CONTENTS

ACKNOWLEDGEMENT
PREFACE
METHODLOGY OF THE STUDY
OBJECTIVES OF THE STUDY
INTRODUCTION OF INDIAN SUGAR INDUSTRY
HISTORY OF THE NAWANSHAHR CO-OPERATIVE
SUGAR MILLS LTD.
GROWTH AND FUTURE PROSPECTS
ORGANISATIONAL STRUCTURE OF THE
NAWANSHAHR CO-OPERATIVE SUGAR MILLS LTD.
MAIN ACHIVEMENTS OF THIS SUGAR MILL
OBJECTIVES OF THE SUGAR MILL
SUGAR INDUSTRY & GOVERNMENT POLICY
FINANCIAL STATEMENT ANALYSIS
PRODECURE OF FINANCIAL STATEMENT ANALYSIS
METHODS OR DEVICES OF FINANCIAL ANALYSIS
RATIO ANALYSIS
NATURE OF THE RATIO ANALYSIS
GUIDELINES AND PRECAUTIONS USE IN RATIO
USE & SIGNIFICANCE OF RATIO ANALYSIS
SHORT TERM FINANCIAL POSITION
ACTIVITY RATIO
GENERAL PROFITABILITY RATIO
LONG TERM FINANCIAL POSITION
DEBT-EQUITY RATIO
SOLVENCY RATIO
FIXED ASSETS RATIO
EQUITY RATIO
RATIO OF CURRENT ASSETS TO PROPRIETORS
FUNDS
LIMITATIONS OF THE RATIO ANALYSIS
LIMITATIONS OF THE STUDY
CAUTIONS IN USING RATIO ANALYSIS
FINDIGS & SUGGESTIONS
BIBLIOGRAPHY
PREFACE
Theory & practice are the two aspects of the management. In order to produce dynamic
and promising executives, the two have been blended together. Practical training exposes
the potential manager to the actual work environment and provides them rich insight into
what actually goes on in the industrial climate of India. Infact this implementation of the
theory in practice is the life force of management.
As a part of my course reuirement for the degree of
!."#$.%I&Professional' underwent industrial training in T()
*A+A*,(A(- "#%#P)-ATI.) ,/0A- $I11, 1T2. for
period of six weeks.
I have tried to understand this industrial monster by
observing the financial set of complex. I have drawn my
conclusion s as my regarding the industry from my observation. I
was given training related to only a part of the function duties
performed. I too have learned from this experience and so I am
writing about the company and finance department, as I have
understood it.
The study has been written in very simple language. )very
effort was made to avoid any type of misunderstanding while
writing a report.
METHODOLOGY OF THE STUDY
2uring my training, I visited all the departments3 vi4. Production,
Accounts, "ommercial, marketing, and factory department and
collect information relating to my topic, whatever I could have
from them. 5or collecting information, I used following
techniues6
2iscussion with senior officers and other employees of the
mills.
Personal observations
,tudy of documents, files and annual reports.
It was difficult to all the activities of mill in a short period of six
weeks. 7et these methods of getting information ensure more
reliability and accuracy. +hatever I learnt about the mill, I tried to
present it in the report.
OBJECTIVES OF THE STUDY:-
The main ob8ectives of the study are as under6%
To get financial review of The *.".,.$. ltd. i.e. liuidity,
soundness and profitability.
To get idea of financial analysis.
To find out and study the change in the current period
figures.
To ascertain reasons for these changes and to take corrective
measures in future.
To study the overall financial position of the mill.
To get the practical knowledge of our sub8ect.
To know how the actual work is being done in the industry.
INTRODUCTION OF INDIAN SUGAR
INDUSTRY
,ugar industry is the second largest agro%industry of Industry
of India. India occupies the first position among the countries
producing sugarcane in the world. Industry gives employment to
three lakhs fifty thousand labourers. !eside this industry
provides indirect employments to two%lakhs fifty thousand
farmers to produce sugarcane currently. There are about 9:;
,ugar mills out of which <=> in co%operative sectors, ?:9 in
private sectors and @A in public sector.
In past, India has been producing gur and khandsari
since long time. !ut the modern sugar industry came into being
in ?:;= when the first sugar factory was installed in !ihar. The
second sugar factory was set up in ?:;9 in /.P. Initially the
progress of this industry was very slow and till ?:?9, there were
only six sugar factories in the country.
!y ?:=? to ?:=< the number of factories rose to =?. In
?:=<, the industry was given protection. !y ?:=>, the number of
sugar mills rose to ?=<. !y ?:@?, the number of sugar mills was
?=: and the production of sugar were ??.= lakhs tones. !y ?::?
to ?::< the number of sugar mills was 99B and industry
produced == lakhs tones of sugar. *ow there are more then @;;
sugar mills and industry produces more than ??; lakhs tones
sugar annually.
HISTORY OF THE NAWANSHAHR CO-
OPERATIVE SUGAR MILLS LTD.
The *awanshahr "o%operative ,ugar $ills has its @? years
glorious history. In the Pun8ab, there are ?9 "o%operative ,ugar
$ills and The *awanshahr "o%operative ,ugar $ills 1td. is the
A
th
mill of the state and 9
th
in co%operative sector and the only
mill of ,.!.,.*A0A-&*awanshahr' district. It is the most
successful mill in the district.with slow and steady speed, the
mill took ?= years from ?:@@%@A to ?:AB%A: to become
functional. It was registered under Pun8ab "o%operative
societies Act ?:@A with @= members. Its first crushing year
started in 2ecember ?:AB.
The crushing capacity of the mill was expanded from
?<@; T"2 &Turnover "apacity 2ate', which became operational
on ?AC?;C?::;.
The mill is using double sulphitation plant of 8uice
clarification process.
The mill has established an alcohol plant at "handpur
-ukri on 0arshankar%*urpurbedi road about <@ km. from
*awanshahr. The plant started commercial production on
?@C?<C?::A.
The mill remains closed for six months during every
year and during season the mill runs for <9 hours a day.
GROWTH AND FUTURE PROSPECTS
The *awanshahr "o%operative ,ugar $ills 1td. +as registered
under Pun8ab "o%operative ,ocieties Act on <A%;9%?:@A with @=
members. The licensed capacity of 9;; T"2 &Turnover
"apacity 2ate' was considered low. It was increased to ?;;;
tones per day on *ovember ?:A= which was lowest as
compared to all other sugar mills in the state. The inauguration
ceremony was performed on <<
nd
*ovember ?:AB and actual
crushing was started on <?
st
2ecember ?:AB the present
membership of the mill stands at ?>B<; with a total share capital
of -s. :?>.A? lakh out of which individual members ?>=A>
with its @9=.A? lakh, "o%operative ,ocieties 9@< with share
capital amounting to -s. @.A: lakh and state government -s.
=AB.=; lakh. In addition to it, -s. @?<.99 lakh are lying in share
deduction money, which will ultimately be transferred to share
capital. #n B
th
Dune ?:B> the crushing capacity was further
increased from ?<@; tones to <@;; tones. 5urther expansion to
@;;; tones capacity is under consideration but initially it will be
for <@;; tones under moderni4ation scheme with power co%
generation.
+ith the installation of the mill, there had been all%
round development of the assigned rural area. About -s. =B crores
are being paid every year to the growers as cane price. There are
@A: villages in the assigned area and about <;,;;; acres are under
sugarcane cultivation. 2aily 9;; trolleys are being used for
supplying cane and 9;;%@;; labourers are engaged in sugarcane
harvesting and earn their livelihood. The sugarcane tops so
available are used as fodder for about ?@,;;; cattle and people
with low income can keep better milch cattle to say that main
revenue earning source of the state government is sugar industry
because the molasses made available by the sugar mill is used for
bottling and crores of rupees are earned as various taxes and duties.
ORGANISATIONAL STRUCTURE OF
THE NAWANSHAHR CO-OPERATIVE
SUGAR MILLS LTD
!#A-2 #5 2I-)"T#-,
"hairman & $2

