CHAPTER - VI RATIO ANALYSIS 6.3 UTILITY OF RATIO ANALYSIS 6.4 LIMITATIONS OF RATIO ANALYSIS 6.5 RATIO TABLES, CHARTS, ANALYSIS AND
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1 CHAPTER - VI RATIO ANALYSIS 6.1 INTRODUCTION 6.2 NATURE OF RATIO 6.3 UTILITY OF RATIO ANALYSIS 6.4 LIMITATIONS OF RATIO ANALYSIS 6.5 RATIO TABLES, CHARTS, ANALYSIS AND INTERPRETATION OF DIFFERENT RATIOS 6.6 HYPOTHESES TESTING WITH THE HELP OF ANOVA 6.7 CONCLUSION REFERENCES 167
2 6.1 INTRODUCTION Ratio analysis is one of the powerful tools of financial performance analysis. It indicates a quantitative relationship between the figures and group of figure which is used for evaluation and decision making obviously, no purpose will be served by comparing two sets of figures which are not at all connected with each other. Moreover, absolute figures are also unfit for comparison figures are also unfit for comparison. Times: When one value is divided by another the units used to express the quotient is termed as Times. For Example: It out of 100 students in a class, 80 are present, the attendance ratio can be expressed as follows: 80 / 100 = 0.8 Percentage: If the quotient obtained is multiplied by 100, the unit of expression is termed as Percentage. For Example: In the above example, the attendance ratio as a percentage of the total number of student is as follows: 0.8 x 100 = 80% According ratios are, therefore mathematical relationship expressed between inter-connected accounting figures. 6.2 NATURE OF RATIO 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. In financial analysis a ratio is used as benchmark for evaluating the financial position and performance of a firm. The absolute accounting figures reported in the financial statements do not provide a meaningful understanding of the 168
3 performance and financial position of a firm. An accounting figure conveys meaning when it is related to some other relevant information. For Example: Rs. 5 crores profit may look impressive but the firm s net performance can be said to be good or bad only when the net profit figure is related to the firm s investment. Ratio helps to summarize large quantities of financial data and to make qualitative judgment about the firm s financial performance. Such is the nature of all financial ratios. 6.3 UTILITY OF RATIO ANALYSIS Many diverse groups of people are interested in analysis the financial information to indicate the operating and financial efficiency and growth of the firm like interest of lenders, investors, managers and others. These people use ratio to determine those financial characteristics of the firm in which they are interested. With the help of ratio, one can determine The ability of the firm to meet its current obligations. The extent to which the firm has used its long term solvency by borrowing funds. The efficiency with which the firm is utilizing its assets in generating sales revenue and The overall operating efficiency and performance of the firm. 6.4 LIMITATIONS OF RATIO ANALYSIS The ratio analysis is a widely used technique to evaluate the financial position and performance of a business but, there are certain problems in using ratios. The analyst should be aware of these problems. The followings are some of the limitation of the ratio analysis. It is difficult to decide on the proper basis of comparison. 169
4 The comparison is rendered difficult because of difference in situations of two companies or of one company over years. The price level changes make the interpretations of ratios invalid. The difference in the definitions of items in the Balance Sheet and Profit & Loss Account make the interpretation of ratio difficult. The ratios calculated at a point of times are less informative and defective as they suffer from short-term changes. The ratios are generally calculated from past financial statement and thus, are no indicators of future. 6.5 RATIO TABLES, CHARTS, ANALYSIS AND INTERPRETATION OF DIFFERENT RATIOS Profitability Ratios Profitability is an indication of the efficiency with which the operations of the business are carried on. Poor operational performance may indicate poor sales and hence poor profits. Thus, profitability reflects the final result of business operations. There are two types of profitability ratios. (i) Profit Margin Ratios: These profitability ratios relating to sales, are as under: (A) Gross Profit Ratio (B) Net Profit Ratio (ii) Rate of Return Ratios: The profitability in relation to investment can be measured by (A) Return on Capital Employed (B) Return on Equity The main profitability ratios are as under: 170
