RATIO ANALYSIS

Introduction:
The ratio analysis is the most powerful tool of
financial Analysis. several ratios calculated from
the accounting data can be grouped into various
classes according to financial activity or function to
be evaluated

DEFINATION:

“The indicate quotient of two mathematical

expression and as “The relationship between to or
more things” it evaluates the financial position and
performance of the firm. As started in the
beginning many diverse groups of people are
interested in analyzing financial information to
indicate the operating and financial efficiency and
growth of firm. these people use ratios to determine
those financial characteristics of firm in which
they interested with the help of ratios one can
determine

The ability of the firm to meet its current

obligations.
  The extent to which the firm has used its
long-term solvency by borrowing funds.
 The efficiency with which the firm is

utilizing its assets in generating the sales

revenue.
 The overall operations efficiency of the

performance of form.

Alexander wall is the pioneer of ratio analysis.

He presented a detailed system of ratio analysis in
the year 1919.Ratio analysis is important one for all
management accounting for decision making
Ratio analysis or financial statement stands for the
process of determining and presenting the
relationship of items and groups of items in the
statement.
Ratio analysis is a powerful tool of financial
analysis.it is a process of identifying the financial
straights and weakness of the firm by properly
establishing the relationship between the different
items of balance sheet and profit and loss account
for a meaningful understanding of the financial
position and performance of the firm.
 NEED OF THE STUDY:
 The study has great significance and provides
benefits various parties whom directly or indirectly
with the company.
 To express the relationship between different

financial aspects in such a way that it allows the user

to draw conclusion about the performance ,strength
and weakness of the company.
 To diagnose the information contained in

financial statement so as to judge the profitability of

the firm.
 The study helps to know a liquidity , solvency,

profitability and turnover position of the company

 OBJECTIVE OF THE
PROJECT :
Objectives of Ratio Analysis are:
Determine liquidity or Short-term solvency and Long-
term solvency. Short-term solvency is the ability of the
enterprise to meet its short-term financial obligations.
Whereas, Long-term solvency is the ability of the
enterprise to pay its long-term liabilities of the business.
Assess the operating efficiency of the business.
Analyze the profitability of the business.
1. Simplify accounting information.
2. Determine liquidity or Short-term solvency and Long-
term solvency. Short-term solvency is the ability of the
enterprise to meet its short-term financial obligations.
Whereas, Long-term solvency is the ability of the
enterprise to pay its long-term liabilities of the business.
3. Assess the operating efficiency of the business.
4. Analyze the profitability of the business.
5. Help in comparative analysis, i.e. inter-firm and intra-
firm comparisons.
Advantages Of Ratio Analysis
Ratio analysis plays an important role in analyzing a
company’s financial performance. Therefore, the
advantages of ratio analysis are:
useful tool for analysis of Financial Statements

Accounting ratios are useful for understanding the financial

position of an enterprise. Bankers, investors, creditors, etc, all can
analyse the Balance Sheet and Statement of Profit and Loss using
ratios.

Simplifies accounting data

Accounting ratios simplify summaries and systematize
accounting data to make it understandable.

Its main contribution lies in communicating precisely the

interrelationships which exists between various elements of
financial statements. In other words, these ratios are useful
because they summarize briefly the results of a complicated
computation.

Helpful in assessing the operating efficiency of business

Accounting ratios are useful for assessing the financial health and
performance of the company. It is assessed by evaluating
liquidity, solvency, profitability, etc.

Useful for forecasting

Ratios are helpful in business planning and future forecasting.
The trend of ratios can be analyzed and use as a guide for the
future.
We can decide about what should be the course of action in the
immediate future. Also, many times on the basis of the trend of
ratios, we can calculate ratios for the number of years.

Useful in locating the weak areas

Accounting ratios assist in locating the weak areas of the business
even though the overall performance is good.
The management can then pay attention to the weaknesses and
take remedial action.

