Essay: Analysis of financial statements for a medical and general store

CHAPTER I
INTRODUCTION
1.1 INTRODUCTION TO THE TOPIC
This project is prepared for the analysis and interpretation of financial statements of M/S GANESH MEDICAL AND GENERAL STORES. It deals with the various different types of medicines and other cosmetic items.
It is prepared to know the financial position of the shop. It also helps to know the proper utilization of the resources and other different positions of the shop such as Liquidity, solvency, profitability etc..
The financial statements are prepared for a particulars period to review & report the periodical progress by the shop. It will also help to find out any weakness or threats of the current business planning.
It will help to give the practical knowledge, information about the business transactions. Also help in finding out the Profit & Loss A/C or Income & Expenditure A/C occurred during particular period. The financial statements are also needed for decision making & planning for the procurement of adequate funds & the efficient & adequate use of resources.
1.2 OBJECTIVES OF THE STUDY
• To study the concept of “analysis of financial statement by using the techniques of ratio analysis.”
• To study of focus on facts on a comparative basis relating to the performance of a firm.
• To study the performance of a firm in determining the important aspects of a business such as liquidity, solvency, overall profitability, capital gearing, etc.
• To know the future opportunities and threats for firm.
1.3 SCOPE OF THE STUDY
1) The scope of the study is to understand the actual working and analysis of financial statement.
2) The project will help to study the relationship between the items of the balance sheet and of profit and loss account.
3) While doing project report one should know the various techniques that are used in analyzing financial statements.
4) Ratio analysis is one of the popular tools of financial statement analysis
1.4 LIMITATION OF THE STUDY
1) Generally firm do not provide financial statements to any outside person or for any project work.
2) Some of the information is not accurate, due to which approximate values were used for the analysis. Hence, the results also reveal approximate values.
3) The project is based on theoretical guidelines and as per situations. Hence, it may not be applicable to different situations.
4) The time constraint of the project of two months is not sufficient to study.
5) Financial statements are analyzed only on the basis of ratios. The ratios can’t be taken as ultimate judgment of company’s financial position.
1.5 RESEARCH METHODOLOGY
“A careful investigation or enquiry especially through search for new facts in any branch of knowledge.”
MEANING-
Research methodology is a way to systematically solve the research problem. It may be understood as a science of the study how research is done scientifically. The various steps that are generally adopted by researcher in study his research problem along with the logic behind them. It is necessary for the researcher to know not only the research method or techniques but also the methodology. Thus when we talk of research methodology we not only talk at the research methods but also consider the logic behind the methods we use in the contest of our research and explain why we are using particular method or techniques and why we are not using other so that research are capable of being evaluate either by research himself or by other.
DATA SOURCE AND DATA COLLECTION
The task of data collection begins after a research problem has been defined. While deciding about the method of data collection to be used for the study, the researcher should keep in mind two types of data viz. Primary & Secondary.
PRIMARY DATA-
Primary data are original and first hand information. The source of such information is the individuals and the incidents around them generally.
• Information relating to the project was collected during formal and informal discussions with the proprietor of shop.
• Queries arising in due course of the project brought into the notice of concerned authority and necessary explanation and solutions are adapted.
SECONDARY DATA-
The source of information through documents concerning individuals and institutions are known as secondary data or documentary source
.
Secondary data is generated with the help of following:
Annual Report: Majority of information gathered from the annual reports of the company. These reports consist of Trading And Profit & Loss A/c; Balance Sheet of 3 years.
Reference Books: Theory relating to the subject matter and various concepts taken up from various financial reference books published by various universities
CHAPTER – 2
PROFILE OF THE FIRM
2.1 PROPRIETOR’S PROFILE
 NAME OF PROPRIETOR-
MR. Ramesh Kappur
[ M/S GANESH MEDICAL AND GENERAL STORES]
 ADDRESS-
Near Bus Stand, Mathikere, Dist. New Bengaluru
 STATUS-
Individual – Male
2.2 HISTORY OF FIRM
MR. Kappur, after completing his Graduation in Pharmacy, planned to open a Medical Shop in Mathikere, Dist. New Bengaluru. His elder brother provide him financial help to open the shop.