5 Gross Profit Ratio Gross Profit is defined as net difference between net sales and cost of goods sold before adding other incomes to difference. It measures the efficiency of production. To analyze the factors involved in gross profit the various elements of cost i.e. materials, labour, excise, production expenses etc. to sales may be studied in detail. The gross profit ratio can be expressed as: Gross Profit Gross Profit Ratio = X100 Sales The gross profit margin ratio expresses the relationship of gross profit to net sales AMUL and SUMUL opines that Gross Profit Margin Ratio indicates the gross margin of profits on the net sales and from this margin only all expenses are met and finally net income emerges. Gross profit means the operating profit which is derived by deducting the cost of goods sold from the net sales. Gross Profit Margin Ratio is of vital importance for gauging the business results. Gross profit finally give a balance of net profit offer deducting interest, taxes, financial, administrative and other charges and adding other incomes. It indicates the degree to which the selling price of goods per unit may decline without resulting in losses on operations for a firm. It also expresses the relationship of gross profit on sales in terms of percentage. There is no norm to judge and justify the gross profit ratio and therefore, evaluation is matter of judgment. This ratio serves as an index of overall efficiency and it is useful for the purpose of internal analysis. A higher ratio may reflect increase in operating revenue without corresponding increase in operating cost. 171
6 Table 6.1 Gross Profit Ratio of AMUL during the period from to (In Percentage) Year Average Gross Profit Ratio Index (SOURCE: Computed from the Annual Reports of AMUL to ) Graph: 6.1 Gross Profit Ratio of AMUL Percentage % Years 172
7 Table 6.1 has shown Gross Profit Ratio of AMUL for the period from to The Average Gross Profit of AMUL was 4.10%. During the year , the dairy indicated good sign of Gross Profit while in the other years it did not show good sing of profitability. From to and it was above the average 4.10% while it was highest 5.45% in the year and lowest 3.19% in It shows fluctuating trend. Table 6.2 Gross Profit Ratio of SUMUL during the period from to (In Percentage) Year Gross Profit Ratio Index Average (SOURCE: Computed from the Annual Reports of SUMUL to ) 173
8 Graph: 6.2 Gross Profit Ratio of SUMUL Percentage % Years Table 6.2 has shown Gross Profit Ratio of SUMUL for the period from to The Average Gross Profit of SUMUL was 3.49%. During the year , the dairy indicated good sign of Gross Profit while in the other years it did not show good sing of profitability. From to 05 06, 07 08, 09 10, and to it was above the average 3.49% while it was highest 3.97% in the year and lowest 2.86% in It shows fluctuating trend. 174
9 Table 6.3 Gross Profit Ratio of DUDHSAGAR during the period from to (In Percentage) Year Average Gross Profit Ratio Index (SOURCE: Computed from the Annual Reports of DUDHSAGAR to ) Graph: 6.3 Gross Profit Ratio of DUDHSAGAR Percentage % Years 175
10 Table 6.3 has shown Gross Profit Ratio of DUDHSAGAR for the period from to The Average Gross Profit of DUDHSAGAR was 9.32%. During the year , the dairy indicated good sign of Gross Profit while in the other years it shows average performance. From to it was above the average 9.32% while it was highest 10.86% in the year and lowest 8.43% in It shows fluctuating trend. Table 6.4 Gross Profit Ratio of SABAR during the period from to (In Percentage) Year Gross Profit Ratio Index Average (SOURCE: Computed from the Annual Reports of SABAR to ) 176
11 Graph: 6.4 Gross Profit Ratio of SABAR Percentage % Years Table 6.4 has shown Gross Profit Ratio of SABAR for the period from to with fluctuating trend. The Average Gross Profit of SABAR was 1.86%. From year to it shows declining trend. During the year , the dairy indicated best sign of Gross Profit. In , the GP ratio was at the bottom with 1.25%. After that with drastically rise, it was at the top with 3.54% in Except and , the GP ratio was below average 1.97%. 177
12 Table 6.5 Gross Profit Ratio of PANCHAMRUT during the period from to (In Percentage) Year Average Gross Profit Ratio Index (SOURCE: Computed from the Annual Reports of PANCHAMRUT to ) Graph: 6.5 Gross Profit Ratio of PANCHAMRUT Percentage % Years 178
