6.4 A n a ly s is o f R a tio s a n d S ta tis tic a l T o o ls. 6.2 R a tio s and S ta tis tic a l T o o ls to be A n a lyse d.

Transcription

1 CHAPTER : 6 A N A L Y S IS O F R A T IO A N D S T A TIS TIC A L TOOLS 6.1 T h e R o le o f R a tio s and S ta tis tic a l T o o ls. 6.2 R a tio s and S ta tis tic a l T o o ls to be A n a lyse d. 6.3 In te rp re ta tio n. 6.4 A n a ly s is o f R a tio s a n d S ta tis tic a l T o o ls.

2 CHAPTER: 6 A N A L Y S IS OF R A TIO A N D S TATIS TIC A L TOOLS S.1 The Role of R atios & Statistical Tools : Ratio analysis is o n e of th e m o st com m o n ly used tech nique in the analysis of fin a n c ia l sta te m e n ts and e va luatio n of m anagerial perform ance15 T h e a n a lysis of ra tio s and statistica l tools points out problems and p ro v id e s a basis to solve th e sam e problem s by recommending c o rre c tiv e a ctio ns in tim e. In o rd e r w ords, financial ratios are calculated and te ste d to e x a m in e diffe rent aspects of business operation.16 A ratio can be d e fin e d as the indicated quotient o f two mathematical e x p re s s io n s o r th e relationship betw een tw o or more things. The a n a ly s is o f ratios is th e pow erful tool o f financial analysis. In order to know th e fin a n cia l position o f a firm and also the perform ance of the same, a ra tio o r m ore is used as an index or yardstick. But, the ratio analysis does n o t add anything new but it m akes statem ent more meaningful and h e lp s in draw ing conclusion.17 The main im portance of ratios and its a n a lysis are as follow s: 15 Pradhan, Surendra B asis of Financial Management Educational Enterprise (P) Ltd., Nepal, IBID, P Varshney, G.K., Top Management Accounting,Top Publications, Delhi, 1999.

3 The use of ratio is very helpful in testing the solvency position of the firm. For exam ple, the ratio o f current assets to current liabilities shows upw ard trend, which m eans sufficient working capital. Thus, by studying this ratio, the claim of creditors can be paid easily. It is also very useful in decision-m aking process. It is helpful in financial forecasting and planning. The ratios are m ost useful when com parison is made between com panies fo r profitability. Two types of comparisons of present ratio with past ratio and the second comparison of several previous years are com puted with the objective of know ing im provem ents or downfalls in the financial health. By ratio analysis, a sound liquidity position of a firm can be kno w n and can con trol it. It is also helpful in knowing operating efficiency and controlling cost, and It is helpful in analysing the overall financial health of the com pany. i the other hand, statistical tools are also very important in th e sig n ifica n ce o f data and make maximum use of the

4 169 information gathered. T h e th e o rie s are a lso e m p iric a lly tested by using statistical to o l. S u m m a risatio n o f th e re s u lts is one o f th e require m ent of any study. This can be done by s ta tis tic a l te c h n iq u e s in m e aningful w ay. Statistical tools are h e lp fu l in d ra w in g g e n e ra l and b ro ad conclusions and a l s o fo r the prediction fo r fu tu re. Therefore, the role of ratios and statistical tools are very important a n d should adopt th ese in order to d ra w a m eaningful and accurate result of study. 6.2 Ratios and Statistical Tools to be A nalysed. The follow ing ra tio s and S ta tis tic a l to o l(s) are to be analysed in order to draw a cle a r and a ccu ra te c o n c lu s io n of th e study. Ratios : 1. Current R a tio : The current ra tio is g iven by d ivid in g c u rre n t assets by current,iabilrties- C urrent R a tio = Current Assets Current Liabili,ies