"hief cane "hief )ngg. "hief Accounts !iologist "hief
2evp.#fficer #fficer "hemist

2y."hief 2y."hief 2y."hief Technicians 2y.
)ngg. Accountants "hemist

Add. "ane Assistant Assistant Agri. $anufacturing
2eptt.#fficer )ngg. Accounts "hemist "hemist
#fficer

Accountant 1ab Assistant 1ab
Incharge
"ane "ane Accountant
2evp. Accountant "lerk
Inspector

"ane ,upervisor "ane "lerk

"ane survey
MAIN ACHIEVEMENTS OF THE
NAWANSHAHR CO-OPERATIVE SUGAR
MILLS LTD .

The mill was able to get *ational awards in last A years, the details
of which are as under6%
?::=%:96% ?
st
position in technical efficiency and cane
development.
?::9%:@6% <
nd
position in both the above categories and around <
nd
best $ill.
?::@%:A6% "ommendation "ertificate in the cane development.
?::A%:>6% "ommendation "ertificate in the cane development.
?::>%:B6% <
nd
best mill in financial management.
?::B%::6% <
nd
pri4e in financial management
?:::%;;6% <
nd
pri4es in financial management.
<;;;%;?6% ?
st
pri4e in cane development.
?
st
pri4e in financial management.
?
st
pri4e in best co%operative sugar factory.
OBJECTIVES OF THE SUGAR MILL
The ob8ectives of the mill shall be to promote the economic interest of
the members and for this purpose, they have to carry on the
manufacture of ,ugar, ,ugar products and other ancillary products
and to make arrangement for their sales and also to take necessary
steps and measure for the development of sugarcane and sugar beet.
5or the purpose of attaining the aforesaid ob8ects, it shall be
competent for the mills.
To acuire, purchase or take on lease and erect or construct
on such land, building houses and sheds and others
constructions necessary and suitable for working of the mills
and its other ancillary activities and also to carry on other
socio%economics activities for the benefits of members and
others in its area.
To conduct business of mill in accordance with actCrules and
bye%laws and as per advice of $anaging 2irector, ,ugar fed
and directions issued by the registrar from time to time.
To acuire by purchase or otherwise plant and machinery and
euipment reuired for efficient working of the mills and its
other ancillary activities.
To construct residential uarters, hospital, schools, and
recreation centers, canteen etc., for the welfare of its
employees and their families so as to meet any statutory
reuirement.
To purchase ,ugar "aneC sugar beet from growers preferably
members. To purchase any other raw material on cash or
credit reuired by the mills or by its ancillary units.
To raise funds in such a manner as is prescribed in these bye%
laws.
To sell or to make arrangements for selling finished products
and other by products as manufactured by the mills and its
ancillary units under the advice of ,ugar fed.
To conduct and take on rent godowns at the places of
manufacture as well as other places for storage of raw
materials and finished products.
To undertake research and other development activities for
the development of ,ugar "ane, ,ugar beet and ancillary
products of sugar including provisions of technical advice
regarding the improved cultivation practices on its own or in
collaboration with other co%operatives.
To sell or otherwise dispose off the whole or any part of its
assets, land, building, plant, machinery and stores as isC are
not reuired by the mill with the prior approval of registrar
on the recommendation of ,ugar fed.
To install plant and machinery for the utili4ation of ancillaryC
bye%products with approval of ,ugar fed.
To undertake supply of uality seeds, fertili4ers, insecticides,
pesticides implementsC euipments and other products
reuired as per acre development plan of the mills.
To undertake subsidiary and allied industries which are
conducive to the development and benefits to the mills and
for its members.
To seek affiliation with the Pun8ab ,tate "o%operative ,ugar
$ills 1td. To get professional know how and also to appoint
technical ad personnel on their advice.
To raise loans from the financial institutions from members
and others and to execute documents in favour of the state
government in respect of guarantees to be furnished to such
institutions on behalf of the mills.
To undertake surveys, research and evaluation studies on
,ugar "ane production on its own or through ,ugar fed.
To undertake advancement or loan to members, for ,ugar
"ane production and undertake recovery of these loan from
the members.
To array a serial spray on ,ugar "ane Cbeet crops in mills
area on payment basis.
To undertake propagation of ,ugar "ane by adoption of
approved packages and for better yield of ,ugar "ane Cbeet.
To acuire, purchase, take on lease or otherwise takeover
management, assets and liabilities of any ,ugar factory
including heir corporate, private or 8oint sectors as running
concern as approved by registrar.
To do such thing as are incidental or conductive to
the attainment of all or any of the above ob8ectives.
SUGAR INDUSTRY AND GOVERNMENT
POLICY
,ugar industry is a controlled industry of India. $ain
features of government policy regarding ,ugar industry are6%
2ual price policy has been adopted in respect of this industry
?@E of the total produce is taken away for the public distribution
system at controlled rate fixed from time to time which is not
linked with the actual cost of production. The remaining B@E is
left to the mill is called free sale at market rate.
In the setting up of a new unit "o%operative ,ugar $ill is given
preference.
,ugar producer should get a fair price of their produce. To that
end state government announces price of ,ugar "ane at the price
fixed by the government. *ew mill should have crushing capacity
of <@;; tones. Per day. #nly then government will issue license.
In order to develop ,ugar industry, funds are being mobili4ed by
imposing a levy under ,ugar "ane 1evy Act, ?:B<.
+ith a view to moderni4e ,ugar industry, development funds
have been established.
In ?::=, control on molasses was lifted.
FINANCIAL STATEMENT ANALYSIS
5inancial statement analysis is prepared primarily for decision%
making. They play a dominant role in setting the framework of
managerial decisions but the information provided in the
financial statement is no meaningful conclusions can be drawn
from these statements alone.
(owever the information provided in this
statement is of immense use in making through analysis and
interpretation of financial statements.
MEANING AND CONCEPT OF
FINANCIAL ANALYSIS:-
The term financial analysis, also known as analysis and
interpretation of financial statements refers to the process of
determining financial strength and weakness of the firm by
establishing strategic relationship between the items of the balance
sheet and profit & loss account and other operative data.
According to Metcalf & Titard , 5inancial statement analysis is a
process of evaluating the relationship between component parts of
financial statement to obtain better understanding of firmFs
position and performance.
The purpose of financial diagnosis of the information
contained in financial statement is to 8udge the profitability and
financial soundness of the firm. The analysis and financial
interpretation of the financial statement is essential to bring out
the mystery behind the figure in financial statement. 5inancial
statement is an attempt to determine the significance and the
meaning of the financial statement data so that forecast made of
the future earning, ability to pay interest and debt maturities and
probability of a sound dividend policy.
PROCEDURE OF FINANCIAL
STATEMENT ANALYSIS
Analyst should acuaint himself with the principles and
postulates of accounting. (e should know the plans and
policies of the management so that he may be able to find
out whether these plans are properly executed or not.
The extent of analysis should be determined so that the
sphere of work may be divided. If the aim is to find out the
earning capacity of enterprises then analysis of income
statement will be undertaken. #n the other hand, if financial
position is to be studied then the balance sheet analysis is
necessary.
The financial data given in the statements should be
recogni4ed and arranged. It will involve the grouping of
similar data under same heads, breaking down of individual
components of statements according to nature. The data
should be reduced to a statement form.
A relationship is established among financial statements
with the help of tools and techniues of analysis such as
ratios, trend, fund flow etc.
The information is interpreted in simple and understandable
way. The significance and utility of financial data is
explained for helping decision%making.
The conclusion drawn from interpretation is presented to
the management in the form of report.
METHODS OR DEVICES OF
FINANCIAL ANALYSIS
The following methods of analysis are generally used6%
"omparative Analysis
Trend Analysis
"ommon ,i4e ,tatement
5und 5low Analysis
"ash 5low Analysis
-atio Analysis
"ost%.olume%Profit Analysis
-ATI# A*A17,I, is discussed in the next pages.