13 Table 6.5 has shown Gross Profit Ratio of PANCHAMRUT for the period from to The Average Gross Profit of PANCHAMRUT was 4.91%. During the year , the dairy indicated good sign of Gross Profit while in the other years it shows average performance. From to it was below the average 4.91% while it was highest 6.60% in the year and lowest 4.18% in It shows fluctuating trend. Table 6.6 Gross Profit Ratio of BARODA during the period from to (In Percentage) Year Gross Profit Ratio Index Average (SOURCE: Computed from the Annual Reports of BARODA to ) 179
14 Graph: 6.6 Gross Profit Ratio of BARODA Percentage % Years It can be observed from the above table 6.6 that the gross profit ratio of BARODA is shows mix trend. It showed highest GP ratio 11.62% in and it went to lowest 10.82% in , The average GP ratio is 10.19%. Except , and , the GP ratio was below average. 180
15 Table 6.7 Gross Profit Ratio of BANAS during the period from to (In Percentage) Year Average Gross Profit Ratio Index (SOURCE: Computed from the Annual Reports of BANAS to ) Graph: 6.7 Gross Profit Ratio of BANAS Percentage % Years 181
16 Table 6.7 has shown Gross Profit Ratio of BANAS for the period from to with fluctuating trend. It can be observed that the gross profit ratio of the dairy was highest 4.06% during and lowest 2.21% during From to and , it was above average 2.89% while from year to , it showed GP below average. 182
17 Table: 6.8 Gross Profit Ratios of Selected District Dairy Co - operatives during the period from to (In Percentage) Dairy Average Cooperatives AMUL SUMUL DUDHSAGAR SABAR PANCHAMRUT BARODA BANAS Average (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 183
18 Graph: 6.8 Gross Profit Ratios of Selected District Dairy Co - operatives Percentage % 10 Amul 8 Sumul Dudhsagar 6 Sabar Panchamrut 4 Baroda Banas Years
19 Gross profit is the result of the relationship between prices, sales volume and costs. The average GP ratio was 4.33% during study period. It was observed that the average GP ratio only two dairy cooperatives that are DUDHSAGAR 9.32%, and BARODA 11.09% was above average, while average GP ratio of AMUL 4.10%, SUMUL 3.49%, SABAR 1.86%, PANCHAMRUT 4.91% and BANAS 2.50% was below average. The average GP ratio during the study period was highest of BARODA 11.09% while lowest was of SABAR 2.50%. A high ratio of GP to sales is a sign of good management as it implies that the cost of production of the firm is relatively low. A relatively low gross margin is definitely a danger signal, warranting a careful and detailed analysis of factor responsible for it, like, high cost of production, high cost of raw material and low selling price. 185
20 Net Profit Ratio: This ratio is valuable for the purpose of ascertaining the overall profitability. This ratio is also known as Net Margin. It measures the relationship between net profit and sales of a firm. It can be calculated as: Net Profit Net Profit Ratio = X100 Sales It is an indication of management efficiently to operate the business with sufficient success not only to recover from revenue of the period, the cost of merchandize, the operating expenses including non-cash expenses i.e. depreciation, the interest on the borrowing but also to leave a margin of reasonable compensation to the owners. Net profit margin ratio is widely used as a measure of overall profitability and is very useful indicator. As per Hingorani, Ramanathan and Grewal, It indicates the net margin earned in a sales of Rs. 100/-. Net profit measures the profit per rupee of sales. It throws light on the importance of a company s nonoperating activities. 186
21 Table 6.9 Net Profit Ratio of AMUL during the period from to (In Percentage) Year Average Net Profit Ratio Index (SOURCE: Computed from the Annual Reports of AMUL to ) Graph: 6.9 Net Profit Ratio of AMUL Percentage % Years 187
22 The above Table 6.9 reveals the Net Profit Ratio of AMUL. The average net profit ratio was 0.41%. The highest Net Profit Ratio 0.52% was shown in and lowest 0.25% was in and In year , and , NP ratio was below average 0.41%. The dairy s NP ratio indicates that dairy expenses were controlled. This dairy has good NP ratio which indicates that this is the pioneer dairy to control its expenses. Table 6.10 Net Profit Ratio of SUMUL during the period from to (In Percentage) Year Net Profit Ratio Index Average (SOURCE: Computed from the Annual Reports of SUMUL to ) 188
23 Graph: 6.10 Net Profit Ratio of SUMUL Percentage % Years The table 6.10 shows the fluctuating trend of Net Profit Ratio of SUMUL during the year , dairy shows good profitability but in other years it does not. During the year and to , NP ratio was below average 0.23%. The highest ratio 0.30% was in and lowest 0.15% in It indicates that dairy expenses were controlled though the margin was not good during the study period. 189