And with their mutual efforts, M/S GANESH MEDICAL AND GENERAL STORES, was set up in 2005.
In starting phase, the shop operates on a smaller scale with limited products. But today they have variety of product like, all types of medicines, pharmaceutical products, cosmetic, daily used products etc..
Now it is one of the popular Medical Shop in that area. In last year, they started another shop which deals in food products.
2.3 ORGANIZATIONAL STRUCTURE
2.3 PRODUCT OF THE FIRM
 
CHAPTER 3
CONCEPTUAL BACKGROUND
3.1 INTRODUCTION
OF
FINANCIAL STATMENTS
 A Financial Statement is a compilation of data, which is logically and consistently organized according to accounting principles. Its purpose is to convey an understanding of some financial aspects of a business firm. It shows a position at a movement in time, as in the case of balance sheet, or reveals a series of activities over a given period of time, as in the case of an income statement.
 Financial statements are the major means through which firms present their financial situation to stock holders, creditors and general public. The majority of firms which include extensive financial statements in their annual reports, which receive wide distribution.
3.2 MEANING
AND
DEFINITION
OF
FINANCIAL STATEMENTS ANALYSIS
 Financial analysis is also referred as Financial Statements Analysis. The term ‘financial analysis’, also known as an ‘Analysis & Interpretation’ of financial statements, refers to the process of determining financial strengths and weakness of firm by establishing strategic relationship between the items of balance sheet, Profit and Loss Account and other operative data.
 According to MYERS,
“Analysis of financial statements is the systematic numerical calculation of the relationship between one fact with the other to measure the profitability, operational, efficiency, solvency and the growth potential of the business.
3.3 TYPES OF FINANCIAL ANALYSIS
3.3 TOOLS &TECHNIQUES OF FINANCIAL ANALYSIS
RATIO ANLAYSIS
Ratio analysis a technique of analysis and interpretation of financial statements. It is a process of establishing and interpreting various ratios for helping in making certain decisions.
For example- Liquidity, Profitability, Turnover and Solvency ratio.
FUNDS FLOW ANALYSIS
Funds flow statement is a method by which one studies the changes in the financial position of a business enterprise between beginning and the ending financial statements dates. It is a statement showing sources and uses of funds for a period of time.
CASH FLOW ANLYSIS
A statement of changes in the financial position of firm on cash basis is called a cash flow analysis/ statement. A cash flow statement summarizes the causes of changes in cash position of a business enterprise between dates of two balance sheets.
TREND ANALYSIS
Trend analysis is also trend as Intra-Firm comparison wherein financial statements of the same enterprise for two or more years are compared. The financial statements may be analyzed by computing trends of series of information.
3.4 CONCEPTUAL FRAMEWORK OF RATIO ANALYSIS
A ratio is a simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions.
According to Kohler,
“A ratio is the relation, of the amount, a, to another, b, expressed as the ratio of a to b; a:b ( a is to b); or as a simple fraction, integer, decimal fraction or percentage”.
Meaning of Ratio Analysis
Ratio analysis is a technique of analyzing the financial statements by computing ratios.
In other words, ratio analysis is a process of determining and interpreting relationships between the items of financial statements to provide a meaningful understanding of performance and financial position of an enterprise. Ratio analysis is an accounting tool to present accounting variables in a simple, concise, intelligible and understandable form.
According to Myers, “Ratio analysis is a study of relationship among the various financial factors in a business”.
Objectives of Ratio Analysis
1. Measuring the profitability of business.
2. Judging the operational efficiency of the business.
3. Assessing the solvency of the business.
4. Measuring Short and Long-Term Financial Position of the firm.
5. Facilitating Comparative Analysis of the performance.
Types of Ratios
(A) Liquidity Ratio :
These are the ratios, which measures the short-term solvency and financial position of a firm. These ratios are calculated to comment upon the short-term paying capacity of a concern or the firm’s ability to meet its current obligations.
The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities.
 Current Ratio :
The current ratio is the ratio of total current asset to total current liabilities.
Current Assets
Current Ratio =
Current Liabilities
Current Assets are the assets that are either in the form of cash or cash equivalents in a short time (say, within a year’s time) and Current Liabilities are liabilities repayable in a short time.