INTRODUCTION:-
+e have already studied that
there are various methods or techniues used in analysis of
financial statements, such as comparative statement, trend analysis,
common si4e statements, and schedule of change in working
capital, fund flow and cash flow analysis, cost%volume%profit
analysis and ratio analysis.
MEANING OF RATIO
-atio is the relationship between two variables written in terms of
fraction.
RATIO = NUMERATORDENOMINATOR
According to G)11 and !)25#-2, Ha ratio is an expression of
the uantitative relationship between two numbers.I
NATURE OF RATIO ANALYSIS
-atio analysis is a techniue of analysis and
interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in certain
decisions. (owever ratio analysis is not an end in itself. It is only a
mean of better understanding of financial strengths and weaknesses
of a firm.
The ratio may be used as a symptom like blood pressure, the
pulse rate or the body temperature and their interpretation depends
upon the caliber and competence of the analyst. The following are
the four steps involved in the ratio analysis6
,election of relevant data from the financial statements depending
upon the ob8ective of the analysis.
"alculation of appropriation ratio from the above data.
"omparisons of the calculated ratios with the ratios of the same
firm in the past, or the present.
Interpretation of the ratios.
GUIDELINES AND PRECAUTIONS USE IN
RATIO
The calculations of ratios may not be a difficult task but their
usage is not easy. The information on which these are based, the
constraints of financial statements, ob8ectives for using them, the
caliber of the analyst etc. are important factors which may be kept
in mind while interpreting various ratios6%
Accuracy of financial statements: - !efore calculating ratios
one should see whether proper concepts and conventions have
been used for preparing financial statements or not. These
statements should also be properly audited by competent auditors.
The precautions will establish the reliability of data given in
financial statements.
Objectives or Purpose of Analysis:- The type of ratio to be
calculated will depend upon the purpose for which these are
reuired. If the purpose is to study current financial position then
ratios relating to current assets and current liabilities will be
studied. A creditor, a banker, a shareholder, all has different
ob8ects for studied ratios. The purpose or ob8ect for which has
ratios are reuired to be studied should always be kept in mind for
studying various ratios. 2ifferent ob8ects may reuire the study of
different ratios.
Selection of ratios:- Another precaution in the ratio analysis is
the proper selection of appropriate ratios. The ratios should match
the purpose for which these are reuired. "alculation of large
number of ratios without determining their need in the present
context may confuse the proper light on the matter to be discussed.
Use of standards:- The ratio gives an indication of financial
position only when discussed with the reference to certain
standards. /nless otherwise these ratios are compared with certain
standards, one will not be able be able to reach at conclusions.
These standards may be rule of thumb as in case of current ratios
&<6?' and acid%test ratio &?6?', may be industry standards, may be
budgeted or pro8ected ratios etc. The comparison of calculated
ratios with standards with the help of analyst in forming his
opinion about financial situation of the concern.
Caliber of the analyst!- The ratios are only the tools of analysis
and their interpretation will depend upon the caliber and
competence of analyst. (e should be familiar with various
financial statements and the significance of changes etc. A wrong
interpretation may create confusion for the concern since wrong
conclusion may lead to wrong decisions. The utility of ratios is
linked to the expertise to the analyst.
Ratios provide only a base:- The ratios are only guidelines for
the analyst. (e should study any other relevant information,
situation in the concern, general economic etc. before reaching
final conclusions.
USE AND SIGNIFICANCE OF RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of the
financial analysis. It is used as a device to analysis and interprets
the financial health of enterprise. Dust like a doctor examines his
patient by recording his body temperature, blood pressure etc.
before making his conclusion regarding his illness and before
giving his treatment, a financial analyst analysis the financial
statements with various tools of analysis before commenting upon
the financial health or weakness of an enterprise.
MANAGERIAL USES OF RATIO ANALYSIS
Helpful in decision main!:- 5inancial statements are
prepared primarily for decision making. !ut the information
provided in financial statements is not end in itself and no
meaningful conclusion can be drawn from these statements alone.
-atio analysis helps in making decision from the information
provided in these financial statements.
Helps in financial forecastin! and plannin!:- -atio analysis
is of much help in financial forecasting and planning. Planning is
look ahead and the ratios calculated for a number of years works as
a guide for the future from these ratios. Thus, ratio analysis helps
in forecasting and planning.
Helps in co-ordination:- -atio even helps in co%ordination,
which is of utmost importance in effective business management.
!etter communication of efficiency and weakness of an enterprise
results in better co%ordination in the enterprise.
Helps in control:- -atio analysis even helps in making effective
control of the business. ,tandard ratio can be based upon Performa
financial statements and variances or deviations, if any, come to
the knowledge of the management which helps in effective control
of business.
Other uses:% There are so many uses of ratio analysis. It is the
essential part of the budgetary control and standard costing. -atios
are of utmost importance important in the analysis and
interpretation of financial statements as they bring out the strengths
or weaknesses of a firm.
UTILITY TO
SHAREHOLDERS/INVESTORS
As investor in the company will like to access the financial
position of the concern, where he is going to invest. (is first
interest will be the security of the investment and then a return in
the form of dividend or interest. 5or the first purpose he will try to
access the value of fixed assets and the loan rose against them. The
investor will feel satisfy only if the concern has sufficient amount
of assets.
1ong term solvency ratios will help him in assessing
financial position of the concern. Profitability ratios, on the other
hand, will be useful to the investors in making up his mind whether
present position of the concerns warrants further investments or
not.
UTILITY TO CREDITORS
The creditors or suppliers extend short term credit to
the concern. They are interested to know whether financial position
of the concerns warrants their payment at a specified time or not.
The concern pays short%term creditors out of its current assets. If
the current assets are uite sufficient to meet current liabilities,
then the creditors will hesitate in extending credit facilities.
"urrent and acid%test ratios will give an idea about the current
financial position of the concern.
UTILITY TO EMPLOYEES
The employees are also interested in the financial
position of the concern especially profitability. Their wages
increases and amount of fringe benefits are related to the volume
of profits earned by the concern. The employees make use of
information available in financial statements. .arious profitability
ratios relating to gross profit, operating profit, net profit etc. enable
employees to put forward their view point for the increase of
wages and other benefits.
UTILITY TO GOVERNMENT
0overnment is interested to know the overall strength
of the industry. .arious financial statements published by
industrial units are used to calculate ratio for determining short%
term, long%term and overall financial position of the concerns.
Profitability indexes can also be prepared with the help of ratios.
0overnment may also base its future policies on the basis of
industrial information available from various units. The ratios may
be used as indicators of overall financial strength of public as well
as private sectors. In the absence of reliable economic information,
government plans and policies may not prove successful.
SHORT TERM FINANCIAL POSITION
"#$U#%#&' RA&#OS:- 1iuidity ratios measure the ability
of the firm to meet its current liability or short%term obligations as
and when they become due. A firm must ensure that it does not
suffer from lack of liuidity. A very high degree of liuidity is also
bad as idle assets earn nothing. There should be proper balance
between high liuidity and lack of liuidity. In fact, analysis of
liuidity needs the preparation of cash budgets and cash and fund
flow statementJ but liuidity ratios, by establishing a relationship
between cash and other current assets to current obligations,
provide a uick measure of liuidity. A firm should ensure that it
does not suffer from lack of liuidity, and also that it does not have
excess liuidity. The most common ratios, which indicate the
extent of liuidity or lack it, are6 &i' "urrent ratio and &ii' Kuick
ratio. #ther ratios include cash ratio, interval measure and net
working capital ratio.

