ANALYSIS OF FINANCIAL STATEMENT using technique of Ratio Analysis By Furkan Kamdar.pdf

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A
PROJECT REPORT
ON
―ANALYSIS OF FINANCIAL STATEMENT
BY USING THE TECHNIQUE OF RATIO ANALYSIS”
FOR
ULTRA TECH CEMENT LTD
AT KOVAYA, AMRELI, GUJARAT
SUBMITTED TO TILAK MAHARASHTRA UNIVERSITY
IN PARTIAL FULFILLMENT OF 2 YEARS FULL TIME COURSE MASTER
OF BUSINESS ADMINISTRATION
(MBA)
Submitted By:
FURKAN Y. KAMDAR
(Batch 2008-10)
Guided By:
Prof.R.GANESHAN
MAHARASHTRA COSMOPOLITAN EDUCATION SOCIETY’S
PAI INTERNATIONAL CENTRE FOR MANAGEMENT EXCELLENCE
CAMP PUNE-411001

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Maharashtra Cosmopolitan Education Society’s
PAI International Centre for Management Excellence
CERTIFICATE
This is to certify that FURKAN Y.KAMDAR student of PAI INTERNATIONAL CENTRE FOR
MANAGEMENT EXCELLENCE, Maharashtra Cosmopolitan Education Society, Pune has completed his
field work at ULTRA TECH CEMENT LTD on the topic of ―FINANCIAL STATEMENT ANALYSIS BY
USING THE TECHNIQUE OF RATIO ANALYSIS”FOR ULTRA TECH CEMENT LTD and has submitted
the field work report in partial fulfilment of 2 years full time course MASTER IN BUSINESS
ADMINISTRATION of college for the academic year 2008-2009
He has worked under our guidance and direction. The said report is based on bonafide information.
Project Guide Name Prof. R Ganesan
Designation Director
Pai International Centre for
Management Excellence
Date:
Place: Pune

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PAI INTERNATIONAL CENTRE
FOR
MANAGEMENT EXCELLENCE
Maharashtra Cosmopolitan Education Society
DECLARATION
I hereby declare that the project titled ―FINANCIAL STATEMENT ANALYSIS OF ULTRATECH CEMENT
LTD.‖ is an original piece of research work carried out by me under the guidance and supervision of
Prof.R.GANESAN. The information has been collected from genuine & authentic sources. The work has been
submitted in partial fulfillment of the requirement of MASTER OF BUSINESS ADMINISTRATION (MBA).
Place: Pune Signature:
Date: 26/02/2009 FURKAN KAMDAR

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ACKNOWLEDGEMENT
―The satisfaction Euphoria that accompanies the successful completion of any work would be
incomplete unless we mention the name of the person, who made it possible, whose constant guidance and
encouragement served as a beckon of light and crowned our efforts with success.‖ I consider it a privilege to
express through the pages of this report, a few words of gratitude and respect to those who guided and inspired in
the completion of this project.‖
I am deeply indebted to Mr. Bhavesh PathK (HOS-HRD) for giving me the opportunity to undergo
my project in their esteemed organization and their timely suggestions & Valuable guidance. I also want to give
thanks to Ms. Nidhi Dua (HRD), Mr. Ankur Trivedi (Accounting Dept.), Mr. Dharmendra Bhatt (HRD) and
all the staff members of HR and accounts dept. They constantly encouraged me and showed the right path from
day first till the completion of my project.
My sincere thanks to saumiya madam and all the other faculty members, (Internal guide-PICME, PUNE)
for guiding me throughout the, project.
Last but not the least; my grateful appreciation is also extended to Mrs.Sikha (Administrative Head)
Madam and our administration officer Mr. Atik sir and my cordial thanks to my Parents and friends. However, I
accept the sole responsibility for any possible errors of omission and would be extremely grateful to the readers of
this project report if they bring such mistakes to my notice.
However, I accept the sole responsibility for any possible errors of omission and would be extremely
grateful to the readers of this project report if they bring such mistakes to my notice.
FURKAN Y. KAMDAR

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CONTENTS
Sr.No. Contents Page No.
1. Executive Summary 6
2. Objectives of study 7
3.
Research Methodology 8
Research framework
Type of data
How data was collected
4. Company Profile 10
5. Theoretical Background
Financial Statements 23
Financial statement analysis 32
6. Financial Ratio analysis 34
7.
Financial Overview of UltraTech
Cement Ltd.
41
8. Ratios of UltraTech Cement Ltd. 43
9. Summary of Ratios 66
10. Observation and Findings 67
11. Importance 68
12. Advantages 69
13. Limitations 70
14. conclusion 71
15. bibliography 72

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EXECUTIVE SUMMARY
Project Title: Financial Statement Analysis
Company Name: UltraTech Cement Limited
The training at UltraTech Cement Limited involved the day to day working at corporate accounts
departments with the senior & junior managers and research department in the company. This project helped
me to get the deeper understanding of the process of Financial Statement Analysis and how decisions are
taken to strengthen the financial position.
For this study five years‘ comparative Income Statement & Balance Sheet have been taken for
calculating ratio analysis. Main objective in undertaking this project is to supplement academic knowledge
with absolute practical exposure to day to day functions of the sector.
Financial analysis which is the topic of this project refers to an assessment of the viability, stability
and profitability of a business. This important analysis is performed usually by finance professionals in order
to prepare financial or annual reports. These financial reports are made with using the information taken
from financial statements of the company and it is based on the significant tool of Ratio Analysis. These
reports are usually presented to top management as one of their basis in making crucial business decisions.
During the summer training period at UltraTech Cement Limited, I had close connection with
preparation of financial statements and also their analysis which was made by professionals in the
accounting team of the company. This experience was an emphasis on the importance of these Ratios which
could be the roots of decisions made by management that can make or break the company. So, I was
influenced to allocate the aim of this project to study the details about these ratios and their possible effects
on the decisions made by not only people inside the company but also the outsiders such as investors.

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OBJECTIVE OF THE STUDY
There have been various objectives for this study, the first of which is a detailed analysis of the
financial statements that is the balance sheet and the income statement of UltraTech Cement Ltd.
The second objective, however the most important one or in other word the principle aim of this project is
the understanding and assessment of financial ratios based on the statements of the company.
The next aim of the project is to recognize the position of the company through those ratios and data
available. This recognition is a leading factor in changes of each and every company and the base and root of
lots of management decisions.

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RESEARCH METHODOLOGY
Research framework: This study is based on the data about ULTRATECH CEMENT LTD for a
detailed study of its financial statements, documents and system ratios and finally to recognize and
determine the position of the company.
Types of data which helped to prepare this report:
1. First type is the primary data which was collected personally to be used and studied to prepare and reach
the objectives already mentioned.
2. The secondary data which was already prepared so these data was only used to reach the aims and
objectives of this project. These data has been collected from the financial reports of the company.
How the data was collected:
The sources of collecting the primary data was through interviews, observation and questionnaire, however
the secondary one was collected from the financial statements already available to the employees of the
company and some of which was published.
A) Questionnaire:
This method of data collection is quite popular. In this method a questionnaire – which consists a set of
questions in a definite form -is send to the person concerned with a request to answer the questions and
return the questionnaire. The respondents have to answer the questions on their own.
For the purpose of fulfilling different parts of my project, I prepared a limited number of questionnaires.
These questionnaires were e-mailed to the related persons in the company.
B) Personal Interview:
Personal Interview method requires a person known as the interviewer asking questions generally in a face
to face contact to the other person or persons.
In some cases, I had the chance to ask my questions personally from the Head of Accounts department and
Head of HR Department regarding the information I needed.
Different questions and information I could collect during these two methods are:
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1. The beginning and history of the UltraTech Cement Ltd.
2. Numbers of staff working for different departments.
3. The mission & vision of the company.
4. Areas of operations
5. Other company related information.
C) Printed and Digital Sources:
The secondary data I collected was through the study of the financial statements already existed in the
company in form of printed files or digital files reserved in the company for further references. I had chosen
these files because of the reliability and suitability of these information which I was also sure about the
accuracy of them.
These files consist of:
1. Annual report of the company
2. Financial balance sheets
3. Income statements
4. Financial reports
5. Different reports prepared by Finance Department

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COMPANY PROFILE
ADITYA BIRLA GROUP:
BUSINESS OVERVIEW & BENCHMARKS:
A US $28 billion premium conglomerate, the Aditya Birla Group is in the league of Fortune 500. It is
anchored by an extraordinary force of 100,000 employees, belonging to 25 different nationalities. In India,
the Group has been adjudged ―The Best Employer in India and among the top 20 in Asia‖ by the Hewitt
Economic Times and Wall Street Journal Study 2007. Over 50 percent of its revenues flow from its overseas
operations.
The group operates in 25 countries – India, UK, Germany, Hungary, Brazil, Italy, France, Luxemburg,
Switzerland, Australia, USA, Canada, Egypt, China, Thailand, Laos, Indonesia, Philippines, Dubai,
Singapore, Myanmar, Bangladesh, Vietnam, Malasia and Korea.
Globally the Aditya Birla Group is:
 A metals powerhouse, among the world‘s most cost-efficient aluminium and copper producers.
Hindalco-Novelis is the largest aluminium rolling company. It is one of the 3 biggest producers of
primary aluminium in Asia, with the largest single location copper smelter.
 No. 1 in Viscose staple fibre.
 The 4th
largest producer of insulators.
 The 4th
largest producer of carbon black.
 The 11th
largest cement producer.
 Among the world‘s top BPO companies and among India‘s top 4.
 Among the best energy efficient fertilizer plants.
In India
 A premier branded garment player.
 The 2nd
largest player in viscose filament yarn.
 The 2nd
largest in the Chlor-alkali sector.
 Among the top 5 mobile telephony companies.
 A leading player in Life Insurance and Asset Management.
 Among the top 3 super-market chains in the Retail Business.