 Quick Ratio :
Quick ratio is a relationship of liquid assets with current liabilities and is computed to assess the short term liquidity of the enterprise in its correct form.
Liquid/Quick Asset
Quick Ratio = ___________________
Current Liabilities
 Absolute Liquidity Ratio :
This ratio is computed by dividing the absolute liquid asset by current liabilities. Its objective is to calculate it together with current ratio and quick ratio so as to exclude even receivables from the current assets and find out the absolute liquid asset.
Absolute Liquid Assets
Absolute Liquid Ratio = ______________________
Current Liabilities
(B) Profitability Ratio :
The primary objective of a business is to earn profits. A business need profit not only for its existence but also for its expansion and diversification.
Profitability Ratios are calculated to measure the overall efficiency of the business. Generally, profitability ratios are calculated either in relation to sales or in relation to investment to measure the profitability of the firm.
 Gross Profit Ratio :
This ratio establishes the relationship of gross profit on sales to net sales of a firm, which is calculated in percentage.
This ratio is computed by dividing gross profit by the net sales.
Gross Profit X 100
Gross Profit Ratio = ________________
Net Profit
This ratio indicates the degree to which the selling price of goods per unit may decline without resulting in losses from operations to the firm.
 Net Profit Ratio :
This ratio measures the relationship between net profit and net sales.
The main objective of computing this ratio is to determine the overall profitability due to various factors such as operational efficiency, trading on equity etc.
Net Profit X 100
Net Profit Ratio = ________________
Net Sales
 Operating Ratio :
This ratio measures the relationship between operation cost and net sales.
The main objective of computing this ratio is to determine the operational efficiency with which production and/or purchases and selling operations are carried on.
Operating Cost X 100
Operating Ratio = ____________________
Net Sales
Operating Cost = Cost of Goods Sold + Operating Expenses
 Operating Profit Ratio :
This ratio measures the relationship between operating profit and net sales. The main objective of computing this ratio is to determine the operational efficiency of the business.
Operating Profit X 100
Operating Profit Ratio = ____________________
Net sales
Operating Profit = Net Profit + Non-operating Expenses
+ Non-operating Income.
 Return On Total Asset :
This ratio measures the relationship between net profit before interest and tax, and total assets.
The main objective of computing this ratio is to find out how efficiently the total assets have been used by the business.
Net Profit before Interest and Tax X 100
Return on Total Asset = ________________________________
Total Asset
 Return On Capital Employed/ Return On Investment :
This ratio measures a relationship between Net Profit before Interest and Tax and Capital Employed, in order to find out how efficiently the long-term funds supplied by the creditors and shareholders have been used.
Net Profit before Interest and Tax X 100
R.O.I = ____________________________________
Capital Employed
Capital Employed = Shareholders Fund + Long-term Debts
– Fictitious Asset
 Return on Equity :
This ratio measures the relationship between Net Profit after Interest and Tax, and Preference dividend, Equity shareholders’ Funds. It is computed to find out how efficiently the funds supplied by the Equity Shareholders have been used.
N.P after Interest and Tax and Preference dividend X 100
R.O.E = _____________________________________________
Equity shareholders’ Funds
(C) Turnover Ratio :
Profit depends on the rate of turnover and the net margin. Turnover ratios also termed as Activity or Performance Ratio, judges how well the facilities at the disposal of enterprise are being utilized.
In other words, these ratios measure the effectiveness with which a concern uses resources at its disposal. Higher turnover ratio means, better use of capital or resources, which in turn, means better profitability ratio.
 Fixed Asset Turnover Ratio :
This ratio establishes a relationship between Net Sales and Fixed Assets. The objective of computing this ratio is to determine the efficiency with which the fixed assets are utilized.
Net sales/ C.O.G.S
Fixed Asset Turnover Ratio = ______________________
Net Total Fixed Asset
 Working Capital Turnover Ratio :
This ratio establishes a relationship between Net Sales and Working Capital. Its objective is to indicate the velocity of utilization of Net Working Capital and the number of times the working capital is turned over in the course of year.
