M.Com.

Part II (Semester 3) Research Methodology

IMPORTANCE OF RATIO ANALYSIS:

As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis
lies in the fact that it presents facts on a comparative basis & enables the drawing of interference
regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm
in respect of the following aspects:
1. Liquidity position
2. Long-term solvency
3. Operating efficiency
4. Overall profitability
5. Inter firm comparison
6. Trend analysis.

1. Liquidity position: -
With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm.
The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when
they become due. A firm can be said to have the ability to meet its short-term liabilities if it has
sufficient liquid funds to pay the interest on its short maturing debt usually within a year as well as to
repay the principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratio is
particularly useful in credit analysis by bank & other suppliers of short term loans.

2. Long-term solvency: -
Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect
of the financial position of a borrower is of concern to the long-term creditors, security analyst & the
present & potential owners of a business. The long-term solvency is measured by the leverage/
capital structure & profitability ratio Ratio analysis s that focus on earning power & operating
efficiency.
Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage ratios, for
instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if
it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly, the
various profitability ratios would reveal whether or not the firm is able to offer adequate return to its
owners consistent with the risk involved.

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M.Com. Part II (Semester 3) Research Methodology

3. Operating efficiency:
Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of
management, is that it throws light on the degree of efficiency in management & utilization of its
assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of
a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its
assets- total as well as its components.

4. Overall profitability:
Unlike the outsides parties, which are interested in one aspect of the financial position of a firm, the
management is constantly concerned about overall profitability of the enterprise. That is, they are
concerned about the ability of the firm to meets its short term as well as long term obligations to its
creditors, to ensure a reasonable return to its owners & secure optimum utilization of the assets of the
firm. This is possible if an integrated view is taken & all the ratios are considered together.

5. Inter firm comparison:

Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-
stone to remedial measures. This is made possible due to inter firm comparison & comparison with
the industry averages. A single figure of a particular ratio is meaningless unless it is related to some
standard or norm. One of the popular techniques is to compare the ratios of a firm with the industry
average. It should be reasonably expected that the performance of a firm should be in broad
conformity with that of the industry to which it belongs. An inter firm comparison would
demonstrate the firms position vice-versa its competitors. If the results are at variance either with the
industry average or with those of the competitors, the firm can seek to identify the probable reasons
& in light, take remedial measures.

6. Trend analysis:
Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether
the financial position of a firm is improving or deteriorating over the years. This is made possible by
the use of trend analysis. The significance of the trend analysis of ratio lies in the fact that the
analysts can know the direction of movement, that is, whether the movement is favorable or
unfavorable. For example, the ratio may be low as compared to the norm but the trend may be
upward. On the other hand, though the present level may be satisfactory but the trend may be a
declining one.

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M.Com. Part II (Semester 3) Research Methodology

Advantages of Ratio Analysis

Financial ratios are essentially concerned with the identification of significant accounting data
relationships, which give the decision-maker insights into the financial performance of a company.
The advantages of ratio analysis can be summarized as follows:
Ratios facilitate conducting trend analysis, which is important for decision making and
forecasting.
Ratio analysis helps in the assessment of the liquidity, operating efficiency, profitability and
solvency of a firm.
Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons.
The comparison of actual ratios with base year ratios or standard ratios helps the management
analyze the financial performance of the firm.

Limitations of Ratio Analysis

Ratio analysis has its limitations. These limitations are described below:

1. Information problems
Ratios require quantitative information for analysis but it is not decisive about analytical
output.
The figures in a set of accounts are likely to be at least several months out of date, and so
might not give a proper indication of the companys current financial position.
Where historical cost convention is used, asset valuations in the balance sheet could be
misleading. Ratios based on this information will not be very useful for decision-making.

2. Comparison of performance over time

When comparing performance over time, there is need to consider the changes in price.
The movement in performance should be in line with the changes in price.
When comparing performance over time, there is need to consider the changes in
technology. The movement in performance should be in line with the changes in
technology.
Changes in accounting policy may affect the comparison of results between different
accounting years as misleading.
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M.Com. Part II (Semester 3) Research Methodology

3. Inter-firm comparison
Companies may have different capital structures and to make comparison of performance
when one is all equity financed and another is a geared company it may not be a good
analysis.
Selective application of government incentives to various companies may also distort
intercompany comparison. Comparing the performance of two enterprises may be
misleading.
Inter-firm comparison may not be useful unless the firms compared are of the same size
and age, and employ similar production methods and accounting practices.
Even within a company, comparisons can be distorted by changes in the price level.
Ratios provide only quantitative information, not qualitative information.
Ratios are calculated on the basis of past financial statements. They do not indicate future
trends and they do not consider economic conditions.