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Rock solid in fundamentals, The Aditya Birla Group nurtures a culture where success does
not come in the way of the need to keep learning afresh to keep experimenting.
Beyond Business – The Aditya Birla Group is:
 Working in 3700 villages.
 Reaching out to 7 million people annually through the Aditya Birla Centre for Community
Initiatives and Rural Development, spearheaded by Mrs. Rajshree Birla.
 Focusing on: health care, education, sustainable livelihood, infrastructure and espousing social
causes.
 Running 41 Schools and 18 Hospitals.
VISION:
To be a premium global conglomerate with a clear focus on each business.
MISSION:
To deliver superior value to our customers, shareholders, employees and society at large.
VALUES:
Integrity
Commitment
Passion
Seamlessness
Speed

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ADITYA BIRLA GROUP- MAJOR PRESENCE
Businesses of ABG

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HISTORY
Soren Kristian Toubro, a civil engineer and Henning Holck Larsen, a chemical engineer, the founder of
Larsen & Toubro (L&T) Company were schoolmates, later attended the same engineering college in
Denmark. After becoming engineers both joined, the firm named ‗F. L. Smidth & Company‘, which was
Cement machine manufacturing Company.
Then both came to India in 1935 to assess the value of various cement-manufacturing groups on behalf of F.
L. Smidth & Company M/S Copenhagen. These groups later merged into the Associated Cement
Companies. After completing this task, they searched for proper places for F.L. Smidth‘s local offices in
India.
In the course of their work, both visited India, observed Indian people, and decided to start their own
business here. They started a partnership concern on 1st
May 1938 and started undertaking repair jobs on the
imported machinery like pasteurizes, butter Chuns, creams separators since supply of these machines were
stopped due to world war II. Gradually, they began to develop and manufacture several of these and other
types of dairy equipments. Very soon, L & T was acknowledged as a reliable fabricator with high standards.
L & T has entered in Cement business in 1980. L & T established its first plant at Awarpur, Maharashtra in
1983. Second plant was established in 1991 at Hirmi, M.P. Third and largest plant was established in 1996 at
Kovaya, Gujarat. The fourth plant was established at Tadipatri, A.P. in 1998.
GCW‘s operations started from 2 April 1996. It became Asia‘s largest cement producing unit with the
capacity of 4.2 million-tone per annum.

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PROFILE
UltraTech Cement Limited, a Grasim subsidiary has an annual capacity of 18.2 million tonnes. It
manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland
Pozzolana Cement.
UltraTech has five integrated plants, five grinding units and three terminals — two in India and one in Sri
Lanka. These include an integrated plant and two grinding units of the erstwhile Narmada Cement Company
Limited, a subsidiary, which has been amalgamated with the company in May 2006.
UltraTech is the country's largest exporter of cement clinker. The company exports over 2.5 million tonnes
per annum, which is about 30 per cent of the country's total exports. The export markets span countries
around the Indian Ocean, Africa, Europe and the Middle East.
The cement division of L&T was demerged in 2004 after Grasim made the 30 per cent open offer for equity
shares, gaining control over the new company, christened UltraTech. Besides the long term strategic value in
the wake of rising demand for cement, with the growth of housing and infrastructure sectors in the country,
the acquisition brings significant synergy gains to the parent company.
Ready Mix Concrete is likely to see substantial growth in the coming years. Recognizing the opportunities
that this business will offer, UltraTech has commenced setting up of Ready Mix Concrete plants at various
places in the country.
Ultra Tech Cement Limited (Formerly known as L & T Cement Ltd.) is a very well known name in the field
of cement. The registered office and head office of the company is at Mumbai.
This company‘s reputation is based on a strong customer orientation, the technological sophistication that
characterizes its products, and an impressive record of achievements. Ultra Tech has initiated a
transformation process to ensure that it emerges as a knowledge-based premium conglomerate in the shortest
possible time. Each of its plants incorporated state-of-art technology. Ultra Tech Cement has strong brand
equity and commands a price premium in most markets.
Ultra Tech is committed to a high growth trajectory that will deliver significant value to its customer and
shareholders.
Out of six cement plants of Ultra Tech, GCW at Kovaya is the largest cement plant in Asia. There are
two phases in the plant, which are almost identical in layout and production capacity. The reason for laying
such a big plant near a small village like Kovaya can be justified by the fact that this region is very rich of

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limestone resources, which is the chief raw material for cement production. The estimated resources of
limestone mines are enough to supply raw material for next 40 years to GCW. Ultra Tech is India‘s largest
manufacturer of premium quality cement. Ultra Tech has nationwide network of factories, offices and sales
centers. Authorized stockiest dealing in the company‘s product line, including cement, is located directly or
indirectly in every district of the country.
UltraTech's subsidiaries are: Dakshin Cements Limited and UltraTech Ceylinco (Private) Limited.
ULTRA TECH CEYLINCO (PVT.) LIMITED.
 Ceylinco insurance company limited and UltraTech have incorporated this subsidiary in Sri Lanka.
 Ceylinco is one of the most respected business groups in Sri Lanka with activities in the field of
banking, insurance and finance.
 A bulk Cement terminal has been established near Colombo with annual output of 0.5 MT.
 Cement in bulk is sourced from Ultra Tech‘s Gujarat Cement works and transported by carriers to
Colombo.
NARMADA CEMENT COMPANY LIMITED.
The Narmada Cement Company Ltd. At Jafrabad (Gujarat) and two grinding units at Magdalla (Gujarat) &
Ratnagiri (Maharashtra) all are port-based plants. Clinker is shipped by sea from Jafrabad to the grinding
units.

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LEGENDARY LEADER
GHANSHYAMDAS BIRLA ADITYA VIKRAM BIRLA
AT THE HELM
Board of Directors
 Mr. Kumar Mangalam Birla, Chairman
 Mrs. Rajashree Birla
 Mr. R. C. Bhargava
 Mr. G. M. Dave
 Mr. Y. M. Deosthalee
 Mr. N. J. Jhaveri
 Mr. S. B. Mathur, Additional Director (Independent)
 Mr. V. T. Moorthy, Independent Director
 Mr. J. P. Nayak
 Mr. S. Rajgopal
 Mr. D. D. Rathi
 Mr. S. Misra, Managing Director
 Executive President &Chief Financial Officer : Mr. K. C. Birla
 Chief Manufacturing Officer : Mr. S. K. Maheshwari
 Chief Marketing Officer : Mr. O. P. Puranmalka
 Company Secretary : Mr. S. K. Chatterjee

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A NATIONAL PRESENCE
As part of the eighth biggest cement manufacturer in the world, UltraTech Cement has five integrated plants,
five grinding units as well as three terminals of its own (one overseas, in Colombo, Sri Lanka). These
facilities gradually came up over the years, as indicated below:
2006: Narmada Cement Company Limited amalgamated with UltraTech pursuant to a Scheme of
Amalgamation being approved by the Board for Industrial & Financial Reconstruction (BIFR) in terms of
the provision of Sick Industrial Companies Act (Special Provisions)
2004: Completion of the implementation process to demerge the cement business of L&T and completion of
open offer by Grasim, with the latter acquiring controlling stake in the newly formed company UltraTech
2003: The board of Larsen & Toubro Ltd (L&T) decides to demerge its cement business into a separate
cement company (CemCo). Grasim decides to acquire an 8.5 per cent equity stake from L&T and then make
an open offer for 30 per cent of the equity of CemCo, to acquire management control of the company.
2002
The Grasim Board approves an open offer for purchase of up to 20 per cent of the equity shares of
Larsen & Toubro Ltd (L&T), in accordance with the provisions and guidelines issued by the
Securities & Exchange Board of India (SEBI) Regulations, 1997.
Grasim increases its stake in L&T to 14.15 per cent
Arakkonam grinding unit
2001
Grasim acquires 10 per cent stake in L&T. Subsequently increases stake to 15.3 per cent by October
2002
Durgapur grinding unit

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1998-2000
Bulk cement terminals at Mangalore, Navi Mumbai and Colombo
1999
Narmada Cement Company Limited acquired
Ratnagiri Cement Works
1998
Gujarat Cement Works Plant II
Andhra Pradesh Cement Works
1996
Gujarat Cement Works Plant I
1994
Hirmi Cement Works
1993
Jharsuguda grinding unit
1987
Awarpur Cement Works Plant II
1983
Awarpur Cement Works Plant I
UNIQUE PRODUCT MIX
UltraTech is India's largest exporter of cement clinker. The company's production facilities are spread
across five integrated plants, five grinding units, and three terminals — two in India and one in Sri Lanka.
All the plants have ISO 9001 certification, and all but one have ISO 14001 certification. While two of the
plants have already received OSHAS 18001 certification, the process is underway for the remaining three.
The company exports over 2.5 million tonnes per annum, which is about 30 per cent of the country's total

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exports. The export market comprises of countries around the Indian Ocean, Africa, Europe and the Middle
East. Export is a thrust area in the company's strategy for growth.
UltraTech's products include Ordinary Portland cement, Portland Pozzolana cement and Portland blast
furnace slag cement.
 Ordinary Portland cement
 Portland blast furnace slag cement
 Portland Pozzolana cement
 Cement to European and Sri Lankan norms
Ordinary Portland cement
Ordinary Portland cement is the most commonly used cement for a wide range of applications. These
applications cover dry-lean mixes, general-purpose ready-mixes, and even high strength pre-cast and pre-
stressed concrete.
Portland blast furnace slag cement
Portland blast-furnace slag cement contains up to 70 per cent of finely ground, granulated blast-furnace slag,
a non-metallic product consisting essentially of silicates and alumino-silicates of calcium. Slag brings with it
the advantage of the energy invested in the slag making. Grinding slag for cement replacement takes only 25
per cent of the energy needed to manufacture Portland cement. Using slag cement to replace a portion of
Portland cement in a concrete mixture is a useful method to make concrete better and more consistent.
Portland blast-furnace slag cement has a lighter colour, better concrete workability, easier finishability,
higher compressive and flexural strength, lower permeability, improved resistance to aggressive chemicals
and more consistent plastic and hardened consistency.
Portland Pozzolana cement
Portland Pozzolana cement is ordinary Portland cement blended with pozzolanic materials (power-station fly
ash, burnt clays, ash from burnt plant material or silicious earths), either together or separately. Portland
clinker is ground with gypsum and pozzolanic materials which, though they do not have cementing
properties in themselves, combine chemically with Portland cement in the presence of water to form extra
strong cementing material which resists wet cracking, thermal cracking and has a high degree of cohesion
and workability in concrete and mortar.