Net Sales
Working Capital Turnover Ratio = _____________________
Working Capital
 Stock/ Inventory Turnover Ratio :
This ratio establishes a relationship between Costs of Goods Sold and Average Inventory. This ratio is computed to determine the efficiency with which the inventory is utilized.
Costs of Goods Sold
Stock Turnover Ratio = ________________________
Average Inventory
Opening Stock + Closing Stock
Average Inventory = _______________________________
2
 Debtors Turnover Ratio :
This ratio establishes the relationship between Net Credit Sales and Average Debtor ( or receivable) of the year.
The objective of computing this ratio is to determine the efficiency the trade debtors are managed.
Net Credit Sales
Debtors Turnover Ratio = ____________________
Average Debtor
Average Debtor = O/P Debtors + C/S Debtor +
O/P B/R + C/S B/R
2
 Average collection Period: It provides the approximation of the average time that it takes to collect debtors. It is computed by dividing 365 days or 12 months or 52 Weeks by the number of debtors’ turnover. It is determined as :
365 days or 12 months or 52 Weeks
Average collection Period =
Debtors’ Turnover
 Creditors Turnover Ratio :
It shows the relationship between the Net Credit Purchases and Average Creditors ( or Payable). Its objective is to determine the efficiency with which the creditors are managed.
Net Credit Purchases
Creditors Turnover Ratio =
Average Creditors (or Payable)
Average Creditors = O/P Creditor + C/S Creditor
O/P B/P + C/S B/P
2
 Average Payment Period : This period Shows an Average Period for which the Credit Purchases remain outstanding or the credit period enjoyed by the enterprise in paying creditors. It is determined as :
365 days or 12 months or 52 Weeks
Average Payment Period =
Creditors’ Turnover
(D) Solvency Ratio :
These ratios provide an insight into the financial techniques used by a firm and focus, as a consequence, on the long term solvency position with regard to, periodic payment of interest during the period of loan, repayment of principal on maturity or in predetermined installments on due dates.
 Debt- Equity Ratio :
The Debt- Equity Ratio is computed to ascertain the soundness of the long-term financial position of the firm. This ratio expresses the relationship between Long-term Debts and Shareholders Fund.
Long-term Debts
Debt- Equity Ratio =
Shareholders Fund
 Total Asset to Debt Ratio :
It establishes the relationship between Total Assets and Total Long-term Debts. It measures the safety margin available to the providers of long-term debts.
Total Assets
Total Asset to Debt Ratio =
Long-term Debts
 Proprietary Ratio :
Proprietary Ratio establishes the relationship between Proprietors’ Funds and Total Assets. This ratio shows the extent to which the shareholders own the business.
Its objective is to measure the proportion of Total Asset financed by Equity or Proprietors’ Fund.
Proprietors’ Funds or Shareholders’ Fund
Proprietary Ratio =
Total Asset ( Excluding Fictitious Asset )
CHAPTER 4 ANALYSIS
AND INTERPRETATION OF FINANCIAL STATEMENTS
LIQUIDITY RATIOS
 Current Ratio :
Current Assets
Current Ratio =
Current Liabilities
Year Current Assets Current Liabilities Ratio
2013-2014
2014-2015
2015-2016 1825201.29
2654408.54
2175251.29 234985.74
398779.36
350846.98 7.76 :1
6.6:1
6.2:1
Interpretation
The current ratio has been decreasing year after year which shows decreasing working capital. As an conventional rule, a current ratio of 2:1 is consider satisfactory.
Hence the liquidity position of Ganesh Medical & General Store is satisfactory because all the three years current ratio is not below the standard ratio 2:1.
 Quick Ratio :
Liquid/Quick Asset
Quick Ratio = ___________________
Current Liabilities
Year Quick Assets Current Liabilities Ratio
2013-2014
2014-2015
2015-2016
986349.29
1079432.54
1292602.39
234985.74
398779.36
350846.98 4.1:1
2.7:1
3.6:1
Interpretation
Quick ratio indicates rupees of quick asset available for each rupee of current liability. As a quick ratio of 1:1 is consider satisfactory , a firm easily meet all current claims.