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M.Com. Part II (Semester 3) Research Methodology

RESEARCH METHODOLOGY

Research is defined as a systematic, gathering recording and analysis of data about problem relating
to any particular field.
It determines strength reliability and accuracy of the project.
1. Research Design:
Research Design pertains to the great research approach or strategy adopted for a particular project.
A research project has to be the conducted scientifically making sure that the data is collected
adequately and economically.
The study used a descriptive research design for the purpose of getting an insight over the issue. It is
to provide an accurate picture of some aspects of market environment. Descriptive research is used
when the objective is to provide a systematic description that is as factual and accurate as possible.
2. Method of Data Collection:
Secondary Data: Through the internet and published data

LIMITATION OF THE STUDY

Significant business decisions are frequently made using one or more of the analytical tools
illustrated in this term paper. But, one should be aware of the limitations of these tools and of the
financial statements on which they are based.

Estimates
Financial statements contain numerous estimates. Estimates are used in determining the allowance
for uncollectible receivables, periodic depreciation, the costs of warranties, and contingent losses. To
the extent that these estimates are inaccurate, the financial ratios and percentages are inaccurate.

Cost
Traditional financial statements are based on cost. They are not adjusted for price-level changes.
Comparisons of unadjusted financial data from different periods may be rendered invalid by
significant inflation or deflation. me period.

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M.Com. Part II (Semester 3) Research Methodology

Alternative Accounting Methods

Companies vary in the generally accepted accounting principles they use. Such variations may
hamper comparability. For example, one company may use the FIFO method of inventory costing:
another company in the same industry may use LIFO. If inventory is a significant asset to both
companies, it is unlikely that their current ratios are comparable. In addition to differences in
inventory costing methods, differences also exist in reporting such items as depreciation, depletion,
and amortization. These differences in accounting methods might be detectable from reading the
notes to the financial statements. But, adjusting the financial data to compensate for the different
methods is difficult, if not impossible in some cases.

Atypical Data
Fiscal year-end data may not be typical of the financial condition during the year. Firms frequently
establish a fiscal year-end that coincides with the low point in operating activity or in inventory
levels. Therefore, certain account balances (cash, receivables, payables, and inventories) may not be
representative of the balances in the accounts during the year.

Diversification of Firms
Diversification in U.S. industry also limits the usefulness of financial analysis. Many firms today are
so diversified that they cannot be classified by a single industry they are true conglomerates. Others
appear to be comparable but are not.

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M.Com. Part II (Semester 3) Research Methodology

COMPANY PROFILE

The Reliance group, founded by Dhirubhai H Ambani (1932-2002), is Indias largest private sector
enterprise, with businesses in the energy and material value chain. The flagship company, Reliance
Industries Limited, is a Fortune Global 500 company and is the largest private sector company in
India. The chairman of the company is Mukesh Ambani.
The company is Indias largest petrochemical firm and among the countrys largest companies
(along with the likes of Indian Oil and Tata Group). Oil refining and the manufacture of polyfines
account for nearly all of Reliances sales. It also makes textiles and explores for oil and gas, though
those businesses are relatively small. In 2009 the company merged with its oil and gas refining
subsidiary (Reliance Petroleum) in order to boost the operational and financial synergies of Reliance
as a major refining company.

Reliance Industries Limited (NSE: RELIANCE) is India's largest private sector conglomerate (by
market value) , with an annual turnover of US $ 35.9 billion and profit of US$ 4.85 billion for the
fiscal year ending in March 2008 making it one of India's private sector Fortune Global 500
companies, being ranked at 206th position (2008). It was founded by the Indian industrialist
Dhirubhai Ambani in 1966. Ambani has been a pioneer in introducing financial instruments like fully
convertible debentures to the Indian stock markets. Ambani was one of the first entrepreneurs to
draw retail investors to the stock markets. Critics allege that the rise of Reliance Industries to the top
slot in terms of market capitalization is largely due to Dhirubhai's ability to manipulate the levers of a
controlled economy to his advantage. Though the company's oil-related operations form the core of
its business, it has diversified its operations in recent years. After severe differences between the
founder's two sons, Mukesh Ambani and Anil Ambani, the group was divided between them in 2006.

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M.Com. Part II (Semester 3) Research Methodology

In September 2008, Reliance Industries was the only Indian firm featured in the Forbes's list of
"world's 100 most respected companies.

Stock

According to the company website "1 out of every 4 investors in India is a Reliance shareholder..
Reliance has more than 3 million shareholders, making it one of the world's most widely held stocks.
Reliance Industries Ltd, subsequent to its split in January 2006 has continued to grow. Reliance
companies have been among the best performing in the Indian stock market.

Products

Reliance Industries Limited has a wide range of products from petroleum products, petrochemicals,
to garments (under the brand name of Vimal), Reliance Retail has entered into the fresh foods market
as Reliance Fresh and launched a new chain called Delight Reliance Retail and NOVA Chemicals
have signed a letter of intent to make energy-efficient structures. The primary business of the
company is petroleum refining and petrochemicals. It operates a 33 million tone refinery at Jamnagar
in the Indian state of Gujarat. Reliance has also completed a second refinery of 29 million tons at the
same site which started operations in December 2008. The company is also involved in oil & gas
exploration and production. In 2002, it struck a major find on India's eastern coast in the Krishna
Godavari basin. Gas production from this find was started on April 2, 2009. As of the end of 3rd
quarter of 2009-2010, gas production from the KG D6 ramped up to 60 MMSCMD.