24 Table 6.11 Net Profit Ratio of DUDHSAGAR during the period from to (In Percentage) Year Average Net Profit Ratio Index (SOURCE: Computed from the Annual Reports of DUDHSAGAR to ) Graph: 6.11 Net Profit Ratio of DUDHSAGAR Percentage % Years 190
25 The above table 6.11 indicates that during the year , dairy showed good profitability 0.50% which was highest during study period and lowest was 0.21%. The net profit ratio from to and was below average 0.35%. This indicates that dairy expenses increased sharply as compared to sales during the study period. Table 6.12 Net Profit Ratio of SABAR during the period from to (In Percentage) Year Net Profit Ratio Index Average (SOURCE: Computed from the Annual Reports of SABAR to ) 191
26 Graph: 6.12 Net Profit Ratio of SABAR Percentage % Years The Table 6.12 shows the fluctuating trend of Net Profit Ratio of SABAR. During the year , the dairy achieved highest Net Profit Ratio was 0.66% and lowest 0.33% in During the year to , it was below average 0.46%. This dairy Net Profit Ratio was higher during initial and last years but after that it decreased as dairy was not controlling its expenses compared to sale. 192
27 Table 6.13 Net Profit Ratio of PANCHAMRUT during the period from to (In Percentage) Year Average Net Profit Ratio Index (SOURCE: Computed from the Annual Reports of PANCHAMRUT to ) Graph: 6.13 Net Profit Ratio of PANCHAMRUT Percentage % Years 193
28 The Table 6.13 shows the fluctuating trend of Net Profit Ratio of PANCHAMRUT. During the year dairy shows best profitability 0.66% but in other years it does not. During the year to , it was above average 0.43%, In the year , Net Profit Ratio was worst 0.25%. This dairy s Net Profit Ratio increased in sharply means that in this years the dairy had achieved good control over its expenses during the study period. Table 6.14 Net Profit Ratio of BARODA during the period from to (In Percentage) Year Net Profit Ratio Index Average (SOURCE: Computed from the Annual Reports of BARODA to ) 194
29 Graph: 6.14 Net Profit Ratio of BARODA Percentage % Years The Table 6.14 shows the fluctuating trend of Net Profit Ratio of BARODA. During the year , the dairy achieved highest Net Profit Ratio was 0.62% and lowest 0.20% in During the year to , it was above average 0.36%. This dairy Net Profit Ratio was higher during two last years but after that it decreased as dairy was not controlling its expenses compared to sale. 195
30 Table 6.15 Net Profit Ratio of BANAS during the period from to (In Percentage) Year Net Profit Ratio Index Average (SOURCE: Computed from the Annual Reports of BANAS to ) 196
31 Graph: 6.15 Net Profit Ratio of BANAS Percentage % Years The Table 6.15 shows the fluctuating trend of Net Profit Ratio of BANAS. During the year , the dairy achieved highest Net Profit Ratio was 0.88% and lowest 0.53% in The net profit ratio of , , , and , was below average 0.69%. This dairy Net Profit Ratio was higher during initial and last years but after that it decreased as dairy was not controlling its expenses compared to sale. 197
32 Table 6.16 Net Profit Ratios of Selected District Dairy Co - operatives during the period from to (In Percentage) Dairy Average Cooperatives AMUL SUMUL DUDHSAGAR SABAR PANCHAMRUT BARODA BANAS Average (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 198
33 Graph: 6.16 Net Profit Ratios of Selected District Dairy Co - operatives Percentage % Amul Sumul Dudhsagar Sabar Panchamrut Baroda Banas Years
34 The Net Profit ratio is indicative of management s ability to operate the business with sufficient success not only to recover from revenue of the period. The average net profit ratio was 0.42% during study period, highest net profit ratio of BANAS 0.64% while lowest was of SUMUL 0.23%. It was analysed that only three union out of seven had a favourable net profit ratio, SABAR 0.47%, PANCHAMRUT 0.43% BANAS 0.69%, while AMUL 0.41%, SUMUL 0.23%, DUDHSAGAR 0.32% and BARODA 0.36% showed average net profit below average. A high net profit margin would ensure adequate return to the owners as well as enable a firm to withstand adverse economic condition, when selling price is declining and cost of production was rising. A low net profit margin has the opposite implications Return on Capital Employed Return on capital employed is a good measure of profitability in as much as it is an extension of the input-output analysis. Moreover, it aids in comparing the performance efficiency of dissimilar enterprises. In the words of Anthony, Return on Capital Employed looks at income in relation to the total of the permanent funds invested in the firm. These permanent funds consist of shareholders equity plus non-current liability or the same figure may be found by subtracting current liabilities from total assets. Here, the return means operating profit before interest and tax and the terms capital employed stand for shareholders funds as well as long term borrowing. It may also be computed by taking the total of fixed assets and current assets deducting current liabilities from it. The return on capital employed indicates how the management has used the funds supplied by creditors and owners. The higher the ratio, the more efficient can be considered the firm is using funds entrusted to it. The ratio of 200
