Q.3 From the ratios and other data given below for Bharat Auto Accessories Ltd.

indicate
your interpretation of the companys financial position, operating efficiency and
profitability.

Year I Year
II

Year
III

Current Ratio

265%

278% 302%

Acid Test Ratio

115%

110% 99%

Working Capital Turnover (times)

2.75

3.00

3.25

Receivables Turnover

9.83

8.41

7.20

Average Collection Period (Days)

37

43

50

Inventory to Working Capital

95%

100% 110%

Inventory Turnover (times)

6.11

6.01

5.41

Income per Equity Share

5.10

4.05

2.50

Net Income to Net Worth

11.07% 8.5%

7.0%

Operating Expenses to Net Sales

22%

23%

25%

Sales increase during the year

10%

16%

23%

Cost of goods sold to Net Sales

70%

71%

73%

Dividend per share

Rs. 3

Rs. 3

Rs. 3

Fixed Assets to Net Worth

16.4% 18%

Net Profit on Net Sales

7.03% 5.09% 2.0%

22.7%

Answer:- The financial position of a concern is mainly judged by its current ratio, acid test ratio,
working capital turnover ,fixed assets to net worth. In the given case of Bharat Auto Accessories
Ltd, the current ratio has gone up from 265% to 302% over a period of three years. It is a
measure of the degree to which current assets cover current liabilities (Current Assets /Current
Liabilities). A high ratio indicates a good probability the enterprise can retire current debts.
However, the acid test ratio has gone down from115% to 99%, which is not a very good sign. It
is a measure of the amount of liquid assets available to offset current debt (Cash + Accounts
Receivable / Current Liabilities). A healthy enterprise will always keep this ratio at 1.0or higher.
Also, the fixed asset to net worth ratio is 16.4% for Yr. I and has gone up to 22.7% for Yr. III.
This ratio is a measure of the extent of an enterprises investment in non-liquid and often over
valued fixed assets (Fixed Assets / Liabilities + Equity). A ratio of .75 or higher is usually
undesirable as it indicates possible over-investment. The operating efficiency of a concern can be
viewed by its receivables turnover, average collection period, inventory turnover, operating
expenses to net sales. The receivables turnover has gone down from 9.83 to 7.20,reflecting that
expenses as a percentage of revenue or earnings has gone down over the three year period, which
is a good sign. An increasing average collection period indicates that the concern is offering too
liberal credit terms and has inefficient credit collection. The inventory turnover has gone down
from 6.11 to 5.41 times indicating declining sales and excessive inventory which again reflects
poor operating efficiency. The operating expense to net sales has increased from 22% to 25%
which indicates that the organization has lowered its ability to generate profits in case of
declining revenues. The indicators of profitability are income per equity share, net income to net
worth, and net profit on net sales. All these ratios have declined considerably over the three year
period. This indicates declining profitability over the years. Thus, on a review of the various
ratios, we conclude that Bharat Auto Accessories Ltd does not have a strong financial position, is
not very efficient in its operations and is undergoing a period of declining profitability.