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ULTRATECH CEMENT
GUJARAT CEMENT WORK, KOVAYA
(UNIT OF ULTRATECH CEMENT LTD)
Introduction:
The Gujarat Cement Works (GCW) unit was commissioned in 1996 on 2nd April at Kovaya village, in
Gujarat. Out of six cement plants of UltraTech, GCW at Kovaya is the largest cement plant in Asia. There
are two phases in the plant, which are almost identical in layout and production capacity. It is totally
automatic & dry plant. It is running by Aditya Birla Group after undertaking L&T. reason for laying such a
big plant near a small village like Kovaya can be justified by the fact that this region is very rich in limestone
resources, which is the chief raw material for cement production. The estimated resources of limestone
mines are enough to supply raw material for next 40 years to GCW. Also, the other criteria for site selection
was its proximity to the sea, so that the site could be used for shipping cement to the user points in the
country & also in neighbouring countries like Sri Lanka. Thus, it helps in transportation cost reduction.

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Gujarat Cement Works (GCW) has a captive jetty engineered for exports. Accordingly, for the past five
years, bulk cement has been exported from GCW to UltraTech Ceylinco Pvt. Ltd. (UCPL), the group‘s joint
venture (JV) in Sri Lanka.
Location
The site is located near Rajula (25 km from Rajula) in Gujarat, India. The nearest railway station is Rajula
station and the nearest airport is Bhavnagar. The plant is located at south-eastern coast of Saurashtra in
Gujarat. It is 150 kms from Bhavnagar & 75 kms from Diu. It has received ISO 9002 certificate in October
1997 for its better quality system in manufacturing and dispatching of clinker and cement. Clinker and
cement are exported to Sri Lanka, Saudi Arabia and a few European countries. This unit is largest and high
production unit of UltraTech. This unit has made record in production and quality of cement.
AWARDS
Awards won by Gujarat Cement Works
UltraTech Cement
Year Award
2004
Bhartiya Udyog Ratan Award presented to Sh.KYP Kulkarni By Indian Economic
Development & Research Association (IEDRA), New Delhi
2002-2003
Greentech Gold Safety Award By Greentech Foundation, New Delhi
2002
Gujarat State Safety Award By Gujarat Safety Council (GSC), Vadodara
2001-2002
Greentech Environment Excellence Award By Greentech Foundation, New Delhi
2001
Awards for Excellence in "Industrial Relations" By Federation of Gujarat Industries (FGI),
Vadodara

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INTRODUCTION
FINANCIAL STATEMENTS
Financial statements are summaries of the operating, financing, and investment activities of a business.
Financial statements should provide information useful to both investors and creditors in making credit,
investment, and other business decisions. And this usefulness means that investors and creditors can use
these statements to predict, compare, and evaluate the amount, timing, and uncertainty of potential cash
flows. In other words, financial statements provide the information needed to assess a company‘s future
earnings and therefore the cash flows expected to result from those earnings. In this chapter, we discuss the
four basic financial statements: the balance sheet, the income statement, the statement of cash flows, and the
statement of shareholders‘ equity. The analysis of financial statements is provided in Part Six of this book.
ACCOUNTING PRINCIPLES AND ASSUMPTIONS
The accounting data in financial statements are prepared by the firm‘s management according to a set of
standards, referred to as generally accepted accounting principles (GAAP). The financial statements of a
company whose stock is publicly traded must, by law, be audited at least annually by independent public
accountants (i.e., accountants who are not employees of the firm). In such an audit, the accountants examine
the financial statements and the data from which these statements are prepared and attest—through the
published auditor‘s opinion—that these statements have been prepared according to GAAP. The auditor‘s
opinion focuses on whether the statements conform to GAAP and that there is adequate disclosure of any
material change in accounting principles.
The financial statements are created using several assumptions that affect how we use and interpret the
financial data:

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 Transactions are recorded at historical cost. Therefore, the values shown in the statements are not
market or replacement values, but rather reflect the original cost (adjusted for depreciation, in the
case of depreciable assets).
 The appropriate unit of measurement is the dollar. While this seems logical, the effects of inflation,
combined with the practice of recording values at historical cost, may cause problems in using and
interpreting these values.
 The statements are recorded for predefined periods of time. Generally, statements are produced to
cover a chosen fiscal year or quarter, with the income statement and the statement of cash flows
spanning a period‘s time and the balance sheet and statement of shareholders‘ equity as of the end of
the specified period. But because the end of the fiscal year is generally chosen to coincide with the
low point of activity in the firm‘s operating cycle, the annual balance sheet and statement of
shareholders‘ equity may not be representative of values for the year.
 Statements are prepared using accrual accounting and the matching principle. Most businesses use
accrual accounting, where income and revenues are matched in timing such that income is recorded
in the period in which it is earned and expenses are reported in the period in which they are incurred
to generate revenues. The result of the use of accrual accounting is that reported income does not
necessarily coincide with cash flows. Because the financial analyst is concerned ultimately with cash
flows, he or she often must understand how reported income relates to a company‘s cash flows.
 It is assumed that the business will continue as a going concern. The assumption that the business
enterprise will continue indefinitely justifies the appropriateness of using historical costs instead of
current market values because these assets are expected to be used up over time instead of sold.
 Full disclosure requires providing information beyond the financial statements. The requirement that
there be full disclosure means that, in addition to the accounting numbers for such accounting items
as revenues, expenses, and assets, narrative and additional numerical disclosures are provided in
notes accompanying the financial statements. An analysis of financial statements is therefore not
complete without this additional information.
 Statements are prepared assuming conservatism. In cases in which more than one interpretation of an
event is possible, statements are prepared using the most conservative interpretation.
The financial statements and the auditors‘ findings are published in the firm‘s annual and
quarterly reports sent to shareholders and the 10K and 10Q filings with the Securities and Exchange
Commission (SEC).Also included in the reports, among other items, is a discussion by management,
providing an overview of company events. The annual reports are much more detailed and disclose more
financial information than the quarterly reports.

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There are three basic financial statements:
 Balance sheet
 Income statement
 Cash Flow statement
THE BALANCE SHEET
The balance sheet is a summary of the assets, liabilities, and equity of a business at a particular point in
time—usually the end of the firm‘s fiscal year. The balance sheet is also known as the statement of financial
condition or the statement of financial position. The values shown for the different accounts on the balance
sheet are not purported to reflect current market values; rather, they reflect historical costs.
Assets are the resources of the business enterprise, such as plant and equipment that are used to generate
future benefits. If a company owns plant and equipment that will be used to produce goods for sale in the
future, the company can expect these assets (the plant and equipment) to generate cash inflows in the future.
Liabilities are obligations of the business. They represent commitments to creditors in the form of future
cash outflows. When a firm borrows, say, by issuing a long-term bond, it becomes obligated to pay interest
and principal on this bond as promised. Equity, also called shareholders‘ equity or stockholders‘ equity,
reflects ownership. The equity of a firm represents the part of its value that is not owed to creditors and
therefore is left over for the owners. In the most basic accounting terms, equity is the difference between
what the firm owns—its assets—and what it owes its creditors—its liabilities.
ASSETS
There are two major categories of assets: current assets and noncurrent assets, where noncurrent assets
include plant assets, intangibles, and investments. Assets that do not fit neatly into these categories may be
recorded as either other assets, deferred charges, or other noncurrent assets.
CURRENT ASSETS
Current assets (also referred to as circulating capital and working assets) are assets that could reasonably be
converted into cash within one operating cycle or one year, whichever takes longer. An operating cycle
begins when the firm invests cash in the raw materials used to produce its goods or services and ends with

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the collection of cash for the sale of those same goods or services. For example, if Fictitious manufactures
and sells candy products, its operating cycle begins when it purchases the raw materials for the products
(e.g., sugar) and ends when it receives cash for selling the candy to retailers. Because the operating cycle of
most businesses is less than one year, we tend to think of current assets as those assets that can be converted
into cash in one year. Current assets consist of cash, marketable securities, accounts receivable, and
inventories. Cash comprises both currency—bills and coins—and assets that are immediately transformable
into cash, such as deposits in bank accounts. Marketable securities are securities that can be readily sold
when cash is needed. Every company needs to have a certain amount of cash to fulfil immediate needs, and
any cash in excess of immediate needs is usually invested temporarily in marketable securities. Investments
in marketable securities are simply viewed as a short term place to store funds; marketable securities do not
include those investments in other companies‘ stock that are intended to be long term. Some financial reports
combine cash and marketable securities into one account referred to as cash and cash equivalents or cash and
marketable securities. Accounts receivable are amounts due from customers who have purchased the firm‘s
goods or services but haven‘t yet paid for them. To encourage sales, many firms allow their customers to
―buy now and pay later,‖ perhaps at the end of the month or within 30 days of the sale. Accounts receivable
therefore represents money that the firm expects to collect soon. Because not all accounts are ultimately
collected, the gross amount of accounts receivable is adjusted by an estimate of the uncollectible accounts,
the allowance for doubtful accounts, resulting in a net accounts receivable figure. Inventories represent the
total value of the firm‘s raw materials, work-in-process, and finished (but as yet unsold) goods. A
manufacturer of toy trucks would likely have plastic and steel on hand as raw materials, work-in-process
consisting of truck parts and partly completed trucks, and finished goods consisting of trucks packaged and
ready for shipping. There are three basic methods of accounting for inventory, including:
■ FIFO (first in, first out), which assumes that the first items purchased are the first items sold,
■ LIFO (last in, first out), which assumes that the last items purchased are the first items sold, and
■ Average cost, which assumes that the cost of items sold, is the average of the cost of all items purchased.
The choice of inventory accounting method is significant because it affects values recorded on
the balance sheet and the income statement, as well as tax payments and cash flows.
Another current asset account that a company may have is prepaid expenses. Prepaid expenses
are amounts that have been paid but not as yet consumed. A common example is the case of a company
paying insurance premiums for an extended period of time (say, a year), but for which only a portion (say,
three months) is applicable to the insurance coverage for the current fiscal year; the remaining insurance that
is prepaid as of the end of the year is considered an asset. Prepaid expenses may be reported as part of other
current liabilities.

