MEANING OF FINANCIAL ANALYSIS

Financial Statements Analysis is an analysis which critically examines the relationship between
various elements of the Financial Statements. It focuses on the evaluation of past operations as
revealed by the analysis of basic statements. It is a process of scanning Financial Statements for
evaluating the relationship between the items as disclosed in these. It is an important means of
assessing past performance and forecasting and planning future performance. The analysis
simplifies, summarizes and systematizes the monotonous figures.
MEANING OF RATIO ANALYSIS
Analysis of Financial Statements with the help of Ratio is termed as Ratio Analysis. Ratio
Analysis is a widely used tool of Financial Analysis. It can be used to compare the risk and
return relationships of firms of different sizes. It is defined as the systematic use of ratio to
interpret the Financial Statements so that the strengths and weaknesses of a firm as well as its
historical performance and current financial condition can be determined.
4.3 OBJECTIVES OF RATIO ANALYSIS
Following are the important objectives of Ratio Analysis
1) To provide the necessary basis for Inter-period and Inter-firm Comparison.
2) To help in providing a part of information needed in the process of decision-making.
3) To focus on facts on a comparative basis and facilitate drawing of conclusions relating to the
performance of a firm.
4) To evaluate the performance of a firm in determining the important aspects of a business
such as liquidity, solvency, operational efficiency, overall profitability capital gearing, etc.
5) To throw light on the degree of efficiency in the management and the effectiveness in the
utilization of its assets.
6) To provide the way for effective control of the enterprise in the matter of achieving the
physical and monetary targets.
7) To help management in discharging its basic functions like forecasting, planning, coordination, communication, control, etc.
8) To promote co-ordination among the departments and the staff by the study of performance
and efficiency of each department.
9) To point out the financial condition of business whether it is strong, questionable, or poor
and enables the management to take necessary steps.
10) To act as an index of the efficiency of an enterprise.
4.4 CLASSIFICATION OF RATIOS
Accounting Ratios may be classified as under

Traditional Ratios
Functional Ratios
Traditional Ratios
Traditional Accounting Ratios are classified on the basis of the origin of the figures used in the
accounting ratios, i.e. on the basis of the Financial Statements from which ratios are derived. The
following ratios are usually included in this type of classification.
Balance Sheet Ratios or Financial Ratios
Ratios calculated from the different items as appearing in the Balance Sheet of a concern
are called Balance Sheet Ratios, e.g. Current Ratio, Liquid Ratio, Proprietary Ratio, Debt-equity
Ratio, and so on.
Profit & Loss Account Ratios or Operating Ratios
Ratios calculated from the different items as appearing in the Profit & Loss Account of a
concern are called Profit & Loss Account Ratios or operating Ratio, e.g. Gross Profit Ratio, Net
Profit Ratio, Operating Ratio.
Mixed Ratios or Composite Ratios
Ratios calculated, taking some items as appearing in the Balance Sheet and taking some
items as appearing in Profit & Loss Account, are called Mixed Ratios or Composite Ratios, e.g.
Return on Net Worth, Return on Investment (ROI), Capital Turnover Ratio, etc.
FUNCTIONAL RATIOS
The other way of classifying the ratios in on the basis of functions they perform, what they
indicate, symptoms or characteristics, namely, liquidity, profitability, financial stability and
turnover relationship, etc. This classification assumes greater significance because it distinctly
the different aspects of business performance and helps the various users of Financial Statements
to take guard of their interest. For instance, short-term creditors are interested to evaluate the
liquidity position by analyzing the liquidity ratios, while long-term creditors and investors are
interested in the solvency and profitability position of the organization and as such they study the
solvency and profitability ratios. The following ratios are included in this classification.
1) Liquidity Ratios
2) Leverage Ratios
3) Profitability Ratios
4) Activity/Efficiency Ratios
Liquidity Ratios