From the above calculation it is clear that the liquidity position of Ganesh Medical & General Story is satisfactory. Because for all three years the quick ratio is not below the standard ratio of 1:1.
 Absolute Liquidity Ratio :
Absolute Liquid Assets
Absolute Liquid Ratio = ______________________
Current Liabilities
Year Absolute Liquid Assets Current Liabilities Ratio
2013-2014
2014-2015
2015-2016
61096.29
57487.54
63152.45
234985.74
398779.36
350846.98 0.25:1
0.14:1
0.18:1
Interpretation
The acceptable norm of this ratio 50% or 0.5:1 , i.e. Re.1 worth absolute liquid asset are considered adequate to pay Re.2 worth current liabilities.
But the absolute liquidity ratio is below the acceptable norm so the cash position is not utilize effectively and efficiently.
PROFITABILITY RATIOS
 Gross Profit Ratio:
Gross Profit X 100
Gross Profit Ratio = ________________
Net Profit
Year Gross Profit Net Sales Ratio
2013-2014
2014-2015
2015-2016
2102728
1166097.92
1802074.9
9194259.8
8358418
11033111.8 22.8%
13.95%
16.33%
Interpretation
In the year 2013-2014 the gross profit ratio was 22.80% but in 2014-2015 it is decreased to 13.95% which shows lower earning capacity of the business with reference to its sales. But in 2015-2016 , the ratio increased to 16.32%. due to sale at higher price.
Therefore the gross profit ratio for 3 years reveals satisfactory condition of the business.
 Net Profit Ratio:
Net Profit X 100
Net Profit Ratio = ________________
Net Sales
Year Net Profit Net Sales Ratio
2013-2014
2014-2015
2015-2016
1542347.47
611219.09
1196371.74
9194259.8
8358418
11033111.8 16.77%
7.31%
10.84%
Interpretation
Net profit is the measure of overall profitability. In the year 2013-2014 net profit is 16.77% which is decreased to 7.31% in 2014-2015. Which shows that the profitability is decreased.
But in 2015-2016 there is a slight increased in the profit which shows appreciation in the profitability of the firm.
 Operating Ratio:
Operating Cost X 100
Operating Ratio = ____________________
Net Sales
Operating Cost = Cost of Goods Sold + Operating Expenses
Year Operating Cost Net Sales Ratio
2013-2014
2014-2015
2015-2016
7664326.5
7760614.89
9847906.58
9194259.8
8358418
11033111.8 83.35%
92.84%
89.25%
Interpretation
Operating Ratio indicates an average operating cost incurred on a sale of goods worth Rs. 100. Lower the ratio, greater is the operating profit to cover the non-operating expenses, to pay dividend and to create reserves.
Hence in the year 2013-2014, the ratio is 83.35%, which indicates higher operating profit among the three.
 Operating Profit Ratio:
Operating Profit X 100
Operating Profit Ratio = ____________________
Net sales
Operating Profit = Net Profit + Non-operating Expenses
+ Non-operating Income.
Year Operating Profit Net Sales Ratio
2013-2014
2014-2015
2015-2016
1609092.17
802898.09
1261636.42
9194259.8
8358418
11033111.8 17.5%
9.6%
11.4%
Interpretation
This ratio indicates an average operating margin earned on a sale of Rs.100 and what portion of sales is left to cover non-operating expenses, to pay dividend and to create reserves.
Higher ratio (In the year 2013-2014, which was 17.50%) indicates more efficient is the operating management. Because of higher gross profit and lower operating expenses.
 Return on Total Asset:
Net Profit before Interest and Tax X 100
Return on Total Asset = ________________________________
Total Asset
Year N.P Before Interest and Tax Total Assets Ratio
2013-2014
2014-2015
2015-2016
1542347.47
611219.09
1196371.74
2771383.29
3082649.54
2946357.29 55.65%
19.82%
40.53%
Interpretation
This ratio indicates the firm’s ability of generating profit per rupee of total assets. Higher the ratio, the more efficient the managements and utilization of total assets.
Hence in the year, 2013-2014, Return on Total Asset is 55.65%, which shows that there is a efficient utilization of total assets in the firm.