Subsidiaries

Major Subsidiaries & Associates

Reliance Petroleum Limited (RPL) was a subsidiary of Reliance Industries Limited (RIL)
and was created to exploit the emerging opportunities, creating value in the refining sector
worldwide. Currently, RPL stands amalgamated with RIL.

Reliance Life Sciences is a research-driven, biotechnology-led, life sciences organization

that participates in medical, plant and industrial biotechnology opportunities. Specifically,
these relate to Biopharmaceuticals, Pharmaceuticals, Clinical Research Services,
Regenerative Medicine, Molecular Medicine, Novel Therapeutics, Bio-fuels, Plant
Biotechnology and Industrial Biotechnology.

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M.Com. Part II (Semester 3) Research Methodology

Reliance Industrial Infrastructure Limited (RIIL) is engaged in the business of setting

up / operating Industrial Infrastructure that also involves leasing and providing services
connected with computer software and data processing.

Reliance Institute of Life Sciences (Rils) established by Dhirubhai Ambani Foundation, is

an institution of higher education in various fields of life sciences and related technologies.

Reliance Logistics (P) Limited is a single window solutions provider for transportation,
distribution, warehousing, logistics, and supply chain needs, supported by in house state of art
telemetric and telemetry solutions.

Reliance Clinical Research Services (RCRS), a contract research organization (CRO) and
wholly owned subsidiary of Reliance Life Sciences, has been set up to provide clinical
research services to pharmaceutical, biotechnology and medical device companies.

Reliance Solar, The solar energy initiative of Reliance aims to bring solar energy systems
and solutions primarily to remote and rural areas and bring about a transformation in the
quality of life.

Relicord is the first and one of the most dependable stem-cell banking services of South East
Asia offered by Mukesh Ambani controlled Reliance Industries.

Reliance's Oil & Gas find

Andhra Pradesh near Vishakhapatnam. It was the largest discovery of natural gas in world in
financial year 2002-2003. On 2 April 2009, Reliance Industries (RIL) commenced natural gas
production from its D-6 block in the Krishna-Godavari (KG)

The gas reserve is 7 trillion cubic feet in size. Equivalent to 1.2 billion barrels (165 mil in 2002,
Reliance found natural gas in the Krishna Godavari basin off the coast of lion tonnes) of crude oil,
but only 5 trillion cubic feet are extractable.

On 2008 Oct 8, Anil Ambani's Reliance Natural Resources took Reliance Industries to the Bombay
High Court to uphold a memorandum of understanding that said RIL will supply the natural gas at
$2.34 per million British thermal units to Anil Ambani.

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M.Com. Part II (Semester 3) Research Methodology

Reliance Retail

Reliance Retail is the retail business wing of the Reliance business. Many brands like Reliance Fresh,
Reliance Footprint, Reliance Time Out, Reliance Digital, Reliance Wellness, Reliance Trends,
Reliance AutoZone, Reliance Super, Reliance Mart, Reliance iStore, Reliance Home Kitchens, and
Reliance Jewel come under the Reliance Retail brand. Reliance saw opportunity in retailing chicken,
mutton and other meat products (halal and non-halal) through one of its retail arms called "Delight
Non-Veg." One of the Delight outlets has been shut down due to protest by anti-animal cruelty
activists at Gandhi Nagar, Delhi who want Reliance to close its non-veg food marketing.

Environmental record
Reliance Industry is the worlds largest polyester producer and as a result one of the largest producers
of polyester waste in the world. In order to deal with this large amount of waste they had to create a
way to recycle the waste. They operate the largest polyester recycling center that uses the polyester
waste as a filling and stuffing. They use this process to develop a strong recycling process which won
them a reward in the Team Excellence competition.

Reliance Industries backed a conference on environmental awareness in New Delhi in 2006. The
conference was run by the Asia Pacific Jurist Association in partnership with the Ministry of
Environment & Forests, Govt. of India and the Maharashtra Pollution Control Board. The conference
was to help bring about new ideas and articles on various aspects of environmental protection in the
region. Maharashtra Pollution Control Board invited various industries complied with the pollution
control norms to take active part in the conference and to support as a sponsor. The conference
proved effective as a way to promote environmental concern in the area.

Awards & Recognition

International Refiner of the Year in 2005 at the 23rd Annual Hart's World Refining and Fuels
Conference.