CURRENT RATIO :-
It measures the firmFs short term solvency.
"urrent -atio is the relationship between the current assets and
current liabilities. "urrent assets include cash and those assets that
can be converted into cash within a year, such as marketable
securities, debtors and inventories. Prepaid expenses are also
included in current assets as they represent the payments that will
not made by the firm in the future. All obligations or liabilities
maturing within the year are included in current liabilities. "urrent
liabilities include creditors, bills payable, accrued expenses, short%
term bank loan, income tax liability and long term debt maturing in
the current year. A ratio of greater than one means the firm has
more current assets than current liabilities. The current ratio is a
measure of the firmFs short term solvency. It indicates the
availability of current assets in rupees for every one rupee of
current liability. This ratio is also known as working capital ratio.
It can be calculated as6
L"#$"%"&'
R(&")
C$**+,&
R(&")
A-"%-T+.&
R(&")
A/.)0$&+ L"#$"%
R(&")
Current Ratio L Current Assets
Current "iabilities
A ratio of greater than one means that the firm has
more current assets than current claims against them.

CURR()& RA&#O O* &H( )A+A)SHAHR CO-
OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
C$**+,& A..+&. 6A7 823915::: ;4:2:4358 :14<5<:31
C$**+,& L"(/"0"&"+. 6B7 8353224:8 <91;3;5:5 <853;4128
C$**+,& R(&") 6AB7 2.484&"=+. 2.3<;&"=+. 9.9&"=+.
INTERPRETATION

The rule of thumb of current ratio of current assets and current
liabilities is <6? i.e. current assets should be double than current
liabilities but here in case of sugar mill, the current ratio in <;;>
was ;.B96? and in <;;: it raised to ?6? which shows that the more
investment in fixed assets and its liuidity position in current assets
is not well.
LIMITATIONS OF CURRENT RATIO
"urrent ratio is a general and uick measure of liuidity of a
firm. It represents the margin of safety or cushion available to the
creditors and other current liabilities. It is most widely used for
making short term analysis of the financial position or short term
solvency of the firm. !ut one has to be careful while using current
ratio as a measure of liuidity, because it suffers from following
limitations6%

CRU%( : - It is crude ratio because it measures only the uantity
not the uality of current assets.
+#)%O+ %R(SS#)- : % .aluation of current assets and
window dressing is another problem of current ratio. "urrent assets
and current liabilities are manipulated in such a way that current
ratio losses its significance. It does not present the real financial
position of the concern. The inferences drawn from such a ratio
will be faulty and deceptive. +indow dressing may be indulged in
the following ways6%
o #vervaluation of closing stock
o #bsolete or worthless stocks are shown in the closing inventory at
their cost instead of writing them off.
o #mission of a liability for merchandise in inventory.
o Inadeuate provision for bad and doubtful debts.
QUICK OR LIQUID RATIO
Q$"-> R(&")? also called (-"%-&+.& *(&")? establishes
a relationship between uick, or liuid, assets and current
liabilities. This ratio established the relationship between liuid
assets and current liabilities. An asset is a liuid if it can be
converted into cash immediately without the loss of value. "ash is
the most liuid assets. #ther assets that are considered to be
relative liuid and included in uick assets are debtors and bills
receivables and marketable securities &temporary uoted
investments'. Inventories normally reuire some time for reali4ing
into cashJ their value also has a tendency to fluctuate. Kuick ratio
is the most severe test of short term solvency.
$uic Ratio 0 $uic or "i1uid Assets
Current "iabilities
$uic or "i1uid Assets
0 Current Assets 2 Stoc 2 Prepaid (3penses
$U#C4 RA&#O O* &H( )A+A)SHAHR CO-OP(RA&#,(
SU-AR .#""S "&%.
P(*&"-$0(*. 1223 1224 1225
Q$"-> A..+&. 6A7 598:235 <495133 91;294;:3
C.L. 6B7 8353224:8 <91;3;5:5 <853;4128
Q$"-> R(&") 6AB7 2.295&"=+. 2.299&"=+. 2.11&"=+.
INTREPRETATION
/sually, a high acid test ratio is an indication that the firm is
liuid and has the ability to meet its current liabilities in time and
vice%versa. As a rule of thumb ?6? is considered satisfactory. There
is decrease in uick ratio from ;.;??6? in<;;B to ;.<<6? in <;;:.
Also according to the rule of thumb it represents very bad position
of the sugar mill.
ABSOLUTE LIQUID RATIO OR CASH
RATIO
,ince cash is the most liuid asset although receivable, debtors and
!C- are generally more liuid than inventories, yet there may be
doubts regarding their reali4ation into cash immediately or in time.
Trade investment or marketable securities are euivalent of cashJ
they may be included in the computation of cash ratio6
Cash Ratio 0 Absolute "i1uid Assets
Current "iabilities
A5SO"U&( RA&#O O* &H( )A+A)SHAHR CO-
OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
A.L. A..+&. 6A7 <15:<85 1<31583 89<442<
C$**+,& L"(/"0"&"+. 6B7 8353224:8 <91;3;5:5 <853;4128
A/.)0$&+ R(&") 6AB7 2.299&"=+. 2.22<&"=+. 2.11&"=+.
INTREPRETATION
The rule of thumb for absolute liuid ratio is ;.@6? i.e. assets
should be half than its current liabilities. (ere in sugar mill, the
ratio in <;;> was ;.;??6? increased to ;.;;@6? in <;;B. ,o it shows
good liuidity position of sugar mill in case of absolute liuid
ratio.
AC&#,#&' RA&#OS
The Activity -atios are also called the Turnover -atios or
performance -atios. 5unds of creditors and owners are invested in
various assets, the larger the amount of sales. A-&"@"&' R(&"). are
employed to evaluate the efficiency with which the firm manages
and utili4ed its assets. These ratios are also called T$*,)@+*
R(&"). because they indicate the speed with which the assets are
being converted or turned over into sales. Activity ratios, thus,
involves a relationship between sales and assets. ,everal activity
ratios can be calculated to 8udge the effectiveness of assets
effectiveness of assets utili4ation.
5unds are invested in various assets in a
business to make sales and earn profits. The efficiency with which
assets are managed directly affected the value of assets. The better
management of assets, the larger is the amount of sales and profits.
Activity ratios measures the efficiency of effectiveness with which
a firm manages the ratio at which the fund invested in inventories
are converted into sales. 2epending upon the purpose, a number of
turnover ratios are calculated.
TYPES OF ACTIVITY RATIO
#nventory Creditors %ebtors +orin!
&urnover &urnover &urnover Capital
Ratio Ratio Ratio &urnover
Ratio
INVENTORY TURNOVER RATIO
Inventory turnover ratio is also known as stock
velocity. It established the relationship between the cost of goods
sold during a given period and average amount of inventory carried
during that period. It would indicate whether inventory has been
efficiently used or not. The purpose is to see whether only the
reuired minimum funds have been locked up in inventory. )very
firm has to maintain certain level of stock of finished goods. !ut
the level of inventory should not be too high or too low. Inventory
Turnover indicates of the firm in producing and selling its product.
It can be calculated on next page6