27
Companies‘ investment in current assets depends, in large part, on the industry in which they
operate.
Noncurrent Assets
Noncurrent assets are assets that are not current assets; that is, it is not expected that noncurrent assets can be
converted into cash within an operating cycle. Noncurrent assets include physical assets, such as plant and
equipment, and nonphysical assets, such as intangibles.
Plant assets are the physical assets, such as the equipment, machinery, and buildings, which are used in the
operation of the business. We describe a firm‘s current investment in plant assets by using three values:
gross plant assets, accumulated depreciation, and net plant assets. Gross plant and equipment, or gross
plant assets, is the sum of the original costs of all equipment, buildings, and machinery the firm uses to
produce its goods and services. Depreciation, as you will see in the next chapter, is a charge that accounts
for the using up of an asset over the length of an accounting period; it is a means for allocating the asset‘s
cost over its useful life. Accumulated depreciation is the sum of all the depreciation charges taken so far
for all the company‘s assets. Net plant and equipment, or net plant assets, is the difference between gross
plant assets and accumulated depreciation. The net plant and equipment amount is hence the value of the
assets—historical cost less any depreciation- according to the accounting books and is therefore often
referred to as the book value of the assets.
Intangible assets are the current value of nonphysical assets that represent long-term investments of the
company. Such intangible assets include patents, copyrights, and goodwill. The cost of some intangible
assets is amortized (―spread out‖) over the life of the asset. Amortization is akin to depreciation: The asset‘s
cost is allocated over the life of the asset; the reported value is the original cost of the asset, less whatever
has been amortized. The number of years over which an intangible asset is amortized depends on the
particular asset and its perceived useful life. For example, a patent is the exclusive right to produce and sell
a particular, uniquely defined good and has a legal life of 17 years, though the useful life of a patent—the
period in which it adds value to the company-may be much less than 17 years. Therefore the company may
choose to amortize a patent‘s cost over a period less than 17 years. As another example, a copyright is the
exclusive right to publish and sell a literary, artistic, or musical composition, and is granted for 50 years
beyond the author‘s life, though its useful life in terms of generating income for the company may be much
less than 50 years. More challenging is determining the appropriate amortization period for goodwill.
Goodwill was created when one company buys another company at a price that exceeds the acquired
company‘s fair market value of its assets.

28
A company may have additional noncurrent assets, depending on their particular circumstances.
A company may have a noncurrent asset referred to as investments, which are assets that are purchased with
the intention of holding them for a long term, but which do not generate revenue or are not used to
manufacture a product. Examples of investments include equity securities of another company and real
estate that is held for speculative purposes. Other noncurrent assets include long term prepaid expenses,
arising from prepayment for which a benefit is received over an extended period of time, and deferred tax
assets, arising from timing differences between reported income and tax income, whereby reported income
exceeds taxable income.
Long-term investment in securities of other companies may be recorded at cost or market value,
depending on the type of investment; investments held to maturity are recorded at cost, whereas investments
held as trading securities or available for sale are recorded at market value. Whether the unrealized gains or
losses affect earnings on the income statement depend on whether the securities are deemed trading
securities or available for sale.
LIABILITIES
Liabilities, a firm‘s obligations to its creditors, are made up of current liabilities, long-term liabilities, and
deferred taxes.
Current Liabilities
Current liabilities are obligations that must be paid within one operating cycle or one year, whichever is
longer. Current liabilities include:
 Accounts payable, which are obligations to pay suppliers. They arise from goods and services that
have been purchased but not yet paid.
 Accrued expenses, which are obligations such as wages and salaries payable to the employees of
the business, rent, and insurance.
 Current portion of long-term debt or the current portion of capital leases. Any portion of long-
term indebtedness—obligations extending beyond one year—due within the year.
 Short-term loans from a bank or notes payable within a year.
The reliance on short-term liabilities and the type of current liabilities depends, in part, on the
industry in which the firm operates.
LONG TERM LIABILITIES

29
Long-term liabilities are obligations that must be paid over a period beyond one year. They include notes,
bonds, capital lease obligations, and pension obligations. Notes and bonds both represent loans on which the
borrower promises to pay interest periodically and to repay the principal amount of the loan.
A lease obligates the lessee—the one leasing and using the leased asset—to pay specified rental
payments for a period of time. Whether the lease obligation is recorded as a liability or is expensed as lease
payments made depends on whether the lease is a capital lease or an operating lease.
A company‘s pension and post-retirement benefit obligations may give rise to long-term
liabilities. The pension benefits are commitments by the company to pay specific retirement benefits,
whereas post-retirement benefits include any other retirement benefit besides pensions, such as health care.
Basically, if the fair value of the pension plan‘s assets exceeds the projected benefit obligation (the
estimated present value of projected pension costs), the difference is recorded as a long-term asset. If, on the
other hand, the plan‘s assets are less than the projected benefit obligation, the difference is recorded as a
long-term liability. In a similar manner, the company may have an asset or a liability corresponding to post-
retirement benefits.
DEFFERED TAXES
Along with long-term liabilities, the analyst may encounter another account, deferred taxes. Deferred taxes
are taxes that will have to be paid to the federal and state governments based on accounting income, but are
not due yet. Deferred taxes arise when different methods of accounting are used for financial statements and
for tax purposes. These differences are temporary and are the result of different timing of revenue or expense
recognition for financial statement reporting and tax purposes. The deferred tax liability arises when the
actual tax liability is less than the tax liability shown for financial reporting purposes (meaning that the firm
will be paying the difference in the future), whereas the deferred tax asset, mentioned earlier, arises when the
actual tax liability is greater than the tax liability shown for reporting purposes.
EQUITY
Equity is the owner‘s interest in the company. For a corporation, ownership is represented by common stock
and preferred stock. Shareholders‘ equity is also referred to as the book value of equity, since this is the
value of equity according to the records in the accounting books. The value of the ownership interest of
preferred stock is represented in financial statements as its par value, which is also the dollar value on
which dividends are figured. For example, if you own a share of preferred stock that has a $100 par value
and a 9% dividend rate, you receive $9 in dividends each year. Further, your ownership share of the
company is $100. Preferred shareholders‘ equity is the product of the number of preferred shares outstanding
and the par value of the stock; it is shown that way on the balance sheet. The remainder of the equity belongs

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to the common shareholders. It consists of three parts: common stock outstanding (listed at par or at stated
value), additional paid-in capital, and retained earnings. The par value of common stock is an arbitrary
figure; it has no relation to market value or to dividends paid on common stock. Some stock has no par
value, but may have an arbitrary value, or stated value, per share. Nonetheless, the total par value or stated
value of all outstanding common shares is usually entitled ―capital stock‖ or ―common stock.‖ Then, to
inject reality into the equity part of the balance sheet, an entry called additional paid-in capital is added;
this is the amount received by the corporation for its common stock in excess of the par or stated value. If a
firm sold 10,000 shares of $1 par value common stock at $40 a share, its equity accounts would show:
Common stock, $1 par value $10,000
Additional paid-in capital $390,000
There are actually four different labels that can be applied to the number of shares of a corporation on a
balance sheet:
 The number of shares authorized by the shareholders.
 The number of shares issued and sold by the corporation, which can be less than the number of
shares authorized.
 The number of shares currently outstanding, which can be less than the number of shares issued if
the corporation has bought back (repurchased) some of its issued stock.
 The number of shares of treasury stock, which is stock that the company has repurchased.
The outstanding stock is reported in the stock accounts, and adjustments must be made for any treasury
stock. The bulk of the equity interest in a company is in its retained earnings. A retained- earnings is the
accumulated net income of the company, less any dividends that have not been paid, over the life of the
corporation. Retained earnings are not strictly cash and any correspondence to cash is coincidental. Any cash
generated by the firm that has not been paid out in dividends has been reinvested in the firm‘s assets—to
finance accounts receivable, inventories, equipment, and so forth.
THE INCOME STATEMENT
An income statement is a summary of the revenues and expenses of a business over a period of time,
usually one month, three months, or one year. This statement is also referred to as the profit and loss
statement. It shows the results of the firm‘s operating and financing decisions during that time.
The operating decisions of the company—those that apply to production and marketing—
generate sales or revenues and incur the cost of goods sold (also referred to as the cost of sales or the cost
of products sold). The difference between sales and cost of goods sold is gross profit. Operating decisions