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 M.Com. Part II (Semester 3) Research Methodology

Reliance Industries Balance Sheet from 2006 to 2009

in Rs. Cr.
Mar '06 Mar '07 Mar '08 Mar '09
12 months 12 months 12 months 12 months
Sources of Funds
Total Share Capital 1,393.17 1,393.21 1,453.39 1,573.53
Equity Share Capital 1,393.17 1,393.21 1,453.39 1,573.53
Share Application Money 0.00 60.14 1,682.40 69.25
Preference Share Capital 0.00 0.00 0.00 0.00
Reserves 43,760.90 59,861.81 77,441.55 112,945.44
Revaluation Reserves 4,650.19 2,651.97 871.26 11,784.75
Net worth 49,804.26 63,967.13 81,448.60 126,372.97
Secured Loans 7,664.90 9,569.12 6,600.17 10,697.92
Unsecured Loans 14,200.71 18,256.61 29,879.51 63,206.56
Total Debt 21,865.61 27,825.73 36,479.68 73,904.48
Total Liabilities 71,669.87 91,792.86 117,928.28 200,277.45
Application of Funds
Gross Block 84,970.13 99,532.77 104,229.10 149,628.70
Less: Accum. Depreciation 29,253.38 35,872.31 42,345.47 49,285.64
Net Block 55,716.75 63,660.46 61,883.63 100,343.06
Capital Work in Progress 6,957.79 7,528.13 23,005.84 69,043.83
Investments 5,846.18 16,251.34 20,516.11 20,268.18
Inventories 10,119.82 12,136.51 14,247.54 14,836.72
Sundry Debtors 4,163.62 3,732.42 6,227.58 4,571.38
Cash and Bank Balance 239.31 308.35 217.79 500.13
Total Current Assets 14,522.75 16,177.28 20,692.91 19,908.23
Loans and Advances 8,266.55 12,506.71 18,441.20 13,375.15
Fixed Deposits 1,906.85 1,527.00 5,609.75 23,014.71
Total Current Assets, Loans &
24,696.15 30,210.99 44,743.86 56,298.09
Advances
Differed Credit 0.00 0.00 0.00 0.00
Current Liabilities 17,656.02 24,145.19 29,228.54 42,664.81
Provisions 3,890.98 1,712.87 2,992.62 3,010.90
Total Current Liabilities & Provisions 21,547.00 25,858.06 32,221.16 45,675.71
Net Current Assets 3,149.15 4,352.93 12,522.70 10,622.38
Miscellaneous Expenses 0.00 0.00 0.00 0.00
Total Assets 71,669.87 91,792.86 117,928.28 200,277.45
Contingent Liabilities 24,897.66 46,767.18 37,157.61 36,432.69
Book Value (Rs) 324.03 439.57 542.74 727.66

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 M.Com. Part II (Semester 3) Research Methodology

Reliance Industries Profit & Loss Account from 2006 to 2009

in Rs. Cr.
Mar '06 Mar '07 Mar '08 Mar '09
12 months 12 months 12 months 12 months
Income
Sales Turnover 89,124.46 118,353.71 139,269.46 146,328.07
Excise Duty 8,246.67 6,654.68 5,463.68 4,369.07
Net Sales 80,877.79 111,699.03 133,805.78 141,959.00
Other Income 546.96 236.89 6,595.66 1,264.03
Stock Adjustments 2,131.19 654.60 -1,867.16 427.56
Total Income 83,555.94 112,590.52 138,534.28 143,650.59
Expenditure
Raw Materials 59,739.29 80,791.65 98,832.14 109,284.34
Power & Fuel Cost 1,146.26 2,261.69 2,052.84 3,355.98
Employee Cost 978.45 2,094.09 2,119.33 2,397.50
Other Manufacturing Exp. 668.31 1,112.17 715.19 1,162.98
Selling and Admin Exp. 5,872.33 5,478.10 5,549.40 4,736.60
Miscellaneous Expenses 300.74 321.23 412.66 562.42
Preoperative Exp. Capitalised -155.14 -111.21 -175.46 -3,265.65
Total Expenses 68,550.24 91,947.72 109,506.10 118,234.17

Operating Profit 3,400.91 4,815.15 4,847.14 5,195.29

PBDIT 0.00 0.00 0.00 0.00
Interest 10,711.18 14,528.75 23,018.14 18,446.66
PBDT 0.88 0.51 48.10 0.00
Depreciation 10,712.06 14,529.26 23,066.24 18,446.66
Other Written Off 1,642.72 2,585.35 3,559.85 3,137.34
Profit Before Tax 9,069.34 11,943.40 19,458.29 15,309.32
Extra-ordinary items 3,400.91 4,815.15 4,847.14 5,195.29
Tax 10,711.18 14,528.75 23,018.14 18,446.66
Reported Net Profit 0.88 0.51 48.10 0.00
Total Value Addition 8,810.95 11,156.07 10,673.96 8,949.83
Preference Dividend 0.00 0.00 0.00 0.00
Equity Dividend 1,393.51 1,440.44 1,631.24 1,897.05
Corporate Dividend Tax 195.44 202.02 277.23 322.40
Per share data (annualized)
Shares in issue (lakh) 13,935.08 13,935.08 14,536.49 15,737.98
Earning Per Share (Rs) 65.08 85.71 133.86 97.28
Equity Dividend (%) 100.00 110.00 130.00 130.00
Book Value (Rs) 324.03 439.57 542.74 727.66

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M.Com. Part II (Semester 3) Research Methodology

FINANCIAL POSITION OF RELIANCE INDUSTRIES LIMITED

After going through the various ratios, fund flow and cash flow analysis would like to state that:
The long-term solvency of the company is very satisfactory.
Immediate solvency position of the company is also quite satisfactory. The company can meet
its urgent obligations immediately.
Credit policies are effective.
Overall profitability position of the company is quite satisfactory.
Dividend payout ratio is satisfactory. Dividend paid in all years to its shareholders.
The company is paying promptly to the suppliers.
The return on capital employed is satisfactory.
The profitability position of the company is very satisfactory.