Liquidity Ratios are those ratios which are computed to evaluate the capacity of the
company to pay off its short-term liabilities. These ratios indicate the short-term financial
position of the company by relating short-term resources with short-term obligations. These
ratios are basically used by the short-term creditors, viz. suppliers, bankers, lenders, employees
and all others who are interested in the recovery of money due to them. Short-term creditors
focus their attention on the liquidity of the company.
The most common ratios which indicate the extent of liquidity or lack of it are as follows:
Current Ratio
This ratio is also called Working Capital Ratio. It is used to assess the short-term financial
position of the business concern. In other words, it is a measure of the companys short-term
solvency, i.e. its ability to meet its short-term obligations. It matches the total current assets of
the company against its current liabilities.
As a measure of short-term solvency, it indicates the rupees of current assets available for
each rupee of current liability. Apparently, the higher the current ratio, the more protected are the
short-term creditors and vice -versa. Conventionally, a current ratio of 2:1 (current assets twice
of current liabilities) is satisfactory. The Formula for computation of current ratio is given
below:
Current Assets
Where,
Current Assets

Current Assets
Current Liablities

= Cash in Hand + Cash at Bank + Short-term Investments + Bills

Receivable + Debtors + Short-term Loans & Advances + Inventory +

Prepaid Expenses.
Current Liabilities = Creditors + Bills Payable + Bank Overdraft + Provision for Taxation

Proposed Dividend + Unclaimed Dividend + Payment Received in

Advance + Outstanding Expenses + Other Liabilities Payable within One
Year.
Current Ratio of KSFC
Table 4.1 Showing Current Ratio of KSFC:
(Rs. in Lakhs)
YEAR

2005-06

CURRENT

CURRENT

CURRENT

ASSETS

LIABILITIES

RATIO

34,534.03

12,434.02

2.78

2006-07

19,612.14

7,816.77

2.51

2007-08

27,933.61

18,900.97

1.48

2008-09

23,712.52

9,292.14

2.55

2009-10

18,690.25

9,453.41

1.98

2010-11

29,196.75

10,345.30

2.82

CHART 4.1 Showing Current Ratio of KSFC:

CURRENT RATIO
3
2.5
2
1.5
RATIOS 0.51
0

YEARS

Analysis and Interpretation

The Current Ratios for a period of six years of Karnataka State Financial Corporation are
presented in Table 4.1. The current ratio of KSFC was 2.78:1 in 2005-06 which declined to
1.48:1 in 2007-08. Thereafter, it again rose to 2.82:1 in 2010-11.
A close look at the table and the chart reveals that Current Ratios of Corporation have been
above the ideal ratio, which is 2:1, during the study period except in the year 2007-08. It is an
indication of a sound liquidity position of the Corporation.
A Current Ratio of 2.78:1 in 2005-06 implies that for every one rupee of current liabilities,
current assets of 2.7 rupees were available to meet them. The protection available to the shortterm creditors declined in 2007-08 to 1.48. However, current assets were 2.55, 1.98 and 2.82
times of current liabilities in 2008-09, 2009-10 and 2010-11 respectively. An analysis of these
figures reveals that the Corporation is able to meet its short-term obligations in full.

Although KSFC has better short-term solvency position, a higher current ratio of more
than 2:1 may be regarded as an inefficient working capital management. Therefore, it should
have a reasonable current ratio.
Super Quick Ratio:
This ratio is also called, Cash Position Ratio or Cash Ratio or Absolute Liquidity
Ratio. This ratio establishes the relationship between super quick assets and current liabilities. It
may be used by banks and financial institutions who are very much interested in lending shortterm loans to companies for a period of not more than three months. Generally, an absolute liquid
ratio of 0.5:1 is considered as an ideal ratio. This ratio is computed with the help of the following
formula.
Super-Quick Ratio

Super Quick Assets

Current Liabilities

Where,
Super Quick Assets = Cash in Hand + Cash at Bank + Marketable Securities
TABLE 4.2 Showing Super Quick Ratio of KSFC:
(Rs. In Lakhs)
YEAR

SUPER QUICK

CURRENT

SUPER QUICK

ASSETS

LIABILITIES

RATIO

2005-06

11,563.87

12,434.02

0.93

2006-07

4,871.07

7,816.77

0.62

2007-08

4,995.99

18,900.97

0.26

2008-09

6,498.37

9,292.14

0.7

2009-10

6,979.35

9,453.41

0.74

2010-11

3,651.58

10,345.30

0.35

CHART 4.2 Showing Super Quick Ratio of KSFC:

SUPER QUICK RATIO

1
0.8
0.6
0.4
RATIOS 0.2
0

YEARS

Analysis and Interpretation:

The Super Quick Ratios of KSFC over a period of six years are presented in the Table 4.2.
The Super Quick Ratio of KSFC was 0.93 in 2005-06. It declined to 0.62 in 2006-07. These
ratios are well above the ideal ratio which is 0.5:1. It suggests that the Corporation was having
sufficient cash and bank balances at its disposal to meet its current liabilities. The ratio
deteriorated in the year 2007-08. The decline in the ratio was due to more increase in the current
liabilities than the super quick assets. The ratio showed an upward trend in the next two years.
Again, it declined to 0.35:1.
The analysis of these figures reveals that the corporation has maintained sufficiently high amount
of cash and bank balances than what is usually considered as ideal, over the years barring 200708 and 2010-11. The ratios in 2007-08 and 2010-11 were 0.26:1 and 0.35:1 respectively which
suggest that cash and bank balances were not sufficient to meet the short-term obligations.
Leverage/Solvency/Capital Structure Ratios
The second category of financial ratios is Leverage or Capital Structure Ratios. The longterm lenders/creditors would judge the soundness of a firm on the basis of the long-term
financial strength measured in terms of its ability to assure the long-term lenders with regard to
a) periodic payment of interest during the period of the loan and b) repayment of principal on
maturity or in predetermined installments at due dates.
There are, thus, two aspects of the long-term solvency of a firm: a) ability to repay the
principal when due and b) regular payment of the interest. Accordingly, there are two different,
but mutually dependent and interrelated, types of leverage ratios. First, ratios are based on the

relationship between borrowed funds and owners capital. These ratios are computed from the
Balance Sheet and reflect the relative / stake of owners and creditors in financing the assets of
the firm. In other words, such ratios reflect the safety margin to the long-term creditors. The
second category of such ratios is based on the Income Statement and shows the number of times
the fixed obligations are covered by earnings before interest and taxes. In other words, they
indicate the extent to which a fall in operating profits is tolerable in that the ability to repay
would not be adversely affected.
Following are some important leverage ratios
Debt to Equity Ratio
The relationship between borrowed funds and owners capital is a popular measure of the
long-term financial solvency of a firm. This relationship is shown by the Debt-Equity Ratio. This
ratio indicates the relative proportions of debt and equity in financing the assets of a firm. It
reveals the extent to which debt financing has been used in the business. It discloses to the
creditors the extent of their in interest being covered by the net worth by the company. It can be
computed by using the following formula.
'

Debt-Equity Ratio

Total Debt (Outsider s Fund )

Shareholder s ' Funds

Where,
Total Debt Debentures + Term Loans + Loans on Mortgage + Loans from Financial
= Institutions + Other Long-Term Loans + Redeemable Preference Share
Capital + All Current Liabilities.
Shareholders Funds Equity Share Capital + Irredeemable Preference Share Capital +
= Capital Reserves + Retained Earnings + Any Earmarked Surplus
Like Provision for Contingencies etc. Fictitious Assets
(Goodwill, Preliminary Expenses).
TABLE 4.3 Showing Debt-Equity Ratio of KSFC
(Rs. In Lakhs)
YEAR