5 170 Here, Current assets in clu d e cash, a s s e ts w h ich can be converted into cash wtthm one ye a r M a rk e ta b le s e cu ritie s, debto rs and inventories are the examples of c u rre n t a sse ts P re p a id e xp e n se s are also can be considered as c u rre n t a sse ts as th e y re p re s e n t th e paym ents that w ill not be made by the firm in fu tu re All o b lig a tio n s, w h ich m a tu re w ith in a ye a r are included in current liabilities. C re d ito rs, bills p a yable, accru e d expenses, short-term loan from the bank, lo n g te rm debt m a tu rin g in current year etc. are included in current liabilities. Im portance: T h e re is im p o rta n c e o f th is ra tio as it indicates the availability of current a s s e ts in ru p e e s fo r eve ry one rupee o f current liability. This ratio represents a m a rg in of safe ty" fo r creditors. 2. Q u ic k R a tio /A c id T e s t R a tio /L iq u id R atio: Q u ic k ra tio is fo u n d out by dividing quick assets by current liabilities Quick assets Q u ic k R a tio = Current Liabilities

6 171 Current Assets - Inventories * Current Liabilities [Since, Q uick a s s e ts = C u rre n t a s s e ts - In v e n to rie s ]» Inventories are sto ck of th e p ro d u c t o f a com pany, w hich is manufacturing for sale and c o m p o n e n ts th a t m a ke up th e product. The various forms in w h ich in v e n to rie s e x is t in a m a n u fa c tu rin g com pany are raw materials, w ork in p ro cess and fin is h e d g o ods. B u t in such fin a ncia l institutions like M R B & M S C B Ltd., th e s e tw o b a n k s considered fixed assets and loan & a d vance s d is b u rs e d as in ve n to rie s. Importance: The im portance o f Q uick R a tio /A c id T e s t R a tio /L iq u id R atio is to know whether a firm can m e et its o b lig a tio n s b e cause o f its quick assets or not. Simply, the q u ick ratio re m a in s an im p o rta n t index of th e firm s liquidity. 3. Cash Ratio: It is the ratio o f cash and c u rre n t lia b ilitie s. T ra d e investm ent or marketable securities are also e q u iv a le n t o f cash. T herefore, they are also included in th e ca lcu la tio n o f ca s h ra tio. T h e cash ratio is m easured by the following fo rm u la :

7 172 Cash + Marketable Securities/Investments. C ash R a tio Current Liabilities Importance: It s im p o rta n ce is also sam e as in the above ratios nam ely, current ratio, quick ratio and cash ratio and is m ainly fo r m easuring the ability of a firm to meet its curre n t obligations. 4. Net W orking Capital Ratio: It is also know n as N et C urrent A ssets R atio and m easured by the following form ula: Net Working Capital Net W orking C apital R atio = Net Assets Current Assets - (Current Liabilities + Short term borrowing) - Fixed Assets + Net Current Assets Current Assets - (Current Liabilities + Short term borrowing) Fixed Assets + (Current Assets - Current Liabilities)

8 173 Importance This ratio is use d to m e a sure th e liq u id ity position of a firm and the Net Working C a p ita l itself is a lso used to m e a sure th e firm s potential reservoir of funds 5. Total D ebt Ratio: Net Assets. It can be m e a sure d by d ivid in g to ta l D ebt by Capital Em ployed or /. Total Debt R a tio = Total Debt Capital Employed Total Debt Net Assets Total D ebt in clu d e s short and long te rm borrow ings, debentures and bonds, d e fe rre d p a ym e n t a rra n g e m e n ts fo r buying capital equiptments, bank borrow in g, p u b lic d e p o sits and any other interest bearing loan. T h e N e t A sse t in c lu d e s net Fixed A ssets and Net Current Assets. Importance: It m ay be use d to a n a lyse th e long term solvency of a firm.

9 174 6 Size of Deposit: The ratio nam ed a s S ize o f D e p o s it ca n be m e a sure d by dividing the Amount of D eposit by th T o ta l N u m b e r o f A c c o u n ts. Therefore, Size of D e p o sit = Amount of Deposit Total No. of Accounts Importance: It helps to study th e c u s to m e rs a ttitu d e to w a rd s th e fin a n cin g institutes. It m easures the'"am ount o f d e p o s it p e r a c c o u n t. Statistical Tool(s): The statistical to o l n a m e ly th e c o rre la tio n is v e ry im porta nt fo r th e study. It is defined as a te c h n iq u e th a t g iv e s th e re la tio n s h ip betw een tw o or more variables. In o th e r w o rd s, th e c o rre la tio n th u s expresses th e relationship or in te rd e p e n d e n ce o f tw o s e ts o f v a ria b le s upon each oth er in such a way that th e changes in th e v a lu e o f o n e varia ble are in sympathy with the ch a n g e s in th e o th e r.18 K.V.Rao, Research Methodology in Commerce and M anagement, Sterling Publishers Pvt. Ltd., New Delhi-1995.