35 similar business organization and also the average of the industry such a comparison will reveal the relative the operating efficiency of business firm. The success of otherwise of enterprise is judged with the help of this ratio. It is perhaps the most important ratio from the view point of management. The ratio can be worked out in the following way. The rate of profit earned as against capital invested is the primary test of success of any business. Garrison consider it, The only measure which can said to show satisfactory the return obtained from capital employed. (A) (B) (C) There are different concepts employed according to J. Batty. Gross Capital Employed Net Capital Employed Proprietor s Net Capital Employed The selection of concept of capital employed depends upon the object of measurement. Generally the gross capital employed seems to be the best for measuring the efficiency of management. The same has been adopted here for measuring return on capital employed. EarningBeforeInterest and Tax Return on Capital Employed = X100 CapitalEmployed Capital Employed = Net Fixed Assets + Net Working Capital 201
36 Table 6.17 Return on Capital Employed of Selected District Dairy Co - operatives during the period from to (In Percentage) Dairy Cooperatives Average AMUL SUMUL DUDHSAGAR SABAR PANCHAMRUT BARODA BANAS Average (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 202
37 Graph: 6.17 Return on Capital Employed of Selected District Dairy Co operatives Percentage % Amul Sumul Dudhsagar Sabar Panchamrut Baroda Banas Years 203
38 This ratio measures a relationship between net profit before interest and tax (PBIT) and capital employed. This ratio indicates the firm s ability of generating profit per rupee of capital employed. Higher the ratio, more efficient the management and utilization of capital employed. The average ROCE ratio was 013% during study period, the highest ROCE ratio was of SUMUL 0.25% while lowest of BARODA 0.07%. It was analysed that only two daries out of seven had a ROCE above average that is SUMUL 0.25%, BANAS 0.18%, while the AMUL 0.11%, DUDHSAGAR 0.13%, SABAR 0.09%, PANCHAMRUT 0.12% and BARODA 0.07% are below average ROCE. 204
39 Return on Equity Common or ordinary shareholders are entitled to the residual profits. The rate of dividend is not fixed; the earnings may be distributed to shareholders or retained in the business. Nevertheless, the net profits after taxes represent their return. A return on shareholders equity is calculated to see the profitability of owner s investment. The shareholders equity or net worth will include paid up share capital, share premium and reserves and surplus, less accumulated losses. Net worth can also be found by subtracting total liabilities from total assets. The return on equity is calculated as following: Return on Equity = Profit After Tax X 100 Equity Return on Equity indicates how well the firm has used the resources of owners. In fact, this ratio is one of the most important relationships in financial analysis. The earning of a satisfactory return is the most desirable objective of firm. The ratio of net profit to owner s equity reflects the extent to which this objective has been accomplished. The returns on owner s equity of the company should be compared with the ratio for other similar companies and the industry average. This will reveal the relative performance and strength of the company in attracting future investment. 205
40 Table 6.18 Return on Equity of Selected District Dairy Co - operatives during the period from to (In Percentage) Dairy Average Cooperatives AMUL SUMUL DUDHSAGAR SABAR PANCHAMRUT BARODA BANAS Average (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 206
41 Graph: 6.18 Return on Capital Employed of Selected District Dairy Co - operatives Percentage % Amul Sumul Dudhsagar Sabar Panchamrut Baroda Banas Years 207
