The ratio for 2004 is equal to 0.14 which means that the company is financing 14% of its assets by debt financing. And that is a good figure.
The ratio in 2004 is showing a decrease of 36% over 2002’s figures and 33% over 2003’s figures which suggest that the company is offering more protection to its creditors.
The company’s dependence on debt financing for its assets is not only less in 2004 but is also showing a gradual decline. This suggests that the company’s creditworthiness is also improving.
This ratio tells us about how efficiently the company can meet its financial charges with its earnings before paying its tax and other financial obligations.
This also tells us about the efficiency of the company against its various financial charges.
The higher the ratio, the better the company’s position of covering its charges.
R
2004
2003
2002
FINANCIAL CHARGES COVERAGE RATIO
29.90
7.69
4.73
PERCENTAGE RISE/FALL IN 2004
Over 2003
Over 2002
288.8%
532%
esults: Table 6.9
Graph 6.6 Financial Charges Coverage Ratio Inference:
The ratio is 29.90 in 2004 that means that the company has RS 29.90 for every Re1 of its financial charges to cover out of its earnings before interest and tax.
In other words we can say that the company has produced Rs29 against every Re1 of its financial charges. And this is a very good sign.
The ratio in 2004 is showing a rise of 289% over 2003 &532% over 2002.this suggests that the company has improved its efficiency in utilizing its finances and is deriving a maximum return from its finances.
This ratio is a measure of the efficiency of the company’s asset management.
It also tells us about how many times the company has turned over (converted) into sales.
The higher the ratio, the more efficient is the company is in asset management.
Table 6.10
R
2004
2003
2002
ASSET TURNOVER RATIO
3.55
3.23
3.06
PERCENTAGE RISE/FALL IN 2004
Over 2003
Over 2002
9.91%
16.01%
esults:
Graph 6.7 Asset Turnover Ratio
Interpretation:
In 2004 the ratio is equal to 3.55 which means that the company has turned over its assets 3.55 times into sales during the year and that is a good sign.
The ratio in 2004 is showing an increase of 9.91% and 16.01% over 2003 and 2002 respectively.
This suggests that the company has improved its assets management.
6.6.2 FIXED ASSETS TURNOVER RATIO
Formula:
Total sales
Average Fixed Assets
Significance:
This ratio is a measure of the company’s efficiency in turning over its fixed assets into sales.
The higher the ratio, the better it is.
R
2004
2003
2002
FIXED ASSET TURNOVER RATIO
7.19
6.92
6.90
PERCENTAGE RISE/FALL IN 2004
Over 2003
Over 2002
3.90%
4.20%
esults: Table 6.11
Graph 6.8 Fixed Assets Turnover Ratio
Interpretation:
The ratio in 2004 is equal to 7.19 this shows that the company has turned over its fixed assets 7.19 times into sales in the year.
The ratio in 2004 is showing a 3.90 % and 4.20% rise over 2003 and over 2002’s values. This suggests that the company’s efficiency in utilizing its fixed assets has increased over the three years.
The rising fixed assets turnover ratio of the company suggests that not only the company’s sales has increased but also that the company is moving towards utilizing its fixed assets to its maximum.
6.6.3 INVENTORY TURNOVER RATIO Formula:
Cost of goods sold
Average inventory
Significance:
The inventory turnover ratio tells us about the company’s efficiency in inventory management.
This tells us that how many times the company has turned over its inventory into finished goods and hence into cost of goods sold.
This also tells us about the liquidity of the items in the inventory.
The higher the ratio the faster the turnover of inventory and hence the more liquid is the inventory.
Results: Table 6.12
2004
2003
2002
INVENTORY TURNOVER RATIO
6.97
6.11
5.52
(IN DAYS )
51.65
58.92
65.23
PERCENTAGE RISE/FALL IN 2004
Over 2003
Over 2002
14.08%
26.27%
Graph 6.9 Inventory Turnover Ratio Graph 6.10 Inventory Turnover in Days Inference:
The ratio is 6.97 for 2004 which means that the company has turned over its inventory almost 7 times into finished goods.
The ratio in 2004 is showing a rise of 14.08% over 2003 and 26.27% over 2002’s figures. This means that the company’s inventory management has improved over the three years.
The inventory turnover in days for the three years2004, 2003 and 2002 is respectively 52 days 59days & 65 days. This shows a 13 days reduction over 2002 which suggest that the inventory has become more liquid.
The above results suggest that the company’s inventory is relatively more liquid and is converted into sales quickly. That’s why the high difference between the current ratio and acid test ratio, showing an increased investment in inventories, do not have any negative impact on company’s liquidity.
6.6.4 PAYABLE TURNOVER RATIO
Formula:
Net Annual credit purchases
Average Accounts payable
Significance:
This ratio tells about a company’s efficiency in paying off its trade obligations/debts.
It shows that how many times in the year the company has turned its account payables into credit purchases i.e. how many times the company has paid its payables generated by its credit purchases.
This ratio is more useful for the trade creditors/suppliers of the company, rather than the company itself.
The higher the ratio, the better it is.