DATA ANALYSIS AND INTERPRETATION

Calculation and Interpretation of Ratios

1) Current Ratio:
Formula:
Current Assets
Current Ratio =
Current Liabilities

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

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M.Com. Part II (Semester 3) Research Methodology

Current Assets 24,696.15 30,210.99 44,743.86 56,298.09

Current Liabilities 21,547.00 25,858.06 32,221.16 45,675.71

Current Ratio 1.14 1.16 1.38 1.23

Comments:
In Reliance Industries Ltd., the current ratio is 1.23:1 in 2008-2009. It means that for one rupee of
current liabilities, the current assets are 1.23 rupee is available to the them. In other words, the
current assets are 1.23 times the current liabilities.
Almost 4 years current ratio is same but current ratio in 2007-2008 is bit higher, which makes
company sounder. The consistency increase in the value of current assets will increase the ability of
the company to meets its obligations & therefore from the point of view of creditors the company is
less risky.
Thus, the current ratio throws light on the companys ability to pay its current liabilities out of its
current assets. The Reliance Industries Ltd. has a goody current ratio.

2) Liquid Ratio:
Formula:
Quick Assets
Liquid Ratio =
Quick Liabilities

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

Quick Assets 14,576.33 18,674.48 24,227.75 36029.91

Quick Liabilities 21,547.00 25,858.06 32,221.16 45,675.71

Liquid Ratio 0.67 0.69 0.75 0.78

Comments:

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M.Com. Part II (Semester 3) Research Methodology

The liquid or quick ratio indicates the liquid financial position of an enterprise. Almost in all 4 years
the liquid ratio is same, which is better for the company to meet the urgency. The liquid ratio of the
Reliance Industries Ltd. has increased from 0.67 to 0.78 in 2008-2009 which shows that company
follow low liquidity position to achieve high profitability.
This indicates that the dependence on the long-term liabilities & creditors are more & the company is
following an aggressive working capital policy.
Liquid ratio of Company is not favorable because the quick assets of the company are less than the
quick liabilities. The liquid ratio shows the companys ability to meet its immediate obligations
promptly.

3) Proprietary Ratio:
Formula:
Proprietary Funds OR
Proprietary Ratio =
Total Funds Shareholders Funds
Proprietary
Ratio = Fixed Assets + Current
Liabilities

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

Proprietary Fund 49,804.26 63,967.13 81,448.60 126,372.97

Total Fund 68,520.72 87,439.93 105,405.58 189,655.07

Proprietary Ratio 0.72 0.73 0.77 0.66

Comments:
The Proprietary ratio of the company is 0.66 in the year 2008-2009. It means that the for every one
rupee of total assets contribution of 66 paisa has come from owners fund & remaining balance 34
paisa is contributed by the outside creditors. This shows that the contribution by owners to total
assets is more than the contribution by outside creditors. As the Proprietary ratio is very favorable of
the company. The Companys long-term solvency position is very sound.

4) Stock-Working Capital Ratio:

Formula:
Stock-Working Capital Ratio = Stock

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M.Com. Part II (Semester 3) Research Methodology

Working Capital

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

Stock 10,119.82 12,136.51 14,247.54 14,836.72

Working Capital 3149.15 4352.93 12,522.70 10,622.38

Stock Working 3.21 2.78 1.13 1.39

Capital Ratio

Comments:
This ratio shows that extend of funds blocked in stock. The amount of stock is decreasing from the
year 2005-2006 to 2008-2009. However, in the year 2008-2009 it has increased a little to. In the year
2007-2008 the sale is increased which affects decrease in stock that effected in increase in working
capital in 2007-2008.
It shows that the solvency position of the company is sound.

5) Capital Gearing Ratio:

Formula:
Preference Capital+ Secured Loan
Capital Gearing Ratio =
Equity Capital & Reserve & Surplus

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

Secured Loan 7,664.90 9,569.12 6,600.17 10,697.92

Equity Capital & 49,804.26 63,967.13 81,448.60 126,372.97

Reserves & Surplus

Capital Gearing 16% 15% 8.2% 8.5%

Ratio

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M.Com. Part II (Semester 3) Research Methodology

Comments:
Gearing means the process of increasing the equity shareholders return through the use of debt.
Capital gearing ratio is a leverage ratio, which indicates the proportion of debt & equity in the
financing of assets of a company.
For the last 2 years [i.e.2007-2008 TO 2008-2009] Capital gearing ratio is all most same which
indicates, near about 8.5% of the fund covering the secured loan position. But in the year 2005-2006
the Capital-gearing ratio is 16%. It means that during the year 2005-2006 company has borrowed
more secured loans for the companys expansion.