42 The ratio reveals how profitably the owner s funds have been utilized by the firm. The average ROE during study period was 0.05%. The highest ROE of SABAR was 0.09% and the lowest of AMUL, PANCHAMRUT, and BARODA was 0.04%. The EAT of SABAR are comparatively high than other dairies because of its higher post tax earning the ROE was comparatively high. Three Dairies out of seven that AMUL 0.04%, PANCHAMRUT 0.04%, and BARODA 0.04%, had a ROE below industry average, while the rest four dairies that is SUMUL 0.06%, DUDHSAGAR 0.06%, SABAR 0.09% and BANAS 0.06% was higher than the industry average. 208
43 6.5.2 Liquidity Ratios Liquidity refers to the ability of a firm to meet its obligations in the short run usually one year. These ratios are also termed as Working Capital Ratio or Short Term Solvency Ratio. A firm must have adequate working capital to run its day-to-day operations. Inadequacy of working capital may bring the entire business operation to a grinding halt because of inability of the enterprise to pay for wages, materials and other regular expenses. So, Liquidity ratios are generally based on the relationship between current assets and current liability. The important liquidity ratios are as followings: Current Ratio A very popular ratio, the current ratio is calculated by dividing current assets by current liabilities. Current Ratio = Current Assets CurrentLiabilities Current assets include cash and those assets that can be converted into cash within year, such as marketable securities, debtors and inventories, prepaid expenses are also included in current assets as they represent the payments that will not be made by the firm in the future. All obligations maturing within a year are included in current liabilities. Current liabilities include creditors, bill payable, accrued expenses, income tax liabilities, short term bank loan and long term debt maturing in the current year. The general norms for current ratio in India is 1.33:1, internationally it is 2:1. 209
44 Table 6.19 Current Ratio of Selected District Dairy Co - operatives during the period from to (In Times) Dairy Cooperatives Average AMUL 2.34:1 2.14:1 1.74:1 2.14:1 2.23:1 2.09:1 2.11:1 2.16:1 2.23:1 2.10:1 2.13:1 SUMUL 0.89:1 0.89:1 0.90:1 1.16:1 1.10:1 1.13:1 1.01:1 1.07:1 1.08:1 1.12:1 1.04:1 DUDHSAGAR 1.10:1 1.09:1 1.29:1 1.23:1 1.16:1 1.09:1 1.12:1 1.15:1 1.25:1 1.26:1 1.17:1 SABAR 1.12:1 1.23:1 1.29:1 1.16:1 1.14:1 1.22:1 1.28:1 1.30:1 1.21:1 1.25:1 1.22:1 PANCHAMRUT 2.24:1 2.33:1 2.15:1 2.11:1 2.01:1 1.96:1 1.86:1 2.89:1 2.11:1 1.13:1 2.08:1 BARODA 0.89:1 0.92:1 1.01:1 0.99:1 0.96:1 1.08:1 1.02:1 0.97:1 0.98:1 0.97:1 0.98:1 BANAS 1.61:1 1.55:1 1.71:1 1.81:1 1.77:1 1.78:1 1.80:1 1.71:1 1.85:1 1.81:1 1.74:1 Average 1.46:1 1.45:1 1.44:1 1.51:1 1.48:1 1.48:1 1.46:1 1.61:1 1.53:1 1.38:1 1.48:1 (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 210
45 Graph: 6.19 Current Ratio of Selected District Dairy Co - operatives Percentage % Amul Sumul Dudhsagar Sabar Panchamrut Baroda Banas Years
46 The Current Ratio is a measure of the firm s short-term solvency, It indicates the availability of current assets in rupees for everyone rupees of current liability. A ratio of greater than one means that the firm has more current assets than current claims against them. The average Current Ratio during study period was 1.48:1. The highest Current Ratio of AMUL was 2.13:1 and the lowest of BARODA 0.98:1, Four Dairies out of seven that SUMUL 1.04:1, DUDHSAGAR 1.17:1, SABAR 1.22:1 and BARODA 0.98:1, had a Current Ratio below to the average, while the rest three dairies that is AMUL 2.13:1, PANCHAMRUT 2.08:1,and BANAS 1.75:1was higher than the industry average. The present trend of current ratio shows a good position of assets in the AMUL, PANCHAMRUT and BANAS Liquidity Ratio This ratio is termed as Quick Ratio or Acid Test Ratio. This ratio is ascertained by comparing the liquid assets to current liabilities. The Liquidity Ratio is define as Liquidity Ratio = Liquid Assets CurrentLiabilities Liquid assets are defined as current assets excluding inventories. Some accountant prefer the term Current Liabilities for Liquid Liabilities for the purpose of ascertaining this ratio. Liquid liabilities means liabilities which are payable within a short period. The bank overdraft and cash credit facilities will be excluded from current liabilities. The ideal ratio is 1. This ratio is also an indicator of short term solvency of the firm. The comparison of current ratio with quick ratio shall indicate the inventory hold-ups. 212