31
also result in administrative and general expenses, such as advertising fees and office salaries. Deducting
these expenses from gross profit leaves operating profit, which is also referred to as earnings before
interest and taxes (EBIT), operating income, or operating earnings. Operating decisions take the firm
from sales to EBIT on the income statement.
The results of financing decisions are reflected in the remainder of the income statement. When
interest expenses and taxes, which are both influenced by financing decisions, are subtracted from EBIT, the
result is net income. Net income is, in a sense, the amount available to owners of the firm. If the firm has
preferred stock, the preferred stock dividends are deducted from net income to arrive at earnings available
to common shareholders. If the firm does not have preferred stock (as is the case with Fictitious and most
nonfictitious corporations), net income is equivalent to earnings available for common shareholders. The
board of directors may then distribute all or part of this as common stock dividends, retaining the remainder
to help finance the firm.
Companies must report comprehensive income prominently within their financial statements.
Comprehensive income is a net income amount that includes all revenues, expenses, gains, and losses items
and is based on the idea that all results of the firm—whether operating or nonoperating should be reflected in
the earnings of the company. This is referred to as the all-inclusive income concept. The all-inclusive
income concept requires that these items be recognized in the financial statements as part of comprehensive
income.
It is important to note that net income does not represent the actual cash flow from operations
and financing. Rather, it is a summary of operating performance measured over a given time period, using
specific accounting procedures. Depending on these accounting procedures, net income may or may not
correspond to cash flow.
CASH FLOW STATEMENT:
It is a statement, which measures inflows and outflows of cash on account of any type of business activity.
The cash flow statement also explains reasons for such inflows and outflows of cash so it is a report on a
company's cash flow activities, particularly its operating, investing and financing activities.

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FINANCIAL ANALYSIS
Financial analysis is a tool of financial management. It consists of the evaluation of the financial condition
and operating performance of a business firm, an industry, or even the economy, and the forecasting of its
future condition and performance. It is, in other words, a means for examining risk and expected return. Data
for financial analysis may come from other areas within the firm, such as marketing and production
departments, from the firm‘s own accounting data, or from financial information vendors such as Bloomberg
Financial Markets, Moody‘s Investors Service, Standard & Poor‘s Corporation, Fitch Ratings, and Value
Line, as well as from government publications, such as the Federal Reserve Bulletin. Financial publications
such as Business Week, Forbes, Fortune, and the Wall Street Journal also publish financial data (concerning
individual firms) and economic data (concerning industries, markets, and economies), much of which is now
also available on the Internet.
Within the firm, financial analysis may be used not only to evaluate the performance of the firm,
but also its divisions or departments and its product lines. Analyses may be performed both periodically and
as needed, not only to ensure informed investing and financing decisions, but also as an aid in implementing
personnel policies and rewards systems.
Outside the firm, financial analysis may be used to determine the creditworthiness of a new
customer, to evaluate the ability of a supplier to hold to the conditions of a long-term contract, and to
evaluate the market performance of competitors.
Firms and investors that do not have the expertise, the time, or the resources to perform financial
analysis on their own may purchase analyses from companies that specialize in providing this service. Such
companies can provide reports ranging from detailed written analyses to simple creditworthiness ratings for
businesses. As an example, Dun & Bradstreet, a financial services firm, evaluates the creditworthiness of
many firms, from small local businesses to major corporations. As another example, three companies—
Moody‘s Investors Service, Standard & Poor‘s, and Fitch—evaluate the credit quality of debt obligations
issued by corporations and express these views in the form of a rating that is published in the reports
available from these three organizations.

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 Who uses these analyses?
Financial statements are used and analyzed by a different group of parties, these groups consists of people
both inside and outside a business. Generally, these users are:
A. Internal Users: are owners, managers, employees and other parties who are directly connected with a
company:
1. Owners and managers require financial statements to make important business decisions that affect its
continued operations. Financial analysis is then performed on these statements to provide management with
more detailed information. These statements are also used as part of management's report to its stockholders,
and it form part of the Annual Report of the company.
2. Employees also need these reports in making collective bargaining agreements with the management, in
the case of labour unions or for individuals in discussing their compensation, promotion and rankings.
B. External Users: are potential investors, banks, government agencies and other parties who are outside
the business but need financial information about the business for numbers of reasons.
1. Prospective investors make use of financial statements to assess the viability of investing in a business.
Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus
providing them with the basis in making investment decisions.
2. Financial institutions (banks and other lending companies) use them to decide whether to give a
company with fresh loans or extend debt securities (such as a long- term bank loan ).
3. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of
taxes and duties paid by a company.
4. Media and the general public are also interested in financial statements of some companies for a variety
of reasons.

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FINANCIAL RATIO ANALYSIS
Ratio analysis is such a significant technique for financial analysis. It indicates relation of two mathematical
expressions and the relationship between two or more things.
Financial ratio is a ratio of selected values on an enterprise's financial statement.
There are many standard ratios used to evaluate the overall financial condition of a corporation or other
organization. Financial ratios are used by managers within a firm, by current and potential stockholders of a
firm, and by a firm‘s creditor. Financial analysts use financial ratios to compare the strengths and
weaknesses in various companies.
Values used in calculating financial ratios are taken from balance sheet, income statement and the cash flow
of company, besides Ratios are always expressed as a decimal values, such as 0.10, or the equivalent percent
value, such as 10%.
Essence of ratio analysis:
Financial ratio analysis helps us to understand how profitable a business is, if it has enough money to pay
debts and we can even tell whether its shareholders could be happy or not.
Financial ratios allow for comparisons:
1. between companies
2. between industries
3. between different time periods for one company
4. between a single company and its industry average
To evaluate the performance of one firm, its current ratios will be compared with its past ratios. When
financial ratios over a period of time are compared, it is called time series or trend analysis. It gives an
indication of changes and reflects whether the firm‘s financial performance has improved or deteriorated or

35
remained the same over that period of time. It is not the simply changes that has to be determined, but more
importantly it must be recognized that why those ratios have changed. Because those changes might be result
of changes in the accounting polices without material change in the firm‘s performances.
Another method is to compare ratios of one firm with another firm in the same industry at the same point in
time. This comparison is known as the cross sectional analysis. It might be more useful to select some
competitors which have similar operations and compare their ratios with the firm‘s. This comparison shows
the relative financial position and performance of the firm. Since it is so easy to find the financial statements
of similar firms through publications or Medias this type of analysis can be performed so easily.
To determine the financial condition and performance of a firm, its ratios may be compared with average
ratios of the industry to which the firm belongs. This method is known as the industry analysis that helps to
ascertain the financial standing and capability of the firm in the industry to which it belongs.
Industry ratios are important standards in view of the fact that each industry has its own characteristics,
which influence the financial and operating relationships. But there are certain practical difficulties for this
method. First finding average ratios for the industries is such a headache and difficult. Second, industries
include companies of weak and strong so the averages include them also. Sometimes spread may be so wide
that the average may be little utility. Third, the average may be meaningless and the comparison not possible
if the firms with in the same industry widely differ in their accounting policies and practices. However if it
can be standardized and extremely strong and extremely weak firms be eliminated then the industry ratios
will be very useful.

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What does ratio analysis tell us?
After such a discussion and mentioning that these ratios are one of the most important tools that is used in
finance and that almost every business does and calculate these ratios, it is logical to express that how come
these calculations are of so importance.
What are the points that those ratios put light on them? And how can these numbers help us in performing
the task of management?
The answer to these questions is: We can use ratio analysis to tell us whether the business
1. is profitable
2. has enough money to pay its bills and debts
3. could be paying its employees higher wages, remuneration or so on
4. is able to pay its taxes
5. is using its assets efficiently or not
6. has a gearing problem or everything is fine
7. is a candidate for being bought by another company or investor
But as it is obvious there are many different aspects that these ratios can demonstrate. So for using them first
we have to decide what we want to know, then we can decide which ratios we need and then we must begin
to calculate them.

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Which Ratio for whom:
As before mentioned there are varieties of people interested to know and read these information and
analyses, however different people for different needs. And it is because each of these groups have different
type of questions that could be answered by a specific number and ratio.
Therefore we can say there are different ratios for different groups, these groups with the ratio that suits
them is listed below:
1. Investors: These are people who already have shares in the business or they are willing to be part of it. So
they need to determine whether they should buy shares in the business, hold on to the shares they already
have or sell the shares they already own. They also want to assess the ability of the business to pay
dividends. As a result the Return on Capital Employed Ratio is the one for this group.
2. Lenders: This group consists of people who have given loans to the company so they want to be sure that
their loans and also the interests will be paid and on the due time. Gearing Ratios will suit this group.
3. Managers: Managers might need segmental and total information to see how they fit into the overall
picture of the company which they are ruling. And Profitability Ratios can show them what they need to
know.
4. Employees: The employees are always concerned about the ability of the business to provide
remuneration, retirement benefits and employment opportunities for them, therefore these information must
be find out from the stability and profitability of their employers who are responsible to provide the
employees their need. Return on Capital Employed Ratio is the measurement that can help them.

38
5. Suppliers and other trade creditors: Businesses supplying goods and materials to other businesses will
definitely read their accounts to see that they don't have problems, after all, any supplier wants to know if his
customers are going to pay them back and they will study the Liquidity Ratio of the companies.
6. Customers: are interested to know the Profitability Ratio of the business with which they are going to
have a long term involvement and are dependent on the continuance of presence of that.
7. Governments and their agencies: are concerned with the allocation of resources and, the activities of
businesses. To regulate the activities of them, determine taxation policies and as the basis for national
income and similar statistics, they calculate the Profitability Ratio of businesses.
8. Local community: Financial statements may assist the public by providing information about the trends
and recent developments in the prosperity of the business and the range of its activities as they affect their
area so they are interested in lots of ratios.
9. Financial analysts: they need to know various matters, for example, the accounting concepts employed
for inventories, depreciation, bad debts and so on. therefore they are interested in possibly all the ratios.
10. Researchers: researchers' demands cover a very wide range of lines of enquiry ranging from detailed
statistical analysis of the income statement and balance sheet data extending over many years to the
qualitative analysis of the wording of the statements depending on their nature of research.