6) Debt-Equity Ratio:
Formula:
Total Long Term Debt
Debt-Equity Ratio =
Total Shareholders Funds

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

Long Term Debt 21,865.61 27,825.73 36,479.68 73,904.48

Shareholders Fund 49,804.26 63,967.13 81,448.60 126,372.97

Debt Equity Ratio 0.44 0.44 0.45 0.59

Comments: The debt equity ratio is important tool of financial analysis to appraise the financial
structure of the company. It expresses the relation between the external equities & internal equities.
This ratio is very important from the point of view of creditors & owners.
The rate of debt equity ratio is increased from 0.44 to 0.59 during the year 2005-2006 to 2008-2009.
This shows that with the increase in debt, the shareholders fund also increased. This shows long-term
capital structure of the company is sound. The lower ratio viewed as favorable from long term
creditors point of view.

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M.Com. Part II (Semester 3) Research Methodology

7) Gross Profit Ratio:

Formula:
Gross Profit
Gross Profit Ratio = * 100
Net Sales

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

Gross Profit 18345.48 25,439.43 30,086.28 25,758.2

Net Sales 80,877.79 111,699.03 133,805.78 141,959

Gross Profit Ratio 22.7 22.7 22.4 18.14

Comments:
The gross profit is the profit made on sale of goods. It is the profit on turnover. In the year 2005-2006
the gross profit ratio is 22.7%. It has decreased to 18.14% in the year 2008-2009 due to increase in
sales with corresponding more increase in cost of goods sold.
It is continuously declined from 2005-2006 t0 2008-2009 due to high cost of purchases & overheads.
Although the gross profit ratio is declined during the years 2005-2006 to 2008-2009. The net sales
and gross profit is continuously increasing from the year 2005-20063 to 2008-2009.

8) Operating Ratio:
Formula:
COGS + Operating Expenses
Gross Operating Ratio = * 100
Net Sales

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

COGS + Operating 68,550.24 91,947.72 109,506.10 118,234.17

Expenses

Net Sales 80,877.79 111,699.03 133,805.78 141,959

Operating Ratio 84.75% 82.31% 81.80% 83.28%

Comments:

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M.Com. Part II (Semester 3) Research Methodology

The operating ratio shows the relationship between costs of activities & net sales. Operating ratio
over a period of 4 years when compared that indicate the change in the operational efficiency of the
company.
The operating ratio of the company has decreased in 3 year and increase a little in last year. This is
due to increase in the cost of goods sold, which in 2005-2006 was 84.75%, in 2006-2007 was
82.31%, in 2007-2008 was 81.80% & in 2008-2009 it is 83.28%. Though the cost has increased in
2006-2007 as compared to 2005-2006, it is reducing continuously over the next two years, indicate
downward trend in cost but upward / positive trend in operational performance.

9) Net Profit Ratio:

Formula:
NPAT
Net Profit Ratio = * 100
Net Sales

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

NPAT 9,069.34 11,943.40 19,458.29 15,309.32

Net Sales 80,877.79 111,699.03 133,805.78 141,959.00

Net Profit Ratio 11.21% 10.69% 14.54% 10.78%

Comments:
The net profit ratio of the company is high in all year but the net profit is increasing order from this
ratio of 4 year it has been observe that the from 2005-2006 to 2007-2008 the net profit is increased
and it decreased in the year 2008-2009.
Profitability ratio of company shows considerable increase in 3 years and decreased in the last year.
Companys sales have increased in 3 years and decreased in the last year. At the same time company,
has been successful in controlling the expenses i.e. manufacturing & other expenses.
It is a clear index of cost control, managerial efficiency & sales promotion.

10) Stock Turnover Ratio:

Formula:
Stock Turnover Ratio = COGS

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M.Com. Part II (Semester 3) Research Methodology

Average Stock

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

COGS 18,90,98 21,96,32 28,33,02 25,72,26

Average Stock 5,49,90 5,97,58 6,73,11 6,89,30

Stock Turnover Ratio 3.4 3.6 4.20 3.73

Comments:
Stock turnover ratio shows the relationship between the sales & stock it means how stock is being
turned over into sales. The stock turnover ratio is 2001-2002 was 3.4 times which indicate that the
stock is being turned into sales 3.4 times during the year. The inventory cycle makes 3.4 rounds
during the year. It helps to work out the stock holding period, it means the stock turnover ratio is 3.4
times then the stock holding period is 3.5 months [12/3.4=3.5months]. This indicates that it takes 3.5
months for stock to be sold out after it is produced. For the last 4 years stock turnover ratio is lower
than the standard but it is in increasing order. Inurn the year 2001-2002 to 2004-2005 the stock
turnover ratio has improved from 3.4 to 3.73 times, it means with lower inventory the company has
achieved greater sales. Thus, the stock of the company is moving fast in the market.

