that it is producing Rs. 1.22 sales for onerupee of capital employed. It should be interpreted cautiously because thedenominator of the ratio includes fixed assets net ofdepreciation. Thus old assets with lower bookvalue may create a misleading intuition of highturnover without any improvement in sales. A high fixed turnover ratio indicates efficientutilization of fixed assets in generating sales. SriSai Ltd, here, ensuring it efficiently. Interpreting the reciprocals of these ratios Sri SaiLtd need Rs 0.095 investments in current assets forgenerating a sale of one rupee. In case of working capital turnover Sri Sai Ltd hassignificantly improved. It needs Rs 0.095 of netcurrent assets for generating sale of one rupeewhich has increase from Rs 0.089 in 2013. Sri Sai Ltd‟s credit turnover ratio is in raise in 2012as compared to preceding year which is good forthe company. Because in this year the time period26ISSN 2348-7852 (Print) | ISSN 2348-7860 (Online) ijre.orgIJRE | Vol. 03 No. 05 | May 2016of payment is greater but the ratio is going todecrease in 2013 as compare to previous year.CONCLUSIONAfter the detailed study of the Ratio Analysis of SRI SAILTD LIMITED, it can be interpreted that Sri Sai Ltdliquidity position is more or less constant.Sri Sai Ltd quick ratio in the current year has decreased incomparison to previous year. Although quick ratio is extraacute test of liquidity than current ratio, yet it should be usedcautiously as all debtors may not be liquid and cash may bestraight away needed to pay operating expenses.Sri Sai Ltd Inventory turnover ratio of the company is goodit means that there is correct outflow of the stock and goodsdo not linger in the godown for a long timeThe debtors turnover ratio for the year 2014-15 is 3.85 andis lower than 2013-14. Likewise the collection period hasalso increased which is not a good indication.The shorter the average collection period, the improved thequality of debtors, since a short collection period implies ontime payments by debtors. Although Sri Sai Ltd has a zerodebt credit policy but through channel finance facility bymeans of hundi it is giving credit upto 90 days, comparing this with the average collectionperiod, its collection and credit efficiency appears to besatisfactory.A too low collection period is also not essentially favorableas it may point out a very restrictive collection and creditpolicy. As of the fear of bad debt loses the firm may beselling to those only whose financial conditions areundoubtedly sound and who arevery prompt in making the payment. Such a policy succeedsin avoiding the bad debt loses, but it curtails sales soseverely that overall profits are reduced.Sri Sai Ltd net assets turnover has increased in 2013-14 butin 2014-15 it show decrease as compare to previous year.The net assets turnover of 1.22 implies that it is producingRs.1.22 Sales for one rupee of capital employed.Sri Sai Ltd credit turnover is increase in 2013-14 as compareto previous year which is good for the company , Because inthis year the time period of payment is greater but the ratiois going to decrease in 2014-15 as compared to previousyear.REFERENCES:[1] Sudarsanam, P. S., and Taffler, R. J., “FinancialRatio Proportionality and Inter-Temporal Stability:An Empirical Analysis.” Journal of Banking andFinance, Vol. 19, 1995, 45-61[2] Zavgren, C. V., “Assessing the Vulnerability ofAmerican Industrial Firms: A Logistic Analysis,”Journal of Business Finance and Accounting,Spring 1985, 19-45.[3] Guertin, Wilson H. and Bailey, John P. Jr.,Introduction to Modern Factor Analysis, EdwardsBrothers, Ann Arbor, 1966.[4] GREWAL, T.S, (2008), Analysis of financialstatement, sultan chand &sons, edition-2008.[5] MAHSHWARI & MAHESHWARI, ratio analysis.[6] Cost accounting and financial statement, ICAI,professional competence course.