Useful in inter-firm and intra-firm comparison

A firm may compare its performance with the other firms or with
the industry standards in general. The comparison is called inter-
firm comparison.

If we compare the performance of different units which belongs

to the same firms then it is known as “intra-firm comparison”.
Accounting ratios help in making the comparison simple.
LIMITATIONS OF THE STUDY
Limitations of Ratio Analysis:

Ratio analysis information is historic – it is not

current ratio analysis does not take into account external
factors such as a worldwide recession ratio analysis does
not measure the human element of a firm ratio analysis
can only be used for comparison with other firms of the
same size and type it may be difficult to compare with
other businesses as they may not be willing to share the
information
Ratio analysis is a powerful tool for assessing the strengths
and weaknesses of an enterprise. But, it has certain limitations
which are:

 False result
 Ignores Qualitative factors
 Lack of standard ratio
 May not be comparable
 Price level changes are not considered
 Window dressing

False result
We calculate ratios from the financial statements, so the reliability
of the ratio and its analysis depends on the correctness of the
financial statements.

If the financial statements are not true and fair, an analysis will
give a false picture of affairs.
Ignores Qualitative factors
Ratio analysis provides quantitative analysis and thus, ignores
qualitative factors. Such factors may be important while taking a
decision.

Lack of standard ratio

There is no single standard ratio against which we can compare
the ratio.

May not be comparable

Ratios may not be comparable if the different firm follows
different accounting policies and procedures.

For example, if one firm follows the straight-line method of

depreciation while another firm follows the diminishing balance
method, then we cannot make a comparison.

Price level changes are not considered

Change in price level affects the comparability of the ratios. But a
change in price levels is not considered in accounting variables
from which we compute the ratios. Hence, this handicaps the
utility of accounting ratios.

Window dressing
Ratios may be affected by window dressing. Manipulation of
accounts is a way to conceal vital facts and present the financial
position better than what it actually is.

Thus, on account of such a situation, the presence of a particular

ratio may not be a definite indicator of good or bad management.
 These limiting factors are :

1. The user should possess the practical knowledge about the

concerns and the industry in general.
2. Ratios are not an end. They are only means to an end.
3. A single ratio in itself is not important. The trend is more
significant in the analysis. Comparison of ratios should be made.
4. For comparative purposes, there should be a standard ratio.
There is no such standards prescribed for the ratios.
5. The accuracy and correctness of ratios are totally dependent
upon the reliability of the data contained in the financial
statement on the basis of which ratios are calculated.
6. To use ratios, first of all there should be uniformity in the
accounting plan used by both the firms. In addition. There must
be consistency in the preparation of financial statement and
recording the transactions from year to year within that concern.
7. Ratios become meaningless if detached from the details from
which they are derived. The should be used as supplementary
and not substitution of the original absolute figures.
8. Time lag in calculation and communicating the same should
not be unnecessarily too much.
9. The method of presentation should be precise and without any
ambiguity.
10. Price level changes make the ratio analysis meaningless.
11. Inter-firm comparison should never be undertaken in the
case of concerns which are not associated or comparable.
12. All techniques concerning the ratio analysis should be taken
into account.
 SCOPE OF THE STUDY:

The scope of the study limited to collecting financial date

published in the annual reports of the company every
year. the analysis is done to suggest the possible solution.
The study is confined is carried out for 5years(2009-
14.)The present study is confined to only Amara raja
batteries limited only.
 METHODOLOGY:
The main aim of the study is to know the financial
performance of the Amara raja batteries limited, Tirupati,
Chittoor Dist.

Research:
Any efforts which are directed to study of strategy
needed to identify the problems and selection of best
solutions for better results are known as research.

Research Design:

In view of the objects of the study listed above an

exploratory research design has been adopted.
exploratory research is one which is largely interprets
and already available information and it lays particular
emphasis on analysis and interpretation of the existing
and available information.

 To know the financial status of the company.

 To know the credit worthiness of the company.
 To offer suggestions based on research finding.