47 Table 6.20 Liquidity Ratio of Selected District Dairy Co - operatives during the period from to (In Times) Dairy Cooperatives Average AMUL 1.38:1 1.05:1 0.94:1 0.98:1 1.03:1 1.12:1 1.23:1 1.04:1 0.96:1 1.16:1 1.09:1 SUMUL 0.61:1 0.65:1 0.60:1 0.76:1 0.72:1 0.66:1 0.70:1 0.73:1 0.80:1 0.77:1 0.70:1 DUDHSAGAR 1.14:1 1.23:1 1.07:1 1.02:1 0.98:1 1.15:1 1.12:1 1.08:1 1.27:1 1.19:1 1.13:1 SABAR 0.92:1 0.94:1 0.89:1 0.99:1 0.96:1 0.98:1 1.02:1 1.05:1 1.01:1 1.12:1 0.99:1 PANCHAMRUT 1.23:1 1.02:1 1.07:1 1.05:1 0.95:1 1.07:1 1.03:1 1.13:1 1.19:1 1.17:1 1.09:1 BARODA 1.07:1 0.92:1 0.89:1 0.98:1 0.95:1 1.02:1 1.08:1 1.12:1 1.07:1 1.09:1 1.02:1 BANAS 1.23:1 1.12:1 1.15:1 1.02:1 0.98:1 1.07:1 1.03:1 1.12:1 1.09:1 1.11:1 1.09:1 Average 1.08:1 0.99:1 0.94:1 0.97:1 0.94:1 1.01:1 1.03:1 1.04:1 1.06:1 1.09:1 1.02:1 (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 213
48 Graph: 6.20 Liquidity Ratio of Selected District Dairy Co - operatives Percentage % Amul Sumul Dudhsagar Sabar Panchamrut Baroda Banas Years
49 Liquidity ratio is an indicator of a company s short-term liquidity. The Liquidity ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position. The average Liquidity ratio during study period was 1.02:1. The highest Liquidity ratio of DUDHSAGAR was 1.13:1 and the lowest of SUMUL 0.70:1, Three Dairies out of Seven that SUMUL 0.70:1, SABAR 0.99:1 and BARODA 1.02:1, had a Liquidity ratio below to the average, while the rest four dairies that is AMUL 1.09:1, DUDHSAGAR 1.13:1, PANCHAMRUT 1.09:1,and BANAS 1.09:1was higher than the to the average. 215
50 6.5.3 Leverage Ratios Financial leverage refers to the use of debt finance while debt capital is cheaper source finance; it is riskier source of finance. Leverage ratios help in accessing the risk arising from the use of debt capital. 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 hand long term creditors like debenture holders, financial institutions etc. are more concerned with the firm s long term financial strength. In fact, a firm should have a strong short as well as long term financial position. Leverage ratios may be calculated from the balance sheet items of determine the proportion of debt in total financing, 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 debt-equity ratio is determined to ascertain the soundness of the long term financial policies of the firm. It is also known as External Internal Equity Ratio. In case debt equity ration is to be calculated as a long term financial ratio it may be calculated as follows: Debt Equity Ratio = Total Long Term Debt Shareholde rs' Funds This ratio is indicating the proportion between shareholders funds and the total long term borrowed funds. Ratios may be taken as ideal if it is 1. The shareholders funds include equity share capital, reserve funds, profit etc. while total long-term debt include total long term borrowed funds. It is to be noted that preference share redeemable within a period of 12 years from the date of their issued should be taken as a part of debt. 216
51 Table 6.21 Debt Equity Ratio of Selected District Dairy Co - operatives during the period from to ( In Percentage) Dairy Average Cooperatives AMUL SUMUL DUDHSAGAR SABAR PANCHAMRUT BARODA BANAS Average (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 217
52 Graph: 6.21 Debt Equity Ratio of Selected District Dairy Co - operatives Percentage % Amul Sumul Dudhsagar Sabar Panchamrut Baroda Banas Years
53 Debt - equity ratio is the key financial ratio and is used as a standard for judging a company's financial standing. It is also a measure of a company's ability to repay its obligations. The average Debt Equity ratio during study period was 1.19%. The highest Debt Equity ratio of AMUL was 1.59% and the lowest of SABAR 1.03%, Only one dairy out of seven that AMUL 1.59% had a Debt Equity ratio above to the average, while the rest six dairies that is SUMUL 1.17%, DUDHSAGAR 1.15%, SABAR 1.03%, PANCHAMRUT 1.14%, BARODA 1.14%, and BANAS 1.11% was lower than the to the average. So, the performance of all dairies are better except AMUL during the reference period from to because every year they decrease the debt proportion in the comparison with the past years. It is good sign for dairy Total Debt Ratio: Several debt ratios may be used to analysis the long term solvency of a firm. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. It may therefore compute debt ratio by dividing total debt by capital employed. The total debt ratio calculated as under: Total Debt Ratio = Total Debt Net Assets Total debt will include short and long term borrowing from financial institutions, debentures, deferred payments, arrangements for buying capital equipments. On the other hand the total assets include total capital employed in the firm during the operation period. A high ratio means that claims of creditors are greater than those of owners. A high-debt company is able to borrow funds on very restrictive terms and conditions. A low ratio means implies greater claims of owners than creditors. 219