#nventory &urnover Ratio
0 Cost of -oods Sold
Avera!e #nventory
Cost of -oods Sold 6CO-S7
0 Sales 2 -ross Profits
OR
Cost of -oods Sold 6CO-S7
0 Openin! stoc 8 Purchases 8 %irect
(3penses 2 Closin! Stoc
Avera!e #nventory
0 Openin! Stoc 8 Closin! Stoc
9
The average inventory is the average opening
and closing balance of inventory. In a manufacturing company
inventory of finished goods is used to calculate inventory
turnover.
#),()&OR' &UR)O,(R RA&#O O* &H(
)A+A)SHAHR CO-OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
N+& S(0+. 6A7 <18941::; <2:<1295
1
15<;322::
A@+*(A+ I,@+,&)*'6B7 8925:232; ;4599:<<
1
8<45298<8
ITR6AB7 9.1&"=+. 9.;&"=+. 2.:8&"=+.
INTERPRETATION

Inventory Turnover -atio measures the
velocity of conversion of stock into sales. /sually, a high
Inventory Turnover C,tock velocity indicates efficient management
of inventory because more freuently the stock is soldJ the lesser
amount of money is reuired to finance the inventory. A low
inventory turnover ratio indicates an inefficient management of
inventory. (ere in sugar mill, the ratio in <;;> was ?.< increased
to ?.= in <;;B. ,o it shows good inventory position of the sugar
mill in case of Inventory Turnover -atio.
INVENTORY CONVERSION PERIOD
It may also be of interest to see average time taken for
clearing the stock. This can be possible by calculating inventory
conversion period.
This can be calculated by following formula6%
#nventory Conversion Period
0 )o/ of :orin! days in a year
#nventory &urnover Ratio
#),()&OR' CO),(RS#O) P(R#O% O* &H(
)A+A)SHAHR CO-OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
D('. ", ( '+(*6A7 ;:< ;:< ;:<
ITR 6B7 9.1 9.; 2.:8
ICP6AB7 ;28%('. 142%('. 132%('.
INTERPRETATION
Inventory turnover ratio measures the velocity of
conversion of stock into sales. /sually a high inventory turnover
ratio indicates efficient management of inventory because more
freuently the stocks are sold, the lesser amount of money is
reuired to finance the inventory and a low inventory turnover
ratio indicates an inefficient management of inventory. Thus, the
inventory turnover ratio of sugar mill is satisfactory in all the three
years.
CREDITORS TURNOVER RATIO
"reditors are naturally interested in finding out how
much time the firm is likely to take in paying its creditors. This
ratio indicates velocity with which the creditors are turned over
in relation to purchases. (igher the creditorFs turnover ratio the
more favorable it is6%
Creditors &urnover Ratio
0 &otal Credit purchases
Avera!e &rade Creditors
Avera!e &rade Creditors
0Openin! Creditors 8 Closin! Creditors
9
CR(%#&ORS &UR)O,(R RA&#O O* &H( )A+A)SHAHR
CO-OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
N+& P$*-B(.+.6A7 ;;:518242 81;313589 88319:435
A@+*(A+ C*+%"&)*.6B7 11::823<; 11::823<; 1522<48;1
CTR6AB7 9.84&"=+. 9.325&"=+. 9.<81&"=+.
INTERPRETATION
The ratio indicates the velocity with which the
creditors are turned over in relation to purchases. 0enerally, higher
the creditorsF velocities better it is or otherwise lower the creditorsF
velocity, less favorable are the results. (ere in sugar mill, the ratio
in <;;> was ?.9B increased to ?.>;: in <;;B. ,o it shows good
A.)-A0) T-A2) "-)2IT#-, position of the sugar mill in
case of A.)-A0) T-A2) "-)2IT#-,.

- TB+ I,.&"&$&+ )C CB(*&+% A--)$,&(,& )C I,%"(
By:-Rajwinder
Kaur

BIBLIOGRAPHY

A--)$,& D+D(*&=+,&
P$*-B(.+ D+D(*&=+,&
S(0+. D+D(*&=+,&
C(,+ D+D(*&=+,&
B(0(,-+ SB++& 122:-23?1223-24?1224-25
A--)$,&. B))>.
L+%A+*.
F",(,-"(0 M(,(A+=+,&
-I.M. PANDEY
F",(,-"(0 M(,(A+=+,&
-R.P. RUSTAGI
F",(,-"(0 =(,(A+=+,&
LIMITATIONS OF THE RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of analysis.
-atios are simple to calculate and easy to understand, but even
they suffer from some serious limitations.
"imited use of sin!le ratio: - A single ratio usually, does not
convey much of 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 meaningful conclusions.
"ac of ade1uate ratio: - There are no well accepted standard
or rules of thumb for all ratios which can be accepted as norms. It
renders interpretation of the ratios difficult.
#nherent limitations of accountin!: - 1ike financial
statements, ratios are also suffers from the inherent weakness of
accounting records, such as their historical nature. -atios of the
past are not necessarily true indicators of the future.
Chan!e of accountin! procedure:- "hange in accounting
procedure by a firm often makes ratio analysis misleading example
a change in valuation methods of inventories from 5I5# to 1I5#
increase in the cost of sales and reduce considerably the value of
closing stock which makes stock turnover ratio to be lucrative
+indo: dressin!: - 5inancial statements can easily be window
dressed to present a better picture of its financial and profitability
position to outsiders. (ence one has to be very careful in making a
decision from ratios calculated from such financial statements.
Personal bias: - -atios are only means of financial analysis and
not end in itself. -atio has to be interpreted and different people
may interpret the same in different ways.
#ncomparable: - *ot only industries differ in their nature but
also the firms of the similar business widely differ in their si4e and
accounting procedure etc. It makes comparison of ratios difficult
and misleading. $oreover comparisons are made difficult due to
difference in definitions of various financial term used in the ratio
analysis.
About fi!ure distort: - -atios devoid of absolute figures may
prove distort as ratio analysis and not a ualitative analysis.
Price level chan!es: - +hile making ratio analysis,
consideration is made to the changes in price level and this make
interpretation of ratio invalid.
Ratio has no substitute: - -atio analysis is merely a tool of
financial statements analysis. (ence, become useless if separated
form the statements from which they are computed.
%iversified product lines: - $any businesses operate a large
numbers of divisions in uite different industries. In such cases
ratios are calculated on the basis of aggregated data cannot be used
for inter%firm comparisons.
*inancial data are badly distorted by inflation: - (istorical
cost values may be substantially different from true values. ,uch
distortions of financial data are carried in the financial ratios.
&o !ive a !ood shape to the popularly used financial
ratios6 % The business may make some year%ending ad8ustments.
,uch window dressing can changes the character of the financial
ratios which would be different had there been no such change.
CAUTIONS IN USING RATIO ANALYSIS
The ratio analysis is a widely used techniue to evaluate
the financial position and performance of a business. !ut there are
certain problems in using ratios. ,o the analyst should be cautions in
using -atio Analysis as it suffers from the following problems6%
It is difficult to decide on the proper basis of comparison.
The comparison is rendered difficult because of difference in
situations of two companies or of one company over years.
The price level changes make the interpretations of ratios
invalid.
The differences in the definition if terms in the balance sheet
and the profit and loss statement make the interpretation of
ratio difficult.
The ratios calculated at a point of time are less informative
but more defective as they suffer from short%term changes.
The ratios are generally calculated from past financial
statements and, thus are no indicators of future.
LIMITATIONS OF THE STUDY
o I have prepared my report on the ratio analysis of T()
*A+A*,(A(- "#%#P)-ATI.) ,/0A- $I11,
1T2.,*A+A*,(A(-. I could study 8ust one topic in the limited
period of six weeks.
o !y selecting one topic I ignored all other important topics e.g.
5inancial ,tatement Analysis, Personnel $anagement, +orking
"apital Analysis etc.
o I got an opportunity to study the financial position of T()
*A+A*,(A(- "#%#P)-ATI.) ,/0A- $I11, 1T2.,
*A+A*,(A(- and I could not reach the other top most
companies situated at different places.
o The period of study was not enough to take all factors into
consideration of concerned company.