10 175 Importance: R egarding th e present study, correlation is useful in studying the relationship betw een va ria b le s like deposit and loan-and-advances. The extent of re la tio n sh ip is also given by using co-efficient of correlation, which is denoted by r. 6.3 Interpretation: Interpretation o f ratios and statistical tools is not an easy task as it seems. The inte rpretatio n n e eds skill and intelligence. Foresightedness the inherent lim ita tio n s o f a n a lysis o f ratios and statistical tools should be kept in m ind w h ile inte rpreting th e results. In cash o f curre n t ratio, as a conventional rule, a current ratio of 2 to 1 or m ore is consid ere d satisfactory. G enerally, a quick ratio o f 1 to 1 is considered current financial satisfactory condition. W hen w e use quick ratio, it should be used cautiously. T h e ra tio o f 1 to 1 or m ore does not alw ays necessarily imply sound liquid ity position. It is because of that all book debts may not be liquid, and cash m a y be im m e d iate ly needed to pay operating expenses. Similarly, in ve n to rie s are not abso lu te ly non-liquid. A com pany may have

11 176 to a m easurable e x te n t of in v e n to rie s to m e e t th e current obligations. Thus, the com p any w ith high v a lu e o f q u ick ra tio m ay suffer from the shortage of fu n d s as it has th e a b o v e points. In cash o f Cash Ratio, if the value is less th a n 1, it is c o n s id e re d to ca rry sm a ll am ount of cash. Although, the firm ca rry the sm a ll a m o u n t of cash, th e re is nothing to be worried about th e la ck o f cash if th e c o m p a n y has reserve borrowing power. In Cash o f N et W o rkin g C a p ita l R atio, if th e valu e is less than 1, it cannot be co n sid e re d as s a tisfa cto ry. W h e n w e subtra ct the value o f Net Working C apital R a tio fro m (h u n d re d ), th e d iffe re n ce is to be treated as the am ount fin a n c e d by th e le n d e rs ra th e r th a n th e owners. Total debt ratio can be in te rp re te d in such a w a y th a t th e value of the ratio is multiplied by 100 so th a t th e p ro d u ct is fin a n ce d by th e lenders in present and the ow ners have provided th e re m a in in g am ount. Interpretation o f ratios in cash o f size o f d e p o sit is m ainly based on the particular bank. T h e bank m a y d e cid e th e a m o u n t considered to be satisfactory p e r account. T he in te rp re ta tio n o f statistica l tool nam ely the correlation can be done in five d iffe re n t m ethods. But Karl P earson s Method is th e m o st w id e ly used m e thod of to m easure the intensity of linear re la tionship betw een tw o varia bles. T his is a m athem atical method.

12 177 The Pearsonian c o rre la tio n c o e ffic ie n t b e tw e e n tw o v a ria b le s X and Y is denoted by V. Thus, V ca n be c a lc u la te d as where, r _ L(X-X) ( Y-Y) V I(X -)U 2 ZfY-Y")2 r = the correlation c o -e ffic ie n t. X and Y = the tw o v a ria b le s. IX Y No. of observations _ Y and Y - ^ observations E X n E y n The co-efficient o f c o rre la tio n (r) is also know n as P e a rso n s Product moment co rre la tio n c o -e ffic ie n t. T h e n u m e ric a l valu e o f r lies between + 1 and 1. If r has p o s itiv e v a lu e it in d ic a te s positive o r direct correlation in betw een th e tw o v a ria b le s X and Y. In o th e r w ords, as the values of X increases th e c o rre s p o n d in g v a lu e s o f Y w ill also incre ase or as the values of X d e cre a se s, th e c o rre s p o n d in g valu e s o f Y w ill decrease. In short, th e m o v e m e n t o f X a n d Y is on th e sam e direction. Negative values of V in d ica te in v e rs e o r n e g a tiv e correlation, th e re b y meaning an increase in th e va lu e o f o n e v a ria b le re s u lts in the decrease in the value of the o th e r va ria b le. A z e ro c o rre la tio n co -efficie n t m eans no