TOTAL

SHAREHOLDERS

DEBT-EQUITY

DEBT

' FUNDS

RATIO

2005-06

1,90,155.54

12,892.55

14.75

2006-07

1,73,719.56

12,892.55

13.47

2007-08

1,75,960.85

33,108.24

5.31

2008-09

1,72,155.17

58,054.77

2.97

2009-10

1,76,040.01

70,732.82

2.49

2010-11

1,96,015.74

72,588.68

2.7

CHART 4.3 Showing Debt-Equity Ratio of KSFC

DEBT-EQUITY RATIO
20
15
10
RATIOS

5
0

YEARS

Analysis and Interpretation

The Debt-Equity Ratios of KSFC have been presented in Table 4.3. It can be seen from
the table that the increase in shareholders funds has been more than the increase in total debt. It
is seen from the table that there has been continuous decline in the quantum of debt proportion
from 14.75:1 in 2005-06 to 2.49:1 in 2009-10. However, a marginal rise in Debt-Equity Ratio
was seen at the end of the study period.
The Debt-Equity Ratio indicates the margin of safety to the creditors. A ratio of 14.75:1
implies that for every 14.75 rupees of outside liability, the firm has only one rupee of owners
capital. It has serious implications from creditors point of view because owners are putting up
relatively less money of their own. However, KSFC reduced the proportion of debt in its capital
structure over a period of time by issuing more shares. At the end of the study period, the DebtEquity Ratio of KSFC was 2.7:1 which is quite an improvement over 2005-06s ratio. Yet, it is
not a satisfactory ratio.
Debt to Total Tangible Assets Ratio
The Debt-Total Tangible Assets Ratio indicates the proportion of total tangible assets
financed by total debt. Symbolically, it is equal to:
Debt-Total Assets Ratio

Total Debt
Total Tangible assets

Where,
Total Tangible Assets = Total Assets (Goodwill + Preliminary Expenses +
Accumulated Losses)
TABLE 4.4 Showing Debt-Total Tangible Assets Ratio Of KSFC
(Rs. In Lakhs)
YEAR

TOTAL

TOTAL TANGIBLE

DEBT-TOTAL

DEBT

ASSETS

TANGIBLE ASSETS
RATIO

2005-06

1,90,155.54

1,42,720.56

1.33

2006-07

1,73,719.56

1,26,520.87

1.37

2007-08

1,75,960.85

1,55,194.58

1.13

2008-09

1,72,155.17

1,72,351.35

0.99

2009-10

1,76,040.01

1,89,210.39

0.93

2010-11

1,96,015.74

2,13,229.12

0.92

CHART 4.4 Showing Debt-Total Tangible Assets Ratio of KSFC

DEBT-TOTAL TANGIBLE ASSETS RATIO

1.5
1
RATIOS 0.5
0

YEARS

Analysis and Interpretation It is observed from the table and the chart that the Debt to Total
Tangible Assets Ratios of KSFC revealed a declining trend during the study period except during
2006-07. The ratio was 1.33 in 2005-06 which signifies that 1.33 rupees of debt is covered by

one rupee of tangible assets. This is undesirable from the point of creditors/lenders as there is no
sufficient margin of safety available to them. There was a slight increase in the ratio in 2006-07.
However, the mid and lower part of the study period revealed an altogether downward trend in
the ratio values. This is a welcome change as the margin of safety available to the
creditors/lenders has increased over the years.
On the whole, there have been desirable changes in the ratio values from the perspective of
creditors/lenders. However, the debt holders are still at high risk because of low margin of safety.
Proprietary Ratio
This ratio is called Equity Ratio or Owners Fund Ratio or Shareholders Equity Ratio. This
ratio points out the relationship between the shareholders funds and total tangible assets. In other
words, it indicates the proportion of total assets financed by owners. The formula for this ratio
may be written as follows:
'

Proprietary Ratio

Shareholder s Funds
100
Total Tangible Assets

TABLE 4.5 Showing Proprietary Ratio of KSFC

(Rs. in Lakhs)
SHAREHOLDERS'

TOTAL TANGIBLE

PROPRIETARY

FUNDS

ASSETS

RATIO (%)

2005-06

12,892.55

1,42,720.56

2006-07

12,892.55

1,26,520.87

10.2

2007-08

33,108.24

1,55,194.58

21.3

2008-09

58,054.77

1,72,351.35

33.7

2009-10

70,732.82

1,89,210.39

37.4

2010-11

72,588.68

2,13,229.12

34

YEAR

CHART 4.5 Showing Proprietary Ratio of KSFC:

PROPRIETARY RATIO
40
30
20
RATIOS 10
0

YEARS
Analysis and Interpretation
The Proprietary Ratios of KSFC over a period of six years are presented in tabular and
graphical form. The Proprietary Ratio of KSFC was 9% in 2005-06 which indicates that
shareholders funds form only 9% of total tangible assets employed in the business. From
creditors point of view, it is alarming for them because it indicates more of creditors funds and
less of shareholders funds in the total tangible assets of the company.
A marginal increase in Proprietary Ratio was registered in the next year. A significant
rise in Proprietary Ratio was seen from 9% in 2005-06 to 37.4 % in 2009-10. This rise was partly
due to increase in the amount of reserves and surplus and the issue of additional share capital The
rise in the ratio implies corresponding increase in the security to the creditors as more
shareholders funds are available as safety of margin. Thereafter, the ratio declined to 34%.
The analysis of these figures reveals that there has been appreciable improvement in the
Proprietary Ratio of KSFC during the period of study. However, creditors are still exposed to
more risk. Usually, a Proprietary Ratio of 50% is regarded as safe.
Fixed Assets to Proprietors Funds Ratio
This is also known as Fixed Assets to Net Worth Ratio. It establishes the relationship
between fixed assets and shareholders funds. The main object of calculating this ratio is to
ascertain the percentage of owners funds invested in fixed assets. This is an indicator of the
efficiency of the management regarding formulation of financial planning. It can be calculated as
follows:
Fixed Assets to Proprietors funds Ratio
Where,

Assets
100
Shareholder s ' Funds

Fixed Assets = Total Fixed Assets - Depreciation

TABLE 4.6 Showing Fixed Assets to Proprietors Funds Ratio of KSFC
(Rs. in Lakhs)
YEAR

FIXED

SHAREHOLDERS'

FIXED ASSETS TO PROPRIETORS'

ASSETS

FUNDS

FUNDS RATIO (%)

2005-06

821.85

12,892.55

6.37

2006-07

748.21

12,892.55

5.80

2007-08

6155.17

33,108.24

18.59

2008-09

6094.41

58,054.77

10.50

2009-10

6011.58

70,732.82

8.50

2010-11

5280.52

72,588.68

7.27

CHART 4.6 Showing Fixed Assets to Proprietors Funds Ratio of KSFC

FIXED ASSETS TO PROPRIETORS' FUNDS RATIO

20.00
15.00
10.00
RATIOS

5.00
0.00

YEARS

Analysis and Interpretation

It is observed from the table and the chart that the Fixed Assets to Proprietors Funds
Ratio of KSFC revealed a fluctuating trend during the study period. A thorough scrutiny of the
ratio values reveals that there was a downward trend in upper part of the study period, that is,
2005-06 and 2006-07. There was a rise in the ratio in 2007-08. There was again a declining trend
during the latter part of the study period.

A ratio of 6.37% implies that 6.37% of shareholders funds are sunk into the fixed assets
which constitute the revenue earning capacity of a business. There was a dip in the ratio in the
next year. This was mainly due to the decrease in the value of fixed assets. The Ratio increased
to 18.59 in 2007-08 which was the highest during the study period. In the last three years, the
value of fixed value decreased as a result of which there was also a decline in the ratio.
On the whole, the Corporation has used very less amount of shareholders funds in
making investment in the fixed assets especially in the latter part of the study period.
Capital Gearing Ratio
This ratio is also known as Capital Structure Ratio or Leverage Ratio. It is used to analyze
capital structure of the company. It establishes the relationship between fixed interest, dividend
bearing securities and equity shareholders funds. It is an indicator of the degree of risk involved
in the total capital employed in the business. It can be calculated as follows:
Interest Dividend bearing Funds
Capital Gearing Ratio =
Equity Shareholder s ' Funds
Where,
Fixed Interest and Dividend bearing Funds = Preference Share Capital + Debentures +
Long-Term Loans
Equity Shareholders Funds = Equity Share Capital + Reserves and Surplus {Goodwill
+ Preliminary Expenses + Profit and Loss A/c (Dr.)}.
TABLE 4.7 Showing Capital Gearing Ratio of KSFC
(Rs. in Lakhs)
YEAR

FIXED INTEREST AND

EQUITY

CAPITAL

DIVIDEND BEARING FUNDS

SHAREHOLDERS' FUNDS

GEARING
RATIO

2005-06

1,77,726.52

12,892.55

13.79

2006-07

1,66,147.79

12,892.55

12.89

2007-08

1,57,059.88

33,108.24

4.74

2008-09

1,62,872.03

58,054.77

2.81

2009-10

1,66,586.60

70,732.82

2.36

2010-11

1,85,670.44

72,588.68

2.56

CHART 4.7 Showing Capital Gearing Ratio of KSFC:

CAPITAL GEARING RATIO

RATIOS

16
14
12
10
8
6
4
2
0

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

YEARS

Analysis and Interpretation

Table 4.7 shows the Capital Gearing Ratio of KSFC for the study period. The Capital
Gearing Ratio of the KSFC reflected a downward trend during the study period except during
2010-11 which recorded a marginal increase in the ratio as compared to the previous year.
The ratio was 13.79:1 in 2005-06. It signifies that for every 13.79 rupees of non-owners
funds one rupee of owners funds is available in the capital structure of KSFC. It shows the
KSFCs heavy dependence on outsiders funds which bear fixed charges. It also shows the
amount of security available to non-owners funds which is very meager in this case (one rupee
for every 13.79 rupees). However, the Corporation has been able to reduce the proportion of nonowners funds to owners funds either by repaying the debt or raising more funds through shares.
It is a healthy sign because it allows KSFC to operate flexibly.The Capital Gearing Ratio of
KSFC was 2.56 which is slightly higher than the previous years ratio. This is a significant
improvement over 2005-06s figure. But, creditors/lenders are still exposed to risk because their
funds are more than the owners funds. This is undesirable from their view point.
Interest Coverage Ratio
This ratio establishes the relationship between the amount of net profits or earnings
before the deduction of interest, taxes and fixed interest charges. This ratio is used as a yardstick
for the lenders to know whether the business concern is able to pay its fixed interest charges on
long-term loans periodically. Interest Coverage Ratio is calculated with the help of the following
formula:
Interest Coverage Ratio =

EBIT Operating Profits

Interest Charges

Where,
EBIT or PBIT = Earnings or Profits before Interest and Taxes
TABLE 4.8 Showing Interest Coverage Ratio of KSFC
(Rs. in Lakhs)
YEAR

EBIT

FIXED INTREST

INTEREST

CHARGES

COVERAGE RATIO

2005-06

17,676.17

16,780.62

1.05

2006-07

15,886.75

14110.66

1.13

2007-08

20,453.21

13,634.01

1.50

2008-09

13,127.48

16,667.20

0.79

2009-10

15,246.00

13,706.49

1.11

2010-11

17,729.21

14,391.03

1.23

CHART 4.8 Showing Interest Coverage Ratio of KSFC

INTEREST COVERAGE RATIO

RATIOS

1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00

YEARS

Analysis and Interpretation

Table 4.8 shows the Interest Coverage Ratio values of the Karnataka State Financial Corporation
during the study period. In 2005-06 Re. 1.05 was available for every one rupee of fixed interest

charges. It does not provide a sufficient margin of safety to the debt holders because even a slight
decline in its earnings would hamper KSFCs ability to offer assured payment of interest to the
lenders.
The further analysis of the figures reveals that Interest Coverage Ratio remained at or below
1.50:1. The highest ratio was 1.50:1 which occurred in 2007-08 and the lowest was 0.79:1 which
occurred in 2008-09. This was the year when KSFC incurred loss. On the whole, it can be said
that earnings available to the lenders are not sufficient. Usually a coverage of six to seven times
is desirable from lenders point of view.
PROFITABILITY RATIOS
Profit is the difference between revenue and expenditure over a period of time. It refers to
the absolute quantum of profits, whereas profitability refers to the ability to earn profits.
Profitability ratios are the ratios which are computed to evaluate the performance and efficiency
of the business concern. Profitability Ratios are used by the management, owners, creditors and
employees. Equity shareholders employ these ratios because they are very much interested in
knowing capital appreciation of their investment and dividend per share. Management employs
profitability ratios to assess the operational performance of the business concern. They are used
by the creditors to ascertain the margin of safety available to them. Profitability ratios are the test
of wages and fringe benefits to the employees. Following are the important profitability ratios:
Return on Assets (ROA)
Here, the profitability ratio is measured in terms of the relationship of between net
profits and assets. The ROA may also be called profit to assets ratio. It is calculated to measure
the productivity of total assets. It is calculated using the following formula:
Return on Assets =