54 Table 6.22 Total Debt Ratio of Selected District Dairy Co - operatives during the period from to ( In Percentage) Dairy Average Cooperatives AMUL SUMUL DUDHSAGAR SABAR PANCHAMRUT BARODA BANAS Average (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 220
55 Graph: 6.22 Total Debt Ratio of Selected District Dairy Co - operatives Percentage % 0.7 Amul 0.6 Sumul 0.5 Dudhsagar 0.4 Sabar Panchamrut 0.3 Baroda 0.2 Banas Years
56 From the above Table 6.22 described total debt ratio. It is represents total investment in the firm by lenders what is the proportion of the debt in the total assets in the firm. The higher the ratio, the greater the risk associated with the firm's operation. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk. The average Total Debt ratio during study period was 0.83%. The highest Debt Equity ratio of BARODA was 0.86% and the lowest of SABAR and PANCHAMRUT 0.78%, Five dairy out of seven that AMUL 0.84%, SUMUL 0.84%, DUDHSAGAR 0.85%, BARODA 0.86%, BANAS 0.84, had a Total Debt ratio above to the average, while the rest two dairies that is SABAR 0.78%, PANCHAMRUT 0.78%, was lower than the to the average. BARODA dairy has greater the risk associated with the firm s operation. 222
57 6.5.4 Activity Ratios Funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets, the larger the amount of sales. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called Turnover Ratios because they indicate the speed with which assets are being converted or turned over into sales. Activity ratios, thus, involve a 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 indicates the efficiency of the firm in producing and selling its product. It is calculated by dividing the cost of goods sold or sales by the average inventory. Inventory Turnover Ratio = Sales 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. The inventory turnover shows how rapidly the inventory is turning into receivable through sales. Generally, a high inventory turnover is indicative of good inventory management. A low inventory turnover implies excessive inventory levels than warranted by production and sales activities. 223
58 Table 6.23 Inventory Turnover Ratio of Selected District Dairy Co - operatives during the period from to (In Times) Dairy Average Cooperatives AMUL SUMUL DUDHSAGAR SABAR PANCHAMRUT BARODA BANAS Average (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 224
59 Graph: 6.23 Inventory Turnover Ratio of Selected District Dairy Co - operatives Percentage % Amul Sumul Dudhsagar Sabar Panchamrut Baroda Banas Years
60 The above given table 6.23, it can be seen that inventory turnover ratio of selected district cooperatives in Gujarat. The average inventory turnover ratio during study period was times. The highest inventory turnover ratio of BARODA was times and the lowest of AMUL times, Only two dairy out of seven that DUDHSAGAR times, BARODA times had an inventory turnover ratio above to the average, while the rest five dairies that is AMUL times, SUMUL times, SABAR times, PANCHAMRUT times and BANAS times was lower than to the average. So, there is a significant difference in the Inventory turnover ratio of all the dairies. DUDHSAGAR dairy and BARODA dairy s ratio indicated of good inventory management compare to other dairies Debtors Turnover Ratio: A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of companies when the firm extends credits to its customers; debtors are created in the firm s accounts. Debtors are convertible into cash over a short period and therefore, are included in current assets. The liquidity position of the firm depends on the quality of debtors to great extent. Debtors turnover is found out by dividing total sales by the year-end balance of debtors. Sales Debtors Turnover Ratio = Debtors Obviously, the higher the debtors turnover the greater the efficiency of credit management. 226
61 Table 6.24 Debtors Turnover Ratio of Selected District Dairy Co - operatives during the period from to (In Times) Dairy Average Cooperatives AMUL SUMUL DUDHSAGAR SABAR PANCHAMRUT BARODA BANAS Average (SOURCE: Computed from the Annual Reports of Selected District Dairy Cooperatives from to ) 227
62 Graph: 6.24 Debtors Turnover Ratio of Selected District Dairy Co - operatives Percentage % Amul Sumul Dudhsagar Sabar Panchamrut Baroda Banas Years
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