 Return On Capital Employed/ Return On Investment :
Net Profit before Interest and Tax X 100
R.O.I = ____________________________________
Capital Employed
Capital Employed = Shareholders Fund + Long-term Debts
– Fictitious Asset
Year N.P Before Interest and Tax Capital Employed Ratio
2013-2014
2014-2015
2015-2016
1542347.47
611219.09
1196371.74
5260393.82
1769134.43
5247244.47 29.32%
26.6%
22.8%
Interpretation
Return on Capital Employed indicates the firm’s ability of generating profit per rupee of capital employed. Higher the ratio, the more efficient the management and utilization of capital employed in the firm.In the year, 2014-2015, the ratio was 26.60%, which shows the higher returns as compared to the other two years.
TURNOVER RATIOS
 Fixed Asset Turnover Ratio:
Net sales/ C.O.G.S
Fixed Asset Turnover Ratio = ______________________
Net Total Fixed Asset
Year Net Sales Net Total Fixed Asset Ratio
2013-2014
2014-2015
2015-2016
9194259.8
8358418
11033111.8
587982
367941
592756 15.63Times
22.71Times
18.61Times
Interpretation
It indicates the firm’s ability to generate sales per rupee of investment in the fixed assets. Higher the ratio, the more efficient the management and utilization of fixed assets, and vice versa.
Hence in the year,2013-2014, the ratio was 15.63 Times, which was the lowest among all three years. But in the next year, the ratio was higher i.e. 22.71 Times, which shows that there is the increase in the efficient utilization of fixed asset.
 Working Capital Turnover Ratio:
Net Sales
Working Capital Turnover Ratio = _____________________
Working Capital
Year Net Sales Working Capital Ratio
2013-2014
2014-2015
2015-2016
9194259.8
8358418
11033111.8
1590215.55
2255629.18
1824404.31 5.78Times
3.7Times
6.04Times
Interpretation
Working Capital Turnover Ratio indicates the firm’s ability to generate sales per rupee of working capital. In general, higher the ratio, the more efficient the management and utilization of working capital and vice versa.
Hence in the year, 2015-2016, the ratio was 6.04 Times. Which was higher as compared to preceding 2 years, that shows firm’s effective utilization of working capital.
 Stock Turnover Ratio:
Costs of Goods Sold
Stock Turnover Ratio = ________________________
Average Inventory
Opening Stock + Closing Stock
Average Inventory = _______________________________
2
Year Cost of Goods Sold Average Inventory Ratio
2013-2014
2014-2015
2015-2016
7091531.8
7192320.08
9231036.9
1706914
1465843
1360750.45 4.15Times
4.9Times
6.78Times
Interpretation
Stock/ Inventory Turnover Ratio indicate the speed with which the inventory is converted into sales. A high ratio indicates efficient performance since an improvement in the ratio shows same volume of sales has been maintained with a lower investment in stocks.
In the year 2015-2016, the ratio was 6.78 Times, which was higher as compared to preceding 2 years. Thus the Stock Turnover Ratio of Ganesh Medical And General Store is satisfactory.
 Debtors Turnover Ratio:
Net Credit Sales
Debtors Turnover Ratio = ____________________
Average Debtor
Average Debtor = O/P Debtors + C/S Debtor +
O/P B/R + C/S B/R
2
Year Net Credit Sales Average Debtor Ratio
2013-2014
2014-2015
2015-2016
9194259.8
8358418
11033111.8
1596225.6
1221990.9
154954.3 5.76Times
6.84Times
7.12Times
 Average collection Period :
365 days or 12 months or 52 Weeks
Average collection Period =
Debtors’ Turnover
Interpretation
Debtors Turnover Ratio indicates the number of times the debtors are turned over during the year. Higher the value of Debtors Turnover the more liquid are the debtors.
In the same way, shorter collection period, better the quality of debtors. Since the shorter collection period implies the prompt payment by debtors.
Here the collection period is decreased every year and the debtors turnover is increased, which shows satisfactory collection period of Ganesh Medical and General Stores.