Net Profit after Interest Tax

100
Total AssetsFictitious Assets

The term fictitious assets include preliminary expenses, deferred revenue expenditure, discount
on issue of shares and debentures, debit balance of Profit and Loss Account and other losses
shown on the assets side of the Balance Sheet.
TABLE 4.9 Showing Return on Assets of KSFC
(Rs. in Lakhs)
YEAR

NET PROFIT AFTER

TOTAL TANGIBLE

RETURN ON

INTEREST AND TAX

ASSETS

ASSETS

2005-06

526.17

1,42,720.56

0.36

2006-07

1295.37

1,26,520.87

1.02

2007-08

6216.74

1,55,194.58

4.01

2008-09

-3984.09

1,72,351.35

(-2.31)

2009-10

296.15

1,89,210.39

0.15

2010-11

2187.14

2,13,229.12

1.03

CHART 4.9 Showing Return on Assets of KSFC:

RETURN ON ASSETS
4.5
4
3.5
3
2.5
2
RATIOS 1.5
1
0.5
0

YEARS

Analysis and Interpretation

Table 4.9 visualizes the net profit after interest and tax as a percentage of total tangible
assets. The Return on Assets over the years has shown fluctuating trend throughout the study
period. In the initial three years, that is, 2005-06, 2006-07 and 2007-08 the ratio values showed a
rising trend which were 0.36, 1.02 4.01 respectively. In 2008-09, ROA showed a negative value
of 2.31. This is due to the loss that KSFC sustained in that year. However, KSFC recovered from
it very soon and registered net profit in the next two years.

The analysis of the ratio values reveals that the income generated by the tangible
assets has been very modest during the study period. In other words, the investment made in
tangible assets is not justified by the amount of income generated.
Return on Investment
Return on Investment is also known as Return on Capital Employed or Overall
Profitability Ratio. It is calculated by establishing the relationship between the operating profit
earned and capital employed. It is an indicator of the earning capacity of the capital invested in
the business. It shows efficiency of the business as a whole. This ratio is calculated by using the
following formula:
Return on Investment =

Operating Profits
100
Capital Employed

Where,
Capital Employed = Equity Share Capital + Preference Share Capital + Reserves and
Surplus + Debentures and Long-Term Loans (Fictitious Assets +
Intangible Assets + Investments outside the Business).
(Or)
Capital Employed = Proprietors Funds + long-Term Loans.
TABLE 4.10 Showing Return on Investment of KSFC
(Rs. in Lakhs)
YEAR

EBIT

CAPITAL

RETURN ON

EMPLOYED

INVESTMENT

2005-06

17,676.17

1,29,971.29

13.6

2006-07

15,886.75

1,18,579.19

13.4

2007-08

20,453.21

1,20,922.45

16.91

2008-09

13,127.48

1,27,783.65

10.27

2009-10

15,246.00

1,26,877.61

12.02

2010-11

17,729.21

1,56,272.35

11.35

CHART 4.10 Showing Return on Investment of KSFC

RETURN ON INVESTMENT
20
15
10

RATIOS

5
0

YEARS

Analysis and Interpretation

The Return on Investment of KSFC is presented in Table 4.10. It is seen from the table and chart
that the ratio values depicted a fluctuating trend throughout the study period. It ranged from
10.27, the lowest, in 2008-09 to 16.91, the highest, in 2007-08.
The Return on Investment was 13.6 in 2005-06 which implies that the Corporation was able to
earn Rs.13.6 on Rs.100 investment. It can be considered as reasonably satisfactory level of
return. The return slightly declined in the next year. The Corporation earned Rs.16.91 on Rs.100
investment which was the highest during the study period as well. In the subsequent years, KSFC
earned a reasonable rate of return on its investment. In the last year of the study period there was
a decline in the rate of return which is not a good sign for KSFC.
Return on Ordinary Shareholders Equity
While there is no doubt that the preference shareholders are also owners of a firm, the real
owners are the ordinary shareholders who bear all the risk, participate in management and are
entitled to all the profits remaining after all outside claims including preference dividends are
met in full. The profitability of a firm from the owners point of view should, therefore, be
assessed in fitness of things, in terms of the return to the ordinary shareholders. The ratio under
reference serves this purpose. It relates net profit, finally available to equity shareholders, to the
capital employed by them. It is calculated as follows:
Return on Ordinary Shareholders Equity

Net Profit after Interest , TaxPreference Dividend

100
'
Ordinary S h are h older s Equity

Ordinary Shareholders Equity = Equity Share Capital + Reserves and Surplus

(Miscellaneous Expenses + Debit Balance of Profit and
Loss Account).

