CURRENT RATIO:
Particulars 2007 2008 2009
Current ratio 1.31 1.22 1.236
Current ratio = current assets/current liabilities.
An ideal current ratio is 2:1. This means the company should have double the amount of
assets as compared to liabilities; so as to enable it to pay off the liabilities well in time-
as some current assets have les liquidity- and also have surplus funds in case of any
contingencies.
As per the data of jai bhagwati mills, the current ratio in the first year is 1.3 (approx) and
it’s reduced to 1.2 (approx) in the next two years. This goes to show that the company
has to take some measures to get its liquidity condition in a better position; otherwise, it
might face difficulties in future when it has to pay off its debts.
Liquid ratio:
Particulars 2007 2008 2009
liquid ratio 1.06 0.88 1.052
Liquid ratio = current assets – stock- prepaid expenses / current liabilities – bank
overdraft
In finance, the Acid-test or quick ratio or liquid ratio measures the ability of a company
to use its near cash or quick assets to immediately extinguish or retire its current
liabilities.
Inventory and prepaid expenses are excluded from the sum of assets financially,
because it is the only current asset which cannot be readily converted into cash, and
prepaid expenses once paid, cannot be taken back. Generally, the acid test ratio should
be 1:1, however this varies widely by industry. In general, the higher the ratio, the
greater the company's liquidity (i.e., the better ability to meet current obligations using
liquid assets).
Considering the liquid ratio for jai bhagwati textile mills, we can conclude that the
company is a very good position. In the year 2007, the quick ratio is ideal (i.e., 1:1).
However, in the next year, it’s declined by almost 20%, but the company has made a
recovery in the year 2009.
Hence, we can say that the company is managing its current assets well, as opposed to
the results of current ratio.
Therefore, if we consider the results of current ratio and liquid ratio, we get totally
different results about the financial position of the company. So, the company should be
concentrating on managing its inventory out of all its current assets.
debtors’ collection period:
Particulars 2007 2008 2009
debtors’ collection period
(in days)
66.26 50.32 69.20
Debt collection period is the period over which the debtors are collected on an average
basis. It indicates the rapidity or slowness with which the money is collected from
debtors.
Debt Collection Period = 12 Months or 365 Days/Debtors Turnover Ratio
This ratio indicates how quickly and efficiently the debts are collected. The shorter the
period the better it is and longer the period more the chances of bad debts. Although no
standard period is prescribed anywhere, it depends on the nature of the industry.
A Jai bhagwati textile mill has a policy of granting credit for a period of 2 months that is
60 days.
The results of debtors’ collection period show that the company is not lax in its debt
policies. Over the three years, the company has an average of 62 days, by which we
can conclude that the company very well conforms to its debtors’ collection policy.
Net profit ratio:
Particulars 2007 2008 2009
Net Profit Ratio (In %) 0.61 2.75 0.47
Net profit margin or ratio = Earning after tax * 100
Net Sales
Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as
percentage.
The two basic components of the net profit ratio are the net profit and sales. The net
profits are obtained after deducting income-tax and, generally, non-operating expenses
and incomes (like return on investments, profit/loss on sale of assets) are excluded from
the net profits as they lie outside the business.
NP ratio is used to measure the overall profitability and hence it is very useful to
proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not
be able to achieve a satisfactory return on its investment.
higher the ratio the better is the profitability.
In jai Bhagwati, as per the cost structure, the company earns 2% profit from its overall
manufacturing cost.
According to the above calculation, NPR for 2007 is 0.61% which is less than 2%. It
shows the company has only been able to recover its manufacturing cost; hardly
earning any profit.
But in 2008, the company’s earning capacity has increased to a great extent i.e. 2.75%
net profit, more than its target.
Now again, in 2009, the company’s profit has decreased to 0.47% which is even lesser
than 2007. It shows the company has fall drastically in terms of earning profit and badly
needs to improve upon its overall manufacturing system.
Stock turnover ratio:
Particulars 2007 2008 2009
stock turnover 9.34 7.07 7.14
In accounting, the Inventory turnover is a measure of the number of times inventory is
sold or used in a time period such as a year. The equation for inventory turnover equals
the cost of goods sold divided by the average inventory.
In the year 2007, the inventory turnover is 9.34, which indicates a good position of
liquidity for the company, as the stock gets converted into cash at an approximate
interval of 40 days. However, in the year 2008 and 2009, the stock turnover has
reduced to almost 7, which shows that the number of days for the stock to get converted
into cash has increased to almost 50 days. So the company should take appropriate
measures to maintain its liquidity position.
Creditors’ turnover
Particulars 2007 2008 2009
creditor's turnover 1.653 2.121 1.690
It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable
include both sundry creditors and bills payable.
Creditors Turnover Ratio = Credit Purchase / Average Trade Creditors
A high creditor’s turnover ratio or a lower credit period ratio signifies that the creditors
are being paid promptly. This situation enhances the credit worthiness of the company.
However a very favourable ratio to this effect also shows that the business is not taking
the full advantage of credit facilities allowed by the creditors.