 Creditors Turnover Ratio:
Net Credit Purchases
Creditors Turnover Ratio =
Average Creditors (or Payable)
Average Creditors = O/P Creditor + C/S Creditor
O/P B/P + C/S B/P
2
Year Net Credit Purchases Average Creditors Ratio
2013-2014
2014-2015
2015-2016
7355407.8
7410586.08
8274833.8
392707.3
354019
351223.8 18.73Times
20.93Times
23.56Times
 Average Payment Period:
365 days or 12 months or 52 Weeks
Average Payment Period =
Creditors’ Turnover
Interpretation
The average payment period ratio represents the average number of days taken by the firm to pay its creditors. Generally, lower the ratio, the better is the liquidity position of the firm. But the higher payment period also implies greater credit period enjoyed by the firm.
Creditors Turnover Ratio is increasing every year and the payment period is decreasing, which shows unsatisfactory creditworthiness of the firm.
SOLVENCY RATIOS
 Debt- Equity Ratio:
Long-term Debts
Debt- Equity Ratio =
Shareholders Fund
Year Long-term Debts Shareholders
Funds Ratio
2013-2014
2014-2015
2015-2016
853795.21
914735.75
1029138.57 1682602.34
1769134.43
1566371.74 0.50:1
0.52:1
0.66:1
Interpretation
Debt-Equity Ratio indicates the margin of safety to long-term creditors. A low debt-equity ratio implies the use of more equity than debt which means a larger safety of margin for creditors since owner’s equity is treated as a margin of safety by the creditors and vice versa.
Hence the Debt-Equity Ratio is increasing, earlier it was 0.51 in the year 2013-2014, which is increased to 0.66 in the year 2015-2016. Which shows there is a more use of debt than equity.
 Total Asset to Debt Ratio:
Total Assets
Total Asset to Debt Ratio =
Long-term Debts
Year Total Assets Long-term Debts Ratio
2013-2014
2014-2015
2015-2016
2771383.29
3082649.54
2946357.29 853795.21
914735.75
1029138.57 3.24:1
3.36:1
2.86:1
 Proprietary Ratio:
Proprietors’ Funds or Shareholders’ Fund
Proprietary Ratio =
Total Asset (Excluding Fictitious Asset)
Year Shareholders Funds Total Assets Ratio
2013-2014
2014-2015
2015-2016
1682602.34
1769134.43
1566371.74 2771383.29
3082649.54
2946357.29 0.60:1
0.57:1
0.53:1
Interpretation
Proprietary Ratio indicates the extent to which the assets of the company can be lost without affecting the interest of creditors of the company. As this ratio represents the relationship of owner’s funds to total assets, higher the ratio, better is the long-term solvency position of the company.
Since the ratio is decreasing, from 0.6 to 0.53, which shows poor solvency position of the firm.
CHAPTER-5
CONCLUSION
Conclusion
From this project we learn application of theory into practical. By this project I learn to apply ratio in practical. The firm is gaining profit and they are trying to increase their profit. By analyzing the financial statement of company we are able to determine the company’s current financial position. From the project we have concluded that a Ganesh Medical and General Stores have a good financial position and has been able to pay their liabilities.
1. Current ratio is in a better condition, which shows good current position and is used to repay short term debt promptly and it shows better ability to repay short term commitment.
2. After computing gross profit ratio in the first year gross profit is maximum, but after that its falls, hence company needs to improve gross profit.
3. As per the net profit ratio, the firm needs to improve net profit in order to maintain the overall profitability.
4. The collection period is decreased every year and the debtors turnover is increased, which shows satisfactory collection period of Ganesh Medical and General Stores.
SUGGESTION
 Firm has to improve its overall profitability by improving the Gross Profit and Net Profit.
 The firm has to take proper care of their solvency position. As the Proprietary Ratio is decreasing continuously.
 There is a more use of debt than equity in the firm. This will be maintained in the future.
 Payment period should be improved in order to maintain their creditors
 Operating cost should be maintained by the firm.
BIBLIOGRAPHY
Bibliography
 Analysis of Financial Statements (Thakur Publications, Pune).
 Analysis of Financial Statements (T.S. Grewal, C.B.S.E, New Bengaluru).
 Financial Management Accounting, Dr Suhas Mahajan
 Financial Management Dr. S.N.Maheshwari.
ANNEXURE