FINDINGS AND SUGGESTIONS
I am giving some suggestions after undergoing training for a
limited period of six weeks in the *A+A*,(A(- "#%
#P)-ATI.) ,/0A- $I11, 1T2., *A+A*,(A(-, yet I
have tried to from opinion about the whole unit. I have given these
suggestions with the help of my analysis at least to some extent to
improve working and financial performance of the mills.
The mill should avail the facility of cash discount on sales.
The mill make should make efforts to decrease its cost of
goods sold by effective use of resources like raw material,
labour forces etc.
The management should try to utili4e total installed capacity.
The mills should concentrate on the profitability as well as on
the customers and farmersF satisfactions.
The system of management in the stores is not satisfactory.
There should be some modern procedure for placing
inventory and the employees in the stores should have
adeuate knowledge about the store%keeping.
The mill should give stress on the uality of product
regularly.
The mills should be free to set their price policy
independently so that they can compete with private mills.
The mill should make effort to establish alcoholic plant. It
will increase the profitability of the mills.
AVERAGE PAYMENT PERIOD
The average payment period can be meaningfully evaluated by
comparing it with the credit period allowed by the suppliers. To the
extent possible, a firm should try to maintain the Average Payment
Period which is approximately eual to the credit term of the
supplier. This will help improving 0oodwill and credit worthiness
of the firm in the market. The average payment period ratio
represents the average numbers of days taken by the firm to pay its
creditors. 0enerally lower ratio represents the better liuidity
position and higher ratio represents poor liuidity position. !ut a
higher payment period also implies greater credit period en8oyed
by the firm and conseuently larger the benefit reaped from credit
suppliers. It can be calculated by the following formula6%
Avera!e Payment Period
0 )o/ of :orin! days in a year
Avera!e trade creditors
A,(RA-( PA'.()& P(R#O% O* &H( )A+A)SHAHR
CO-OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(* 1223 1224 1225
N). )C E)*>",A %('. 6A7 ;:< ;:< ;:<
CTR 6B7 9.84 9.32 9.<8
APP 6AB7 183%('. 19<%('. 1;3%('.
INTERPRETATION
The average payment period presents the average number of
days taken by the firm to pay its creditors. 0enerally the lower
ratio, the better is the liuidity position of the firm and the higher
ratio indicates the vice%versa. ,o, the average payment period of
the sugar mill satisfactory which shows the better liuidity position
of sugar mill. (ere in sugar mill, the average payment period in
<;;> was <9> days decreased to <?@ days in <;;B. ,o it shows
good average payment period of the sugar mill.
WORKING CAPITAL TURNOVER
RATIO
The +orking "apital Turnover -atio studies the velocity or
utili4ation of the working capital of the firm during a year. The
working capital here refers to the net working capital which is
eual to the total current assets less total liabilities. +orking
capital of a concern is directly related to sales. The current assets
like debtors, !ills receivable, cash, stock etc. change with the
decrease or increase in sales. It can be calculated with the
following formula6%
+orin! Capital &urnover Ratio
0 Cost of Sales
Annual +orin! Capital
+orin! Capital
0 Current Assets - Current "iabilities
+OR4#)- CAP#&A" &UR)O,(R RA&#O &H(
)A+A)SHAHR CO-OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(* 1223 1224 1225
N+& S(0+. 6A7 <18941::; <2:<12951 ;:99<::<5
A@+*(A+ W.C. 6B7 -31<39954 -91:;2<93< ;58143;8
W.C.T.R(&") 6AB7 -3.11 -8.29 3.55
INTERPRETATION
+orking "apital Turnover -atio indicates the velocity of the
utili4ation of net working capital. This ratio indicates the number
of times the working capital is turned over in the course of year.
This ratio measures the efficiency with which the working capital
is used by a firm. +orking capital turnover ratio of the sugar mill
is not satisfactory as it negative in <;;>, <;;B and <;;: which is
%>.<<6? in <;;>, %9.;?6? in <;;B, and >.::6? in <;;: as we can say
that more funds are invested in fixed assets of the sugar mill.
GENERALLY PROFITABILITY
RATIO
The following ratios are known as generally profitability ratios6%
-ross Profit Ratio
Operatin! Ratio
Operatin! profit ratio
(3penses Ratio
)et Profits Ratio
TB+ (/)@+ =+,&"),+% *(&"). (*+ %".-$..+% ), ,+F& D(A+.!-
GROSS PROFIT RATIO
0ross profit ratio measures the relationship of
gross profits to net sales and is usually represent as a percentage.
Thus, it is calculated by dividing the gross profits by sales6%
-ross Profit Ratio
0 -ross Profits ; <==
)et Sales