13 178 association b e tw e e n th e tw o varia b le s X and Y. In such case, X does not account for any of th e varia tio n in Y. TA B LE - XXXI CALCULATED R A T IO S O F M R B A N D M SC B LTD. ( TO ) SI. Name of For For the Year ending No the Ratio Current MRB 0.68:1 0.79:1 0.78:1 0.68:1 0.51:1 0.55:1 0.61:1 0.65:1 0.66:1 0.69:1 Ratio MSBC Ltd. 0.46:1 0.57:1 0.60:1 0.66:1 0.93:1 0.84:1 0.88:1 0.29:1 1.16:1 1.13:1 2. Quick MRB :1 0.77:1 0.67:1 0.50:1 0.55:1 0.66:1 0.64:1 0.65:1 0.67:1 Ratio MSBC Ltd. 0.45:1 0.55:1 0.58:1 0.61:1 0.87:1 0.46:1-0.61:1 0.02:1-0.91:1-1.7:1 3. Cash MRB Ratio MSCB Ltd Net MRB Working Capital Ratio MSCB Ltd Total Debt MRB Ratio MSCB Ltd Size of MRB Deposit MSCB (Rs. in Ltd. thousands) Source. The B alance Sheet and P rofit and Loss A ccount of M RB and M S C B Ltd. ( to )

14 179 In this p re sent study, th e sta tistica l tool n a m e ly the correlation can be used in o rd e r to find out th e re la tio n sh ip betw een deposit and the credit disbursem ent o f M R B and M S C B Ltd. T h e follo w in g table is used to calculate the c o -e ffic ie n t o f c o rre la tio n (r). TA B LE - XXXII C O M P A R A TIV E A M O U N T O F D E P O S IT S TO M R B & M SCB LTD. Rs. in Lacs. Yrs For MRB Amt For MSCB Amt Source : State C re d it P la n /S ta te F o cu s Paper, ( to ),N A B A R D, R IM S R oad, Im phal. f TA B LE - XXXIII C O M P A R A T IV E A M O U N T O F C R E D IT D IS B U R S E M E N T OF MRB & M S C B LTD. Rs. in Lacs. Yrs For MRB Amt For MSCB Amt Source : S tate C re d it P lan/s ta te F o cus Paper, ( to ) N A B A R D, R IM S R oad, Im phal.

15 180 Correlation between d e p o s it (x) and c re d it d is b u rs e m e n t (y) o f M RB. X I Y x - x < I < l Zx= Ly= Ex-x = y - y = 0 We have, S(X-X)( Y-Y) r = V y ( x -"xy T. ( y - Y )2 where, r = the correlation co -e ffic ie n t x and y = the tw o va ria b le. I X x = No. of observations I X n and y = I Y No. of observations I Y n x 0 r = V(999.59)2 x 02 = 0 [ sin ce, X x 0 = 0 and 2 x = 0 ]

16 181 Correlation betw een deposit (x) and credit disbursem ent (y) o f MSCB Ltd. X y X X y-y Sx= Zy= Ex - x = 0.02 Zy - y = 0.02! Again w e have, Z(X-X)(Y-Y) V T ( x - x )2 T (Y -Y) x 0.02 V(0.02)2 x (0.02) V

17 A nalysis o f R atios and S tatistical Tools: As d iscu sse d in the p re vious C hapter-v, the A pex Bank, which is NABARD is not re fin a n cin g th e M R B and M S C B Ltd. fo r each and every year. There w a s no re fin a n ce a ssista n ce o f N A B A R D to M RB in the year, and T he sam e th in g w a s happened to M SCB Ltd. in most of the years o f th e study period. It w a s because of the tw o banks in the state are in varyin g stages if decay and ba nkruptcy. During th e years which both th e banks w e re re fin a n ced by N A B A R D, the tw o banks cannot recover th e ta rg e te d am ount. O ve r the years, w h ile the lending rates of MRB and M S C B Ltd. declin ed, th e rates payable on deposits increased. This also leads to a n o th e r fa c to r o f m aking losses. Even as NABARD, MRB and M S C B Ltd. are fu n ctio n in g sim ultaneously, they are not able to cover the a g ricu ltu ra l se cto r and th e farm ers in a coordinate m anner so that these banks cannot be considered satisfa cto ry to deliver credit for agricultural d e ve lo p m e n t in M anipur. As a conventio nal rule, a current ratio o f 2 to 1 is considered satisfactory. T he M RB has a current ratio of 0.68:1, 0.79:1, 0.78:1, 0.68:1, 0.51:1, 0.55:1, 0.61:1, 0.65:1, 0.66:1 and 0.69:1 respectively. On the other hand, the M SCB Ltd. has a current ratio of 0.46:1, 0.57:1, 0.60:1, 0.66:1, 0.93:1, 0.84:1, 0.88:1, 0.29:1, 1.16:1 and 1.13:1