R
2004
2003
2002
PAYABLES TURNOVER RATIO
1.68
1.66
1.75
(IN DAYS)
214 days
217 days
206 days
PERCENTAGE
RISE / FALL IN 2004
Over 2003
Over 2002
1.2%
(4%)
esults: Table 6.13
Graph 6.11 Payable Turnover Ratio Graph 6.12 Payable Turnover in Days Inference:
The ratio is 1.68 in 2004 which tells us that the company has paid its payables of credit purchases 1.68 times in the year, which is almost two times a year and that is not an ideal situation.
In 2004 the ratio has increased by 1.2% over 2003, and decreased by 4% over 2002’s values. The decrease over 2002’s figures is due to the decrease in credit purchases.
The company’s payable turnover in days is 214, 217, 206 days respectively in the years 2004, 2003 and 2002.All these represent that the company pays off its trade debts in too many days, and this is not good sign for the company as this may affect it in a negative way i.e. the company may face difficulties in credit purchasing in the future.
6.6.5 RECEIVABLE TURNOVER RATIO
Formula:
Net Annual credit sales
Average receivables
Significance
This ratio tells us that how many times in the year the company has turned over its receivables i.e. how many times it has generated credit sales from its receivables.
This also tells us about how many times the company has received its receivables in the year.
The higher, the better it is. However a very high value may not be favorable as well, because it may represent a strict collection policy that often costs the company lose its customers.
R
2004
2003
2002
RECEIVABLES TURNOVER RATIO
321.71
189.02
289.93
(IN DAYS)
1.12 days
1.91 days
1.24 days
PERCENTAGE
RISE / FALL IN 2004
Over 2003
Over 2002
70.20%
10.96%
esults: Table 6.14
Graph 6.13 Receivable Turnover Ratio Graph 6.14 Receivable Turnover in Days Inference:
The ratio has value of 321.7 in 2004 which shows that the company has recovered its receivables 321.7 times during the year. And it is more than a good receivable turn over
The ratio in 2004 has increased by 11% and 70% over the values in the years 2002 & 2003 respectively. This means that the company’s receivables are now turning over more quickly.
Both the ratio in 2004 and the gradual rise in its value over the two years are very high. This high rate may seem unfavorable for the company at the first sight. But the fact behind this is that the company’s products are enjoying a very good demand in the market due to which its receivables turn into cash quickly. And due to the same reason the company is not hesitating in maintaining a strict collection policy.
The receivable turnover in days for the three years 2004-2002 are all revolving around 1 or 2 days making the company’s receivables more liquid. This suggests that the difference in company’s cash ratio and acid test ratio (showing some portion of receivables) is not having any negative impact on the company’s liquidity as the receivables here are liquid enough.
“It is defined as the length of time from the commitment of cash for purchases until the collection of receivables resulting from the sales.” It is given by:
(Inventory Turnover in Days + Receivables Turnover in Days)
Cash Cycle:
“It is defined as the length of time from the actual outlay of cash for purchases until the collection of receivables resulting from sales.”
It is given by: (Operating Cycle – Payable Turnover in Days)
Significance:
The Operating Cycle measures the efficiency of overall operations of the company in terms of the number of days the company takes in completing a normal operation.
The length of operating cycles suggests about the current asset needs of the company.
A firm with a very short operating cycle can operate effectively with a relatively small amount of current assets and relatively low current and acid test ratios.
A short operating cycle also suggests a favorable condition of liquidity.
The Cash Cycle suggests some thing about the company’s cash flows and the efficiency of its cash management.
The shorter the cash cycle the better it is.
R
2004
2003
2002
OPERATING CYCLE
52.77 days
60.83 days
66.46 days
CASH CYCLE
-161.23days
-156.17days
-139. 54 days
esults: Table 6.15
Graph 6.14 Operating Cycle in Days Graph 6.15 Cash Cycle in Days Inference:
The Operating Cycle for 2004 is almost 53 days which is 7 days less than that of 2003 and 12 days less than that of 2002. This shows that the company’s operating cycle has shortened very much by the three years. This shows an effective management of operations.
The cycle also suggests that the company can operate effectively with a relatively small amount of current assets and relatively low current and acid test ratios.
This again supports the results of current and acid test ratios in a favorable way. Showing a good liquidity condition of the company.
The company’s Cash Cycleis -161 days in 2004, -156 days in 2003 and -139 days in 2002.this shows that the cash cycle is not only too much shorter but is also continuing to further shortening.
The overly shortened (and even negative) cash cycle suggests a poor (or perhaps a decisive) financing decision by the company. In fact the company is not paying its payables on time; its payable turnover ratio is too large a figure to be subtracted from its operating cycle that the cash cycle goes even to a negative scale.
This ratio tells us the profit of the company relative to sales, after we deduct the cost of production.
It also tells about how the company has priced its products.
The higher the gross profit margin, the more effective the company is in producing and selling products above cost.
Results: Table 6.16
2004
2003
2002
GROSS PROFIT MARGIN/RATIO
13.68%
12.72%
12.19%
PERCENTAGE
RISE / FALL IN 2004
Over 2003
Over 2002
7.55%
12.22%
Graph 6.16 Gross Profit Margin
Inference
The gross profit margin in 2004 is 13.6, suggesting that the company is earning 13.6% of gross profit over its sales.
The gross profit ratio has increased in 2004 by 7.5%over 2003 and by 12.22% over 2002. This shows improvement in company’s effectiveness in producing and selling products above cost.
The higher gross profit margin values also suggest some rise in products’ prices over the three years.