OR
-ross Profit Ratio
0 Sales 2 Cost of !oods sold ; <==
Sales
-ROSS PRO*#& RA&#O O* &H( )A+A)SHAHR CO-
OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(* 1223 1224 1225
G*).. P*)C"& 6A7 4;35:5;2 LOSS LOSS
N+& S(0+. 6B7 <18941::; <2:<12951 ;:99<::<5
G*).. P*)C"& R(&") 6AB7 9<.54G -------------- --------------
INTERPRETATION
The 0ross Profit ratio indicates the extent to which
selling prices of goods per unit may decline without resulting in
losses on operation of a firm. It reflects the efficiency with which a
firm produces its products. As the 0ross Profit is found by
deducting cost of goods sold from the net sales, higher the gross
profit ratio &0CP ratio' better the result. (ere in sugar mill, the
0ross Profit -atio in <;;> was ?@.:B6? and loss in <;;Band <;;:.
,o it shows bad 0-#,, P-#5IT -ATI# of the sugar mill.
OPERATING RATIO
#perating -atio establishes the relationship between cost of goods
sold and other operating expenses on the one hand and the sales on
the other. In other words, it measures the cost of operating per
rupee of sales. The two basic elements of this ratio are operating
cost and sales. The ratio is calculated by dividing operating costs
with the net sales and itFs generally represented as a percentage.
Operatin! Ratio
0 Operatin! Cost ; <==
)et Sales
OR
Operatin! Ratio
0 Cost of -oods Sold8 Operatin! (3penses ;<==
)et Sales
#perating cost can be found by adding operating expenses to the
cost of goods. #perating expenses consist of6%
a' Administrative and office expenses like rent, salaries to staff,
insurance, directorFs fees etc.
b' ,elling and distribution expenses like advertisement, salaries
of salesmen, etc.
OP(RA&#)- RA&#O O* &H( )A+A)SHAHR CO-
OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(* 1223 1224 1225
OD+*(&",A C).& 6A7 ;294<8:2 ;9511942 ;;4421;2
N+& S(0+. 6B7 <18941::; <2:<12951 ;:99<::<5
OD+*(&",A R(&") 6AB7 <.3<&"=+. :.;2&"=+. 5.;4&"=+.
INTERPRETATION
#perating -atio indicates the percentage of net sales that is
consumed by operating cost. #bviously, higher the operating ratio,
the less favorable it is, because, it would have a small margin
&#perating Profit' to cover interest, income Mtax, dividend and
reserves. There is no rule of thumb for this ratio as it may differ
from firm to firm depending upon the nature of its business and its
capital structure. (ere in sugar mill, the #P)-ATI*0 "#,T
-ATI# in <;;> was @.>@6? times increased to A.=;6? times in
<;;B. ,o it shows bad #P)-ATI*0 "#,T -ATI# of the sugar
mill.
OPERATING PROFIT RATIO
This ratio is calculated by dividing operating profit by sales.
#perating profits is calculated as6%
Operatin! Profit
0)et Sales 2 Operatin! Cost
OR
Operatin! Profit
0 )et Sales 2 6Cost of -oods Sold 8
Administrative and Office (3penses 8 Sellin! and
%istribution (3penses7
OD+*(&",A P*)C"& -(, (0.) /+ -(0-$0(&+% (.!-
Operatin! Profit Ratio
0 Operatin! Profit ;<==
Sales
TB". *(&") -(, /+ -(0-$0(&+% (.!-
Operatin! Profit Ratio = <==- Operatin! Ratio
OP(RA&#)- PRO*#& RA&#O O* &H( )A+A)SHAHR
CO-OP(R&#,( SU-AR .#""S "&%/
P(*&"-$0(* 1223 1224 1225
O.P.R(&") 58.1<&"=+. -5;.32&"=+. 52.:1&"=+.
o O.P.RATIO = (100-OPERATING RATIO)
INTERPRETATION
The operating profit ratio indicates the extent to which the selling
prices of goods per unit may decline without resulting in losses on
operations of a firm. It reflects the efficiency with which a firm
produces its products. (ere in sugar mill, the #P)-ATI*0
P-#5IT -ATI# in <;;> was :9.<@ times and there is a loss in
:;.A<. ,o it shows bad #perating Profit -atio of the sugar mill.
EXPENSES RATIO
)xpenses ratios indicate the relationship of various expenses to
net sales. The operating ratio reveals the average total variations in
expenses may be increasing while some is falling. (ence, expenses
ratio are calculated by dividing each items of expenses or groups
of expenses with the net sales to analyse the causes of variation of
the operating ratio. The ratio can be calculated for each individual
item of expenses or a group of items of a particular type of
expenses, like cost of sales ratio, administrative expenses ratio, and
material consumed ratio, etc. +hile interpreting the ratio, it must
be remembered that for fixed expenses like rent, the ratio will fall
if the sales increases and for a variable expenses, the ratio in
proportion to sales shall remain nearly the same.
P(*&"-$0(* +FD+,.+. *(&") = P(*&"-$0(* EFD+,.+. H922
N+& S(0+.
o ,pecific expenses ratio may be calculated as under6
C).& )C A))%. .)0% *(&") = C).& )C A))%. .)0% H922
N+& S(0+.
A%=",".&*(&"@+ & OCC"-+ EFD+,.+. R(&")
= A%=",".&*(&"@+ &OCC"-+ EFD+,.+. H922
N+& S(0+.
S+00",A (,% D".&*"/$&"), EFD+,.+. R(&")
= S+00",A & D".&*"/$&"), EFD+,.+. H922
N+& S(0+.
COS& O* -OO%S SO"% RA&#O O* &H( )A+A)SHAHR
CO-OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
C.O.G.S. 6A7 ;:1434;92 89:929;28 <:9983:3
N+& S(0+. 6B7 <18941::; <2:<12951 ;:99<::<5
C.O.G.S. R(&")6AB7 2.4&"=+. 2.4&"=+. 2.1&"=+.
A%.#)#S&RA&#O) > O**#C( (?P()S(S RA&#O O* &H(
)A+)SHAHR CO-OP(RA&#,( SU-AR .#""S "&%.
P(*&"-$0(*. 1223 1224 1225
A%=",".&*(&"), 6A7 14844:3; ;28:8288 ;554<<88
N+& S(0+. 6B7 <18941::; <2:<12951 ;:99<::<5
A&O.E.R(&")6AB7 <.8;8G :.298G 2.999G
INTERPRETATION
(ere in sugar mill, the Administration & #ffice )xpenses -atio in
<;;> was @.9=9E increased to A.;?9E in <;;B. ,o it shows bad
A2$I*I,T-ATI#* & )NP)*,), -ATI# of the sugar mill.
S(""#)- > %#S&R#5U&#O) (?P()S(S RA&#O O* &H(
)A+A)SHAHR CO-OP(RA&#,( SU-AR .#""S "&%.
P(*&"-$0(*. 1223 1224 1225
S+00",A EFD. 6A7 9:5:343 98<49;3 9:91511;.8
S(0+. 6B7 <18941::; <2:<91251 ;:99<::<45
S+00",A R(&") 6AB7 2.;99G 2.134G 2.88<G
INTERPRETATION
(ere it shows good ,)11I*0 & 2I,T-I!/TI#* )NP)*,),
-ATI# of the sugar mill.
LONG TERM FINANCIAL POSITION OR TEST
OF SOLVENCY
The term solvency refers to the ability of a concern to meet its
long term obligations to meet the fixed interest, cost and payment
of long term borrowings. The long% term indebtedness of a firm
includes debenture holders, financial institutions, providing long%
term and other creditors selling goods on installments basis. The
long term financial soundness or solvency of any business is
examined by calculating ratios known as leverage or capital
structure ratio. The long%term creditors of a firm are primarily
interested in knowing the firmFs ability to pay regularly interest on
long term borrowings, repayments of the principal amount at the
maturity and the security of their loans. Accordingly, long%term
solvency ratios indicate a firmFs ability to meet the interest and
costs and repayments schedules associated with its long%term
borrowings. The followings ratios serve the purpose of
determining the solvency of the concern6%
o DEBT EQUITY RATIO
o SOLVENCY RATIO
o FIXED ASSETS TO NET WORTH RATIO
o EQUITY RATIO
DEBT EQUITY RATIO
2ebt%)uity -atio is also known as )xternal%
Internal )uity -atio is calculated to measure the relative claim of
outsiders and the owners &i.e., shareholders; against the firmFs
assets. This ratio indicates the relationship between the external
euities or the outsidersF funds and the internal euities or the
shareholdersF funds thus6
%ebt-(1uity Ratio
0 Outsiders@ *unds
Shareholders@ *unds
OR
%ebt-(1uity Ratio
0 (3ternal (1uities
#nternal (1uities
O$&."%+*. F$,%. 0 A00 D+/&L"(/"0"&"+. &) )$&."%+*.?
EB+&B+* 0),A-&+*= )* .B)*&-&+*= )* EB+&B+* ", C)*= )C
%+/+,&$*+.? /),%.? =)*&A(A+ )* /"00..
SB(*+B)0%+*. F$,%. = E#$"&' SB(*+ C(D"&(0 I
P*+C+*+,-+ SB(*+ C(D"&(0 I C(D"&(0 R+.+*@+ I R+@+,$+
R+.+*@+ I R+.+*@+. *+D*+.+,&",A (--$=$0(&+% D*)C"&. &
.$*D0$.+. 0">+ *+.+*@+. C)* -),&",A+,-"+.? .",>",A C$,%.
+&-. J (--$=$0(&+% 0)..+. & %+C+**+% +FD+,.+..
%(5&-($U#&' RA&#O O* &H( )A+A)SHAHR CO-
OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
O$&."%+*. F$,%. 6A7 8343224:8 <91;3;531 84<11;:33
SB(*+B)0%+*.F$,%.6B7 98:<92151 98:<2:8;: 98<<9:9;:
D+/&-E#$"&' *(&")6AB7 ;.13&"=+. ;.85&"=+. ;.;8&"=+.
INTERPRETATION
The debt%euity ratio is calculated to measure the extent to which
debt financing has been used in a business. The ratio indicates the
proportionate claims of the owners and outsider against the firm
assets. A ratio of ?6? is considered to be satisfactory ratio although
there cannot be any rule of thumb in some businesses <6? is also
considered to be satisfactory. Thus, the 2ebt%)uity -atio of sugar
mill is not satisfactory as ratio is too high.
SOLVENCY RATIO
The ratio indicates the relationship between the total
liabilities to outsiders to total assets of a firm. This ratio is small
variant of euity ratio and can be simply calculated as ?;;%euity
ratio, i.e., continuing the example taken for the euity ratio,
solvency ratio L ?;;%AA.A> or say ==.==E. 0enerally, lower the
ratio of total assets, more satisfactory or stable is the long%term
solvency position of a firm.
The solvency ratio can be calculated as follows6%
Solvency Ratio
0 &otal "iabilities to Outsiders
&otal Assets
SO",()C' RA&#O O* &H( )A+A)SHSHR CO-
OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
T)&(0 L"(/"0"&"+. 6A7 :1:1999<8 :<4442823 859:<:815
T)&(0 A..+&. 6B7 3<2;898:1 319<<82;< ;:9592532
S)0@+,-' R(&")6AB7 2.4;8&"=+. 2.59;&"=+. 9.;<&"=+.
INTERPRETATION
*early the lower ratio of total liabilities to total assets, more
satisfactory or stable is the long term solvency position of the firm.
,o in case of the sugar mill, the ratio is low and again high which
is satisfactory.
FIXED ASSETS TO NET WORTH
RATIO
The ratio establishes the relationship between
fixed assets and shareholdersF funds i.e., ,hare "apital plus
-eserve, ,urplus and -etained )arnings. This ratio indicates the
extent to which shareholders funds are sunk into fixed assets.
0enerally, the purchase of fixed assets should be financed by
shareholdersF euity including reserves, surpluses and retained
earnings.
This ratio can be calculated as follows6%
*i3ed Assets Ratio
0 *i3ed Assets 6after depreciation7
Shareholders@ funds