TABLE 4.11 Showing Return on Shareholders Equity of KSFC

(Rs. in Lakhs)
YEAR

NET PROFIT AFTER

ORDINARY

RETURN ON

INTEREST AND

SHAREHOLDERS'

SHAREHOLDERS'

TAX

EQUITY

EQUITY

2005-06

526.17

12,892.55

0.041

2006-07

1295.37

12,892.55

0.100

2007-08

6216.74

33,108.24

0.188

2008-09

-3984.09

58,054.77

-0.069

2009-10

296.15

70,732.82

0.004

2010-11

2187.14

72,588.68

0.030

CHART 4.11 Showing Return on Shareholders Equity of KSFC

RETURN ON SHAREHOLDERS' EQUITY

0.250
0.200
0.150
0.100
RATIOS
0.050
0.000
-0.050
-0.100
YEARS

Analysis and Interpretation

The Return on Ordinary Shareholders Equity Ratio of the KSFC for the last six years is
presented in Table and Chart 4.11. The ratio values showed a fluctuating trend during the study
period. A close look at the figures reveals that the ratio values depicted an increasing trend in the
first three years. The fourth year of the study period recorded a negative return which is because
of the loss incurred in that year. Thereafter, there was a marginal increase in the ratio values.
In 2005-06, the ratio was 0.041 which indicates that the Corporation earned Re.0.041 on Rs.100
investment by the ordinary shareholders. This is very unsatisfactory level of return to the equity
shareholders who are the owners of the Corporation. In the next two years there was a little
increase in the level of return, which was very insignificant. In 2008-09 there was negative
return. In 2009-10, the Corporation made little progress. Again, in the last year of the study
period, the return declined. This is not a healthy sign.
On the whole, the return to equity shareholders is not at all considered to be satisfactory.
Earnings Per Share (EPS)
Earnings per Share (EPS) measures the profit available to the equity shareholders on a per share
basis, that is, the amount they can get on every share held. It is calculated by dividing the profits
available to the equity shareholders by number of outstanding shares. The profits available to the
ordinary shareholders are represented by net profits after tax and preference dividend. Thus,

EPS =

Net Profit after Interest , Tax ,Preference Dividend

Number of Ordinary SharesOutstanding

TABLE 4.12 Showing Earnings Per Share of KSFC

(Rs. in Lakhs)
YEAR

EAIT

NO. OF ORDINARY

EARNINGS PER

SHARES OUTSTANDING

SHARE

2005-06

526.17

97,84,550

0.0000538

2006-07

1,295.37

97,84,550

0.0001324

2007-08

6,216.74

97,84,550

0.0006354

2008-09

-3917.39

1,23,05,060

-0.0003184

2009-10

296.15

5,09,05,750

0.0000058

2010-11

2187.14

6,19,05,750

0.0000353

CHART 4.12 Showing Earnings Per Share of KSFC:

EARNINGS PER SHARE
0
0
0
RATIOS 0
0
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
0
0
YEARS

Analysis and Interpretation

The Earnings per Share values of the KSFC for the study period are depicted in the above table
and chart. It can be observed from the above table and chart that the Corporation is not
maintaining the EPS uniformly and at a higher level during the study period. This is mainly due
to negative or low income generated in certain years. The Corporation is not able to generate
even one rupee per share. The income generated is not justifying the contribution made by the
shareholders. On the whole, the EPS of the Corporation is not considered to be satisfactory.
4.4.2.4 Activity/Efficiency Ratios
Activity ratios make use of purchases and sales while calculating various ratios. But, KSFC is
neither a trading company nor a manufacturing company. Hence, the question of purchases and
sales does not arise in the case of KSFC. Therefore, the activity/efficiency ratios cannot be
calculated for KSFC.