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CLASSIFICATION OF RATIOS
In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio
can give a financial analyst an excellent picture of a company's situation and the trends that are
developing. A ratio gains utility by comparison to other data and standards.
Financial ratios quantify many aspects of a business and are an integral part of financial statement
analysis. Financial ratios are categorized according to the financial aspect of the business which the
ratio measures. Although these categories are not fixed in all over the world however there are
almost the same, just with different names:
1. Profitability ratios which use margin analysis and show the return on sales and capital
employed.
2. Rate of Return Ratio (ROR) or Overall Profitability Ratio: The rate of return ratios are
thought to be the most important ratios by some accountants and analysts. One reason why the rate
of return ratios is so important is that they are the ratios that we use to tell if the managing director is
doing their job properly.
3. Liquidity ratios measure the availability of cash to pay debt, which give a picture of a company's
short term financial situation.
4. Solvency or Gearing ratios measures the percentage of capital employed that is financed by debt
and long term finance. The higher the gearing, the higher the dependence on borrowing and long
term financing. The lower the gearing ratio, the higher the dependence on equity financing.
Traditionally, the higher the level of gearing, the higher the level of financial risk due to the increase
volatility of profits. It should be noted that the term ―Leverage‖ is used in some texts.
5. Turn over Ratios or activity group ratios indicate efficiency of organization to various kinds of
assets by converting them to the form of sales.
6. Investors ratios usually interested by investors.

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FINANCIAL OVERVIEW OF ULTRATECH CEMENT LIMITED
BALANCE SHEET
As On 31-03-2005 31-03-2006 31-032007 31-03-2008 31-03-2009
Fixed Assets Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr.
Gross Block 4304.29 4605.38 4784.7 4972.60 7,401.02
Net Block 2548.9 2537.21 2517.28 2500.46 4,635.69
Capital WIP 48.18 141.03 696.95 2283.15 677.28
Investment 184.79 172.39 483.45 170.90 1,034.80
Current Assets
Inventories 283.71 379.57 433.58 609.76 691.97
Debtors 171.95 172.55 183.50 216.61 186.18
Other Current Assets 381.99 220.4 343.09 477.52 483.46
Balance Sheet Total 3619.52 3623.11 4657.85 6258.40 7709.38
Liabilities Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr. Rs. Cr.
Shareholders’ Funds
Equity Share Capital 124.40 124.40 124.49 124.49 124.49
Share Capital Suspense - 0.09 - - -
Employees Stock Option
Outstanding
0.77 1.68
Reserves and Surplus 942.73 913.78 1639.29 2571.73 3475.93
Loan Funds 1531.38 1451.83 1578.63 1740.50 2141.63
Deferred Tax Liabilities 581.71 576.96 560.26 542.35 722.93
Current Liabilities
Creditors 224.67 318.13 463.99 776.79 723.09
Other Current Liab./Prov. 214.63 237.92 291.19 501.77 519.63
Balance Sheet Total 3619.52 3623.11 4657.85 6258.40 7709.38

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SUMMARISED P&L ACCOUNT
As On 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09
Net Sales 2,681.05 3,299.45 4,910.83 5,509.22 6,383.08
Operating profit
(PBIDT)
272.81 554.26 1,417.81 1,720.06 1,760.29
PBIT 51.03 338.23 1191.56 1482.83 1437.29
Gross profit (PBDT) 188.18 501.62 1392.44 1744.24 1684.46
PBT 43.24 285.59 1166.19 1507.01 1361.46
PAT( net profit) 2.85 229.76 782.28 1,007.61 977.02
323.00 237.23 226.25 216.03 221.78
DIVIDEND
As On 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09
Equity dividend 9.33 21.79 49.79 62.24 62.24
Preference dividend - - - - -

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RATIO OF ULTRATECH CEMENT LIMITED
LIQUIDITY RATIOS:
The two liquidity ratios, the current ratio and the acid test ratio, are the most important ratios in almost the
whole of ratio analysis and they are also the simplest to use. Liquidity ratios provide information about a
firm‘s ability to meet its short- term financial obligations. They are of particular interest to those extending
short term credit to the firm. Two frequently-used liquidity ratios are current and quick ratio.
While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important
to financial managers who must meet obligations to suppliers of credit and various government agencies. A
company's ability to turn short-term assets into cash to cover debts is of the utmost importance when
creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity
ratios to determine whether a company will be able to continue as a going concern. A complete liquidity
ratio analysis can help uncover weaknesses in the financial position of the business. Generally, the higher the
value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
1. CURRENT RATIO:
Current Ratio =
Current Asset
Current Liabilities
2005 2006 2007 2008 2009
Current
Asset
837.65 772.52 960.17 1303.89 1361.61
Current
Liabilities
439.30 556.05 755.18 1278.56 1242.72
Current
Ratio
1.91 1.39 1.27 1.02 1.10

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Comments:
The ratio is mainly used to give an idea of the company‘s ability to pay back its short- term liabilities
(debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the
more capable the company is of paying its obligations. A ratio in each year suggests that the
company would be able to pay off its obligations if they came due at that point, but the company has shown
constant decreasing trend in its financial health in subsequent years, Since low current ratio does not
necessarily mean that the firm will go bankrupt, but it is definitely is not a good sign. Short term creditors
prefer a high current ratio since it reduce their risk.
2. Quick or Acid-Test Ratio
The essence of this ratio is a test that indicates whether a firm has enough short-term assets to cover its
immediate liabilities without selling inventory. So it is the backing available to liabilities that must be paid
almost immediately. There are two terms of liquid asset and liquid liabilities in this formula, Liquid asset is
all current assets except the inventories and prepaid expenses, because prepaid expenses cannot be converted
to cash. The liquid liabilities include all current liabilities except bank overdraft and cash credit since they
are not required to be paid off immediately.

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Quick Ratio=
Liquid Asset
Liquid Liabilities
2005 2006 2007 2008 2009
Liquid Asset 553.94 392.95 526.59 694.13 669.64
Liquid Liabilities 439.30 556.05 755.18 1278.56 1242.72
Quick Ratio 1.26 0.70 0.70 0.54 0.54
Comments:
The acid-test ratio is far more forceful than the current ratio, primarily because the current ratio includes
inventory assets which might not be able to turn to cash immediately. Companies with ratios of less than 1
cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test
ratio is much lower than the current ratio, it means current assets are highly dependent on inventory.

46
TURN OVER RATIOS
Accounting ratios that measure a firm's ability to convert different accounts within their balance sheets into
cash or sales. Companies will typically try to turn their production into cash or sales as fast as possible
because this will generally lead to higher revenues.
Such ratios are frequently used when performing fundamental analysis on different companies.
1. FIXED ASSETS TURN OVER RATIO:
It shows how the company uses its fixed assets to achieve sales. The formula is as follows:
Fixed Asset Turn Over Ratio=
Net Sales
Fixed Assets
2005 2006 2007 2008 2009
NET SALES 2681.06 3299.45 4910.83 5508.78 6,383.08
FIXED ASSETS 2597.08 2678.24 3214.23 4783.61 5312.97
FIXED ASSETS
TURN OVER
RATIO:
1.032 1.23 1.53 1.15 1.20

47
Comments:
A High fixed asset turnover ratio indicates the capability of the firm to earn maximum sales with the
minimum investing in fixed assets. So it shows that the company is using its assets more efficiently. As it is
shown in above the Company is using its assets specially fixed assets more efficiently each year although it
had a light decrease in efficiency in 2008 and 2009 compared to 2007.
2. CURRENT ASSETS TURN OVER RATIO:
It is almost like the fixed asset turnover ratio, it calculates the capability of organization to earn sales with
usage of current assets. So it indicates with what ratio current assets are turned over in the form of sales.
This ratio is calculated as:
Current Asset Turn Over Ratio=
Net Sales
Current Assets

48
2005 2006 2007 2008 2009
NET SALES 2681.06 3299.45 4910.83 5508.78 6,383.08
CURRENT
ASSETS
837.65 772.52 960.17 1303.89 1361.61
CURRENT
ASSETS TURN
OVER RATIO:
3.20 4.27 5.11 4.22 4.69
Comments:
In this formula current assets are balance sheet accounts that represent the value of all assets that are
reasonably expected to be converted into cash within one year in the normal course of business. A higher
current assets turnover ratio is more desirable since it shows the better financial position of company and
better usage of these current assets. It can be seen from above figure that the company has shown high ratio
in 2005, 2006, 2007, and 2009, never mind the slight decrease in 2008. It means the company is using its
current assets more efficiently. The comparison between two ratios over the same period of time, also shows
that company has used its current assets better than its fixed assets

49
3. WORKING CAPITAL TURN OVER RATIO:
As its name suggests it is the relationship between turnover and working capital. It is a measurement
comparing the depletion of working capital to the generation of sales over a given period. This provides
some useful information as to how effectively a company is using its working capital to generate sales.
A company uses working capital to fund operations and purchase inventory. These operations and inventory
are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze
the relationship between the money used to fund operations and the sales generated from these operations.
The formula related is:
Working Capital Turn Over Ratio =
Net Sales
Working Capital
2005 2006 2007 2008 2009
NET SALES 2681.06 3299.45 4910.83 5508.78 6,383.08
WORKING
CAPITAL
398.35 216.47 204.99 25.33 118.89
WORKING
CAPITAL
TURN OVER
RATIO
6.73 15.24 23.96 217.48 53.69

50
Comments:
The term working capital is a measure of both a company's efficiency and its short-term financial health. The
working capital ratio is calculated as:
Working Capital = Current Asset – Current Liabilities
Positive working capital means that the company is able to pay off its short-term
liabilities. Negative working capital means that a company currently is unable to meet its short-term
liabilities with its current assets.
In a general sense, the higher the working capital turnover, the better because it means that the company is
generating a lot of sales compared to the money it uses to fund the sales..
4. Capital Employed Turnover Ratio
The capital employed turnover ratio tells us the state of the relationship between the shareholders' investment
in the business and the sales that the management of the business has been able to generate from it.