*#?(% ASS(&S &O )(& +OR&H RA&#O O* &H(
)A+A)SHAHR CO-OP(RA&#,( SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
F"F+% A..+&. 6A7 11<4;9<22 11:;14843 1:92;9<59
SB(*+B)0%+*.C$,%.6B7 98:<92151 98:<2:8;2 98<<9:9;:
F"F+% A..+&. &) N+&
W)*&B R(&") 6AB7
9<8&"=+. 9<8&"=+. 935&"=+.
INTERPRETATION
This ratio indicates the extent to which shareholders
funds are sunk into the fixed assets. ,o if the ratio is less than
?;;E, it implies that ownerF funds are more than total fixed assets
and a part of working capital is provided by the shareholders and if
ratio is more than ?;;E then vice%versa. +hen the ratio is more
than ?;;E, it implies that ownersF funds are not sufficient to
finance the fixed assets and the firm has to depend upon outsiders
to finance the fixed assets. (ere in sugar mill, it is not satisfactory.
EQUITY RATIO
A variant to the debt%euity ratio is the proprietary ratio which is
also known as )uity -atio or ,hareholdersF to Total )uities
-atio or *et +orth to Total Assets -atio. This ratio establishes the
relationship between shareholdersF funds to total assets of the firm.
The ratio of proprietorsF funds to total funds &ProprietorsO
outsidersF funds or total funds or total assets' in an important ratio
for determining long%term solvency of a firm. The component of
this ratio is P,hareholdersF 5unds or PProprietorsF 5unds and Total
Assets. The shareholdersF funds are )uity ,hare "apital,
Preference ,hare "apital, /ndistributed Profits, -eserves and
,urpluses. #ut of this amount, accumulated losses should be
deducted. The total assets on the other hand denote total resources
of the concern.
This ratio can be calculated as under6%
(1uity Ratio
0 Shareholders@ *unds
&otal Assets
($U#&' RA&#O O* &H( )A+A)SHAHR CO-OP(RA&#,(
SU-AR .#""S "&%/
P(*&"-$0(*. 1223 1224 1225
SB(*+B)0%+*.C$,%.6A7 98<3994;3 98:<92151 98:<2:8;:
T)&(0 A..+&.6B7 355;924:: 3<2;898:1 319<<82;<
E#$"&' R(&")6AB7 2.941&"=+. 2.95<&"=+. 2.12;&"=+.
INTERPRETATION
This ratio indicates the extent to which the assets of the
company can be lost without affecting the interest of creditors of
the company. As )uity -atio represents the relationship of
ownersF funds to total assets, highest the ratio or the share of the
total capital of the company better is the long%term solvency
position of the company. Thus, the financial position of the sugar
mill is satisfactory
RATIO OF CURRENT ASSETS TO
PROPRIETORS FUNDS
The ratio is calculated by dividing the total of
current assets by amount of shareholdersF funds. This ratio
indicates the extent to which proprietorsF funds are invested in
current assets. There is no Prule of thumbF for this ratio and
depending upon the nature of the business there may be different
ratios for different firms.
This ratio can be calculated as under6%
Ratio of Current Assets to Proprietors@
*unds
0 Current Assets
Shareholders@ *unds
RA&#O O* CURR()& ASS(&S &O PROPR#(&ORS@
*U)%S O* &H( )A+A)SHAHR CO-OP(RA&#,( SU-AR
.#""S "&%/
P(*&"-$0(*. 1223 1224 1225
C.A. 6A7 823915::: ;4:2:4358 :14<5<:31
S.H. F$,%. 6B7 98:<92151 98:<2:8;: 98<<9:9;:
C.A.&) P*)D F$,%.
R(&")6AB7
133.44&"=+. 1:;.<9&"=+. 1:;.<9&"=+.
INTERPRETATION
This ratio indicates the extents to which proprietorsF
funds are invested in current assets. There is no Prule of thumbF for
this ratio and depending upon the nature of the business there may
be different ratios for different firms. (ere in sugar mill, this ratio
is satisfactory.
SUMMER TRAINING REPORT
ON
RATIO ANALYSIS
IN
T() *A+A*,(A(- "#%#P)-ATI.) ,/0A- $I11, 1T2., *A+A*,(A(-
&A PA-TIA1 -)K/I-)$)*T 5#- T() 2)0-)) #5 !."#$. &Professional'
&7)A-%<;?;'
,/!$ITT)2 T#6 % ,/!$ITT)2 !76%
RAJWINDER
KAUR
&()A2, 2)PT. #5 "#$$)-)")'