11) Return on Capital Employed:

Formula:
NPAT
Return on Capital Employed = * 100
Capital Employed

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

NPAT 9,069.34 11,943.40 19,458.21 15,308.32

Capital Employed 71,669.87 145,415.73 117,928.28 200,277.45

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M.Com. Part II (Semester 3) Research Methodology

Return On Capital 12.65% 8.21% 16.50% 7.64%

Employed

Comments:
The return on capital employed shows the relationship between profit & investment. Its purpose is to
measure the overall profitability from the total funds made available by the owner & lenders.
The return on capital employed of Rs.7.64 indicate that net return of Rs. 7.64 is earned on a capital
employed of Rs.100. this amount of Rs. 7.64 is available to take care of interest, tax, &
appropriation.
The return on capital employed is show-mixed trend, i.e. it decreases in 2006-2007, then increase in
2007-2008 and finally decrease in 2008-2209.In 2007-2008 It is highest that is 16.50%. This
indicates a very high profitability on each rupee of investment & has a great scope to attract large
amount of fresh fund.

12) Earnings per Share:

Formula:
NPAT
Earnings per Share =
Number of Equity Shares

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

NPAT 9,06934 11,943,40.00 19,458,29.00 15,309,32.00

No. of Equity Share 13,935.08 13,935.08 14,536.49 15,737.98

Earnings Per Share 65.08 85.71 133.86 97.28

Comments:
Earnings per share is calculated to find out overall profitability of the company. Earning per share
represents the earning of the company whether or not dividends are declared.
The Earning per share is 97.28 means shareholder gets Rs. for each share of Rs. 10/-. In other words,
the shareholder earned Rs. 97.28 per share.

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M.Com. Part II (Semester 3) Research Methodology

The net profit after tax of the company is increasing in all years accepts 2008-2009. Therefore, the
shareholders earning per share is increased continuously from 2005-2006 to 2007-2008 by 65.08-
133.86% and decrease in 2008-2009 to 97.28%. This shows it is continuous capital appreciation per
unit share for consecutive three years and capital depreciation per unit share in the last year.
The above analysis shows the Earning per share and Dividend per share is increasing rapidly. It is
beneficial to the shareholders and prospective investor to invest the money in this company.

13) Dividend Payout Ratio:

Formula:
Dividend per Share
Dividend Payout Ratio = * 100
Earnings per Share

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

Dividend Per Share 10.00 10.33 11.22 12.05

Earning Per Share 65.08 85.71 133.86 97.28

Dividend Pay-out 15.36% 12.05% 8.38% 12.38%

Ratio

Comments:
The company earned profit in all four years. So, its declare dividend in all four years. In the year
2005-2006, 2006-2007 and 2008-2009 the Dividend payout ratio is 15.36, 12.05 and 12.38
respectively. In the year 2007-2008 the company has declared the dividend 8.38 because the
company has not earned more profit in the year 2001-2002 hence the company has not declared more
dividends in the year 2008-2009. However, the company has declared more dividends in the year
2005-2006 as the company has sufficient profit. From this one can say that the company is more
conservative for expansion.

14) Cost of Goods Sold Ratio:

Formula:
Cost of Goods Sold Ratio = COGS * 100

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M.Com. Part II (Semester 3) Research Methodology

Net Sales

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

COGS 62,532.31 86,259.6 103,719.5 116,200.8

Net Sales 80,773.79 111,699.03 133,805.78 141,959.00

Cost of Goods Sold 77.31 77.22 77.51 81.85

Ratio

Comments:
This ratio shows the rate of consumption of raw material in the process of production. In the year
2005-2006 the cost of goods sold ratio is 77.31% so the gross profit is 22.69%. It indicates that in
2005-2006, the 77.31% of raw material is consumed in the process of production.
During the 3 years, the rate of cost of goods sold ratio is almost same and it increased in last year
however the gross profit & sales is increased during the same period.

15) Cash Ratio:

Formula:
Cash + Bank + Marketable Securities
Cash Ratio =
Total Current Liabilities

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

Cash + Bank + 239.31 308.31 217.79 500.13

Marketable Securities

Total Current Liabilities 21,547.00 25,858.06 32,221.16 45,675.71

Cash Ratio 0.011 0.011 0.006 0.010

Comments:

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M.Com. Part II (Semester 3) Research Methodology

This ratio is called as super quick ratio or absolute liquidity ratio. In the year 2005-2006 the cash
ratio is 0.011 & remains same in the year 2006-2007. Then it is decreased to 0.006 in the year 2007-
2008 & increased in the year 2008-2009 t0 0.010.
This shows that the company has little cash, bank balance, & marketable securities to meet any
contingency.

16) Return on Proprietors Fund Ratio:

Formula:
NPAT
Return on Proprietors Fund Ratio = * 100
Proprietors Fund

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

NPAT 9,069.34 11,943.40 19,458.29 15,309.32

Proprietors Fund 49,804.26 63,967.13 81,448.60 126,372.97

Return on 18.20 16.67 23.89 12.11

Proprietors Fund

Comments:
Return on proprietors fund shows the relationship between profits & investments by proprietors in
the company. In the year 2005-2006 the return on proprietors fund is 18.20% it means the net return
of Rs. 18.20 approximately is earned on the each Rs. 100 of funds contributed by the owners.
During the last 4 years, the rate of return on proprietors fund is in fluctuating order. The return on
proprietors fund during the year 2005-2006 to 2008-2009 is decreased from 18.20% to 12.11% and
it is maximum in the year 2007-2008.
It shows that the company has very large returns available to take care of high dividends, large
transfers to reserve etc. & has a great scope to attract large amount of fresh fund from owners.