51
Capital Employed Turn Over Ratio=
Net Sales
Capital Employed
2005 2006 2007 2008 2009
Net Sales 2681.06 3299.45 4910.83 5508.78 6,383.08
Capital
Employed
2598.84 2490.01 3342.41 4436.72 5742.05
Capital
Employed
Turnover Ratio
1.032 1.33 1.47 1.24 1.11
Comments:
Capital employed can be expressed in different terms, all generally refer to the investment required for a
business to function. By "employing capital" you are making an investment. So, capital employed indicated
the long term funds supplied by creditors and owners of the firms. So it can be computed as:
Capital Employed = share capital + Long term liabilities + reserve and surpluses
This ratio shows the efficiency of the firm with which the capital employed is being utilized. A high ratio is
a sign of capability of firm to earn maximum sales with minimum amount of capital employed and this firm
is constantly improving its ratio from 2005 to 2007 except for 2008 and 2009 it is due to current economic
slowdown prevailing in the country as well as in the world

52
SOLVENCY OR GEARING RATIOS:
Gearing is concerned with the relationship between the long terms liabilities that a business has and its
capital employed. The idea is that this relationship ought to be in balance. It is a general term describing a
financial ratio that compares some form of owner's equity (or capital) to borrowed funds. The shareholders
and lenders of long term loans may be interested in this ratio.
1. Debt Equity ratio:
This ratio reflects the relative claims of creditors and share holders against the assets of the firm, debt equity
ratios establishment relationship between borrowed funds and owner capital to measure the long term
financial solvency of the firm. The ratio indicates the relative proportions of debt and equity in financing the
assets of the firm.
It is calculated as
debt equity ratio=
debt
shareholder‘s fund
The debts side consist of all long term liabilities of the firm. The shareholders‘ fund is the share capital plus
reserve and surpluses.
The lower the debt equity ratio the higher the degree of protection enjoyed by the creditors.
The debt equity ratio defined by the controller of capital issue, debt is defined as long term debt plus
preference capital which is redeemable before 12 years and shareholders‘ fund is defined as paid up equity
capital plus preference capital which is redeemable after 12 years plus reserves & surpluses.
The general norm for this ratio is 2:1. on case of capital intensive industries as norms of 4:1 is used for
fertilizer and cement industry and a norms of 6:1 is used for shipping units.
39

53
2005 2006 2007 2008 2009
DEBT 1531.38 1451.83 1578.63 1740.50 2141.63
SHAREHOLDERS‘
FUND
1067.13 1038.27 1763.78 2696.99 3602.1
DEBT EQUITY
RATIO
1.43 1.40 0.90 0.65 0.59
Comments:
In this ratio shareholders‘ fund is the share capital plus reserve and surpluses. In case of high debt equity it
would be obvious that the investment of creditors is more than owners. And if it is so high then it brings the
firm in a risky position. Or if it is too low it might indicate that the organization has not utilized its capacity
of borrowing which must be utilized and that is because the borrowing from outsiders is a good source of
fund for business with lower returns in compare to equity. The UltraTech Cement Ltd. is trying to lower its
debt equity ratio by lowering its liabilities and increasing its equity. So it wants to improve its position since,
a relatively lower ratio is favorable.

54
2. Proprietary ratio:
It is primarily the ratio between the proprietor‘s funds and total assets. It indicates the relationship between
owners fund and total assets. And shows the extent to which the owner s‘ fund are sunk in assets or different
kinds of it.
proprietary Ratio=
Proprietors Funds
Total Assets
NOTE: Owner‘s funds is equal to Shareholders Funds
2005 2006 2007 2008 2009
Owner‘s fund 1067.13 1038.27 1763.78 2696.99 3602.1
Total Asset 3619.52 3623.11 4657.85 6258.40 7709.38
Proprietary Ratio 3.39 3.49 2.64 2.32 2.14

55
Comments:
This ratio indicates the proportion of proprietor‘s funds used for financing the total assets. As a very rough
measure, it is suggested that 2/3rd
to 3/4th
of the total assets should be financed through borrowings. A high
ratio will indicate high financial strength but a very high ratio will indicate that the firm is not using external
funds adequately.
PROFITABILITY RATIO
As the name itself suggests, this ratio is calculated to determine profitability of the firm. The basic objective
of almost every business is to earn profit which is essential for survival of the business.
A business needs profits not only for its existence but also for its expansion and diversification. The
investors want an adequate return on their investments, workers want higher wages, creditors want higher
security for interest and loan and the list could continue.
It is a class of financial metrics that are used to assess a business's ability to generate earnings as compared
to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios,
having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative
that the company is doing well.
1. GROSS PROFIT RATIO:
The gross profit margin ratio tells us the profit a business makes on its cost of sales. It is a very simple idea
and it tells us how much gross profit our business is earning. Gross profit is the profit we earn before we take
off any administration costs, selling costs and so on. So we should have a much higher gross profit margin
than net profit margin.
High ratios are favorable in this, since it indicates the business is earning a good return on the sale of its
merchandise.

56
Gross Profit Ratio =
Gross Profit
X 100
Net Sales
2005 2006 2007 2008 2009
NET SALES 2681.06 3299.45 4910.83 5508.78 6,383.08
GROSS PROFIT 265.02 501.62 1392.44 1507.01 1684.46
GROSS PROFIT
RATIO
9.88 15.20 28.35 27.36 26.40
Comments:
This ratio indicates the relation between production cost and sales and the efficiency with which goods are
produced or purchased. If it has a very high gross profit ratio it may indicate that the organization is able to
produce or purchase at a relatively lower cost. Gross profit is the profit we earn before we take off any
administration costs, selling costs and so on. Here company has achieved very good efficiency in 2007
compared to other financial years.

57
2. NET PROFIT RATIO:
This shows the portion of sales available to owners after all expenses. A high profit ratio is higher
profitability of the firm. This ratio shows the earning left for shareholder as percentage of Net sales.
Net Margin Ratio measures the overall efficiency of production, Administration selling, financing, pricing
and Taste Management.
Net Profit Ratio =
Net Profit After Tax
X 100
Net Sales
2005 2006 2007 2008 2009
NET SALES 2681.06 3299.45 4910.83 5508.78 6,383.08
NET PROFIT 2.85 229.76 782.28 1007.61 977.02
NET PROFIT
RATIO
0.11 6.96 15.93 18.29 15.30

58
Comments:
It is depicted from the above diagram that company has been trying to improve its profitability year by year
except for 2009 because of environmental instability which includes the economic meltdown in the country
and whole world.
3. OPERATING NET PROFIT RATIO:
This ratio establishes the relation between the net sales and the operating net profit. The concept of operating
net profit is different from the concept of net profit operating net profit is the profit arising out of business
operations only. This is calculated as follows:
Operating net profit = Net Profit + Non operating expenses – non operating income.
Alternatively, this profit can also be calculated by deducting only operating expenses from the gross profit.
This ratio is calculated with help of the following formula.
2005 2006 2007 2008 2009
NET SALES 2681.06 3299.45 4910.83 5508.78 6,383.08
OPERATING NET
PROFIT
272.81 554.26 1,417.81 1,720.06 1,760.29
OPERATING NET
PROFIT RATIO
10.18 16.80 28.87 31.22 27.57
operating n.p. ratio =
Operating Net Profit
X 100
Net sales

59
OVERALL PROFITABILITY OR ROR RATIOS:
The ROI is perhaps the most important ratio of all. It is the percentage of return on funds invested in the
business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business
has been worthwhile. If the ROI is less than the rate of return on an alternative, the owner may be wiser to
sell the company, put the money in risk-free investment such as a bank savings account, , and avoid the daily
struggles of small business management.
These Liquidity, Leverage, Profitability, and Management Ratios allow the business owner to identify trends
in a business and to compare its progress with the performance of others through data published by various
sources. The owner may thus determine the business's relative strengths and weaknesses.

60
1. RETURN ON ASSETS:
This ratio actually measures the profitability of the investments in the firm. And the related formula is:
2005 2006 2007 2008 2009
NPAT 2.85 229.76 782.28 1007.61 977.02
TOTAL ASSET 3619.52 3623.11 4657.85 6258.40 7709.38
RETURN ON
ASSET RATIO
0.07 6.34 16.79 16.10 12.67
Comments:
Because this ratio shows the profitability of investment in the firm so higher the ratio, the better is the return
to the owners of the company.
Return on Asset Ratio =
Net Profit After Tax
X 100
Asset

61
2. RETURN ON CAPITAL EMPLOYED:
This Ratio is considered to be very important. It indicates the percentage of net profits before interest and tax
to total capital employed. It reflects the overall efficiency with which capital is used. The ratio of a particular
business should be compared with other business firms in the same industry to find out the exact position of
the business.
It is calculated as
Note: Capital Employed = Equity Capital + Preference Capital + Reserves and Surplus + Long Term Debt-
Fictitious Assets
2005 2006 2007 2008 2009
N.P.B.I.T 51.03 338.23 1191.56 1482.83 1437.29
C.E. 2598.51 2490.10 3342.41 4437.49 5743.73
ROCE RATIO 1.96 13.58 35.65 33.42 25.02
ROCE Ratio =
Net profit before interest and tax
X 100
Capital Employed

62
Comments:
A measure of the return that a company is realizing from its capital employed. The ratio can also be seen as
representing the efficiency with which capital is being utilized to generate revenue. It is commonly used as a
measure for comparing the performance between businesses and for assessing whether a business generates
enough returns to pay for its cost of capital.
Of course the higher the ratio, the better will be the profitability of the company.
3. RETURN ON EQUITY:
This ratio also known as return on shareholders‘ funds or return on proprietors‘ funds or return on net worth,
indicates the percentage of net profit available for equity shareholders to equity shareholders‘ funds and not
on total capital employed.
It is calculated as:
ROE Ratio =
N.P.A.T. - Preference Dividend
X 100
Equity Share Holders Fund

63
Note: Here Equity Share Holders Fund = Equity Capital + Reserves and Surplus
2005 2006 2007 2008 2009
N.P.A.T –
PREF.DIVIDEND
2.85 229.76 782.28 1007.61 977.02
Equity Share
Holders Fund
1067.13 1038.27 1763.78 2696.99 3602.1
ROE RATIO 0.26 22.13 44.35 37.36 27.12
Comments:
This ratio indicates the productivity of the owned funds employed in the firm. However, in judging the
profitability of a firm, it should not be overlooked that during inflationary periods, the ratio may show an
upward trend because the numerator of the ratio represents current values whereas denominator represents
historical values.

64
INVESTORS RATIOS
1. EARNINGS PER SHARE:
EPS measures the profit earned per share. The higher EPS will attract more investors to acquire shares in the
company as it indicates that the business is more profitable enough to pay the dividends in time. So it is of
utmost importance to investors in order to decide the prospects.
2005 2006 2007 2008 2009
EPS 0.22 18.47 62.84 80.94 78.5
Comments:
As mentioned above, EPS is one of the important criteria for measuring the performance of a company. If
EPS increases, the possibility of a higher dividend per share also increases. However, the dividend payment
depends on the policy of the company. Market price of shares of a company may also show an upward trend
if the EPS is showing a rising trend. However, it should be remembered that EPS of different companies
EPS =
N.P.A.T. - Preference Dividend
Number of equity shares Outstanding

65
may vary from company to company due to the following different practices by different companies
regarding stock in trade, depreciation, source of raising finance, tax-planning measures etc.
DIVIDEND PAYOUT RATIO
EPS described above indicates the amount of profit available for equity share shareholders. Dividend Payout
Ratio indicates the percentage of profit distributed as dividends to the shareholders. It measures the
relationship between the earning belonging to the equity shareholders and the amount finally paid to them:
2005 2006 2007 2008 2009
DPS 0.75 1.75 4.00 5.00 5.00
EPS 0.22 18.47 62.84 80.9 78.5
DPR 341 9.47 6.36 6.18 6.37
Comments: This ratio indicates the policy of management to pay cash dividend. A higher ratio indicates that
the organization is following the liberal dividend policy regarding the dividend while a lower ratio indicates
a conservative approach of the management towards the dividend.
DPR Ratio =
Dividend Per Share
X 100
EPS

66
SUMMARY OF RATIOS
Table of Financial Ratios of ULTRATECH CEMENT LTD. for last Five Years
2005 2006 2007 2008 2009
Current Ratio 1.91 1.39 1.27 1.02 1.10
Quick Ratio 1.26 0.70 0.70 0.54 0.54
Fixed Asset Turn Over Ratio 1.032 1.23 1.53 1.15 1.20
Current Asset Turn Over Ratio 3.20 4.27 5.11 4.22 4.69
Working Capital Turnover Ratio 6.73 15.24 23.96 217.48 53.69
Capital Employed Turnover Ratio 1.032 1.33 1.47 1.24 1.11
Debt Equity ratio 1.43 1.40 0.90 0.65 0.59
Proprietary Ratio 3.39 3.49 2.64 2.32 2.14
G.P. Ratio 9.88 15.20 28.35 27.36 26.40
N.P. Ratio 0.11 6.96 15.93 18.29 15.30
Operating N.P. Ratio 10.18 16.80 28.87 31.22 27.57
Return on Asset Ratio 0.07 6.34 16.79 16.10 12.67
ROCE Ratio 1.96 13.58 35.65 33.42 25.02
ROE Ratio 0.26 22.13 44.35 37.36 27.12
EPS 0.22 18.47 62.84 80.94 78.5
Dividend Payout Ratio 341 9.47 6.36 6.18 6.37

67
Observation and Findings
Based on the ratios and calculations made on my project I can analyze S.S.V. as follows:
 The year 2007 could be called the peak on the business during last five year which almost divides the
ratios into two parts, before 2004 and after that.
 Liquidity ratios shows that the firm has been facing some problems regarding paying short term
liabilities for 3 years, but it is trying to improve the situation.
 The usage ratio of the company had followed a comparable pattern. The overall efficiency of the
company to use its assets, capital or the working capital had increased from 2005 to 2007. However in
the later years, it is declining and falling to a lower level of efficiency, for which we can blame the
environmental conditions of the country, and that involves the economical and political challenges of
India and the world.
 The Company fails to increase its profitability in the last year, though it should be mentioned that we
see a noticeable net profit point in the 2008. It also fails to give satisfactory rate of return in the two
years compared to 2007

68
IMPORTANCE
Ratio analysis is an important technique of financial analysis. It is a means for judging the financial
health of a business enterprise. It determines and interprets the liquidity,solvency,profitability,etc. of a
business enterprise.
 It becomes simple to understand various figures in the financial statements through the use of
different ratios. Financial ratios simplify, sumarise, and systemise the accounting figures presented in
financial statements.
 With the help of raito analysis, comparision of profitability and financial soundness can be made
between one industry and another. Similarly comparision of current year figures can also be made
with those of previous years with the help of ratio analysis and if some weak points are located,
remidial masures are taken to correct them.
 If accounting ratios are calculated for a number of years, they will reveal the trend of costs, sales,
profits and other important facts. Such trends are useful for planning.
 Financial ratios, based on a desired level of activities, can be set as standards for judging actual
performance of a business. For example, if owners of a business aim at earning profit @ 25% on the
capital which is the prevailing rate of return in the industry then this rate of 25% becomes the
standard. The rate of profit of each year is compared with this standard and the actual performance
of the business can be judged easily.
 Ratio analysis discloses the position of business with different viewpoint. It discloses the position of
business with liquidity viewpoint, solvency view point, profitability viewpoint, etc. with the help of
such a study, we can draw conclusion regardings the financial health of business enterprise.

69
ADVANTAGES
Ratio analysis is an important and age-old technique of financial analysis. The following are some of the
advantages of ratio analysis:
1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell
the whole story of changes in the financial condition of the business.
2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the
factors associated with successful and unsuccessful firm. They also reveal strong firms and weak
firms, overvalued and undervalued firms.
3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic
functions of forecasting. Planning, co-ordination, control and communications.
4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the
performance of different divisions of the firm. The ratios are helpful in deciding about their
efficiency or otherwise in the past and likely performance in the future.
5. Help in investment decisions: It helps in investment decisions in the case of investors and lending
decisions in the case of bankers etc.

70
LIMITATIONS
The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to
calculate and easy to understand, they suffer from serious limitations.
1. Limitations of financial statements: Ratios are based only on the information which has been
recorded in the financial statements. Financial statements themselves are subject to several
limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-
financial changes though important for the business are not relevant by the financial statements.
Financial statements are affected to a very great extent by accounting conventions and concepts.
Personal judgment plays a great part in determining the figures for financial statements.
2. Comparative study required: Ratios are useful in judging the efficiency of the business only when
they are compared with past results of the business. However, such a comparison only provide
glimpse of the past performance and forecasts for future may not prove correct since several other
factors like market conditions, management policies, etc. may affect the future operations.
3. Problems of price level changes: A change in price level can affect the validity of ratios calculated
for different time periods. In such a case the ratio analysis may not clearly indicate the trend in
solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in
view the price level changes if a meaningful comparison is to be made through accounting ratios.
4. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well
accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders
interpretation of the ratios difficult.
5. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a
better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst
than help him in making any good decision.
6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to
interpret and different people may interpret the same ratio in different way.
7. Incomparable: Not only industries differ in their nature, but also the firms of the similar business
widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and
misleading.

71
CONCLUSION
 Ratios make the related information comparable. A single figure by itself has no
meaning, but when expressed in terms of a related figure, it yields significant interferences. Thus,
ratios are relative figures reflecting the relationship between related variables. Their use as tools
of financial analysis involves their comparison as single ratios, like absolute figures, are not of
much use.
 Ratio analysis has a major significance in analysing the financial performance of a
company over a period of time. Decisions affecting product prices, per unit costs, volume or
efficiency have an impact on the profit margin or turnover ratios of a company.
 Financial ratios are essentially concerned with the identification of significant
accounting data relationships, which give the decision-maker insights into the financial
performance of a company.
 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 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 conclusions. In brief, financial analysis is the
process of selection, relation and evaluation.
 Ratio analysis in view of its several limitations should be considered only as a tool
for analysis rather than as an end in itself. The reliability and significance attached to ratios will
largely hinge upon the quality of data on which they are based. They are as good or as bad as the
data itself. Nevertheless, they are an important tool of financial analysis.

72
BIBLIOGRAPHY
 Web Sites:
 WWW.ADITYABIRLA.COM
 WWW.ULTRATECH CEMENT LIMITED.COM
 Books Referred:
 ―Basic Financial Management‖- M Y Khan
P K Jain
 ―Financial Management‖- Prasanna Chandra
 Annual Reports

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