17) Operating Profit Ratio:

Formula:
Operating Profit
Operating Profit Ratio = * 100
Net Sales

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M.Com. Part II (Semester 3) Research Methodology

YEAR 2005-2006 2006-2007 2007-2008 2008 -2009

NPAT 14,458.74 20,405.91 22,432.52 24,152.39

Proprietors Fund 80,877.79 111,699.03 133,805.78 141,959

Return on 17.87 18.26 16.76 17.04

Proprietors Fund

Comments:
Operating profit ratio shows the relationship between operating profit & the sales. The operating
profit is equal to gross profit minus all operating expenses or sales less cost of goods sold and
operating expenses.
The operating profit ratio of 17.04% indicates that average operating margin of Rs.17 is earned on
sale of Rs. 100. This amount of Rs. 17 is available for meeting non-operating expenses. In the other
words operating profit ratio 17.04means that 17.04% of net sales remains as operating profit after
meeting all operating expenses.
During the last 4 years, the operating profit ratio is remains almost same. It indicates that the
company has great efficiency in managing all its operations of production, purchase, inventory,
selling and distribution and also has control over the direct and indirect costs. Thus, company has a
large margin is available to meet non-operating expenses and earn net profit.

FINDINGS

1. The current ratio has shown non-fluctuating trend as 1.14, 1.16, 1.38 and 1.23 during 2006,
2007, 2008 and 2009.
2. The quick ratio is also in non-fluctuating trend throughout the period 2006 09 resulting as
0.67, 0.69, 0.75, 0.78. The Company believes in high profitability and low liquidity position.
3. The proprietary ratio has shown a non-fluctuating trend. The proprietary ratio is decreased
compared with the last year.
4. The stock working capital ratio decreased from 3.21 to 1.39 in the year 2006 09.

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M.Com. Part II (Semester 3) Research Methodology

5. The capital gearing ratio is decreased form 2006 08 (0.16, 0.15 and 0.82) and increased in
2009 to 0.85.
6. The debt-equity ratio increased from 0.44-0.59 in the year 2006-09.
7. The gross profit ratio is in fluctuation manner. It decreased in the current year compared with
the previous year from 23.1% to 18.97%.
8. The net profit ratio is also decreased in the current year compared with the previous year from
14.54% to 10.78%.
9. The operating ratio is increased in the current year compared with the previous year from
81.8% to 83.28%.
10. The return on capital employed is increased in the year 2006 and 2008 while it decreased in
the year 2007 and 2009.
11. The earning per share is maximum in the year 2007-2008 and minimum in the year 2005-
2006.
12. Dividend pay-out ratio is maximum in the year 2005-2006 and minimum in the 2007-2008.
13. Cost of goods sold shows a non-fluctuating pattern in the year 2005-2008 and increased in the
year 2008-2009.
14. The cash ratio shows a non-fluctuating pattern in the year 2006, 2008 and 2009 but decreased
in the year 2008.
15. Return on proprietorship fund is maximum in the year 2007-2008 and minimum in the year
2008-2009.
16. The operating profit ratio shows almost similar pattern in all years but it is maximum in the
year 2006-2007 and minimum in the year 2007-2008.
17. The net working capital available to the company was maximum in the year 2009 shows the
high liquidity position of the firm and it was minimum in the year 2007 shows the low
liquidity position of the firm.

SUGGESTIONS, RECOMMENDATIONS & CONCLUSION

1. Liquidity refers to the ability of the concern to meet its current obligations as and when these
become due. The company should improve its liquidity position.

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M.Com. Part II (Semester 3) Research Methodology

2. The company should make the balance between liquidity and solvency position of the
company.
3. The profit ratio is decreased in current year so the company should pay attention to this
because profit making is the prime objective o every business.
4. The cost of goods sold is high in every year so the company should do efforts to control it.
5. The long term financial position of the company is very good but it should pay a little
attention to short term solvency of the company.

CONCLUSION:

The companys overall position is at a very good position. The company achieves sufficient profit in
past four years. The long-term solvency position of the company is very good. The company
maintains low liquidity to achieve the high profitability. The company distributes dividends every
year to its share holders. The profit of the company decreased in the last year due to maintaining the
comparatively high liquidity. The net working capital of the company is maximum in the last year
shows the maximum liquidity.

BIBLIOGRAPHY

1. Annual Reports of Reliance Industries Limited:

F.Y. 2005-2006
F.Y. 2006-2007
F.Y. 2007-2008

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M.Com. Part II (Semester 3) Research Methodology

F.Y. 2008-2009

2. www.ril.com

3. www.moneycontrol.com

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