18 183 respectively fo r the re spective years as on 31/3/92 to 31/3/99. Therefore, it may be inte rpreted to th e in su fficie n cy liquid in all these ten years of present study. T h e ratio g re a te r than one, m e ans th a t the firm has m ore current assets th a n th e c u rre n t claim s against them. But, M RB has the ratio less than one fo r th e a b o ve 10 years. S im ilarly, the M SCB Ltd. has the ratio less th a n one e xce pt fo r th e year ending 31/3/90 and 31/3/91. Both the banks have less curre n t assets than current claim s against them and also has less m argin of safety. For th e q u ick ratio, if th e ratio is o f 1 to 1, it is considered to represent a satisfa cto ry curre n t fin a n cia l condition. But MRB has reached ratios about Vi to 1 fo r each y e a r beginning fro m 1990 to In 1997 and 1998 th e ra tios are being increased a little. On the oth e r hand, the MSCB Ltd. also carries a v e ry sm all quick ratio. T here is only one year (1995) w hich can reach up to 0.87 to 1. The bank also carries negative quick ratios in th e y e a r 1990 to Therefore, it can be concluded that, both the banks h a ve no sound liquidity positions. If the inventories of these two banks do not sell to pay all its current liabilities, the banks may find difficult to m e et its ob lig atio ns. In case o f C ash Ratio, if th e value is less than 1, it is considered to carry sm all a m o u n t of cash. T h e M R B and M SC B Ltd. carries a very small am ount o f cash. T h ere is nothing to be w orried about the lack of

19 184 cash if the b a n k h a s re serve borro w in g pow ers. M RB and M SCB Ltd. borrows from N A B A R D, UBI and S ID B I. The N et W o rkin g C a p ita l R atios o f M R B and MSCB Ltd. are very small. Since th e v a lu e s are less th a n 1, th e tw o banks are unsatisfactory regarding the N et W o rkin g C apital. The a ve ra g e to ta l debt ra tio o f M RB fo r 10(ten) years of study is It m eans th a t lenders have fin a n ced 241 percent or about tw o and half of M R B s net a sse ts (ca p ita l em ploye d). S im ilarly, th e a ve rage to ta l debt ratio o f M SCB Ltd. is 0.45, which means that le n d e rs have fin a n ce d 45 percent or about half of M RB s net assets (ca pital e m p loye d ). It is o b vio u sly im plied that ow ners have provided th e re m a in in g fin a nces. T h e y have financed : = 0.65 percent of M R B s net assets durin g th e se 10(ten) years of study. The size o f d e p o sit of M R B is contin u o usly increasing year by year. It is the h ig h e st in S im ilarly, th e size of deposit of M SCB Ltd. also can be tre ate d as in cre a sin g. T h ere is a little decline in deposits in the year 1997 and This show s th a t th e c u sto m e rs attitude towards the two banks is po sitive.

20 185 The sta tistica l tool use d in o rd e r to fin d out the relationship between deposit and credit d is b u rs e m e n t o f M R B and M S C B Ltd. is correlation As c a lc u la te d a b o ve, th e co rre la tio n co -e fficie n t (r) o f MRB is zero (0) and that of M S C B Ltd. is + 1 (one). Since, th e M R B has ze ro (0) as th e correlatio n co-efficient considering th e tw o v a ria b le s n a m e ly d e p o s its (x) and credit disbursement (y). it can be in te rp re te d th a t th e re is no relationship between these tw o varia b le s. In o th e r w ord s, th e d e p o sit (x) of MRB does not account fo r a n y o f th e v a ria tio n in cre dit d isb u rse m e n t (y) and vice versa. Further, th e c o rre la tio n co -e fficie n t o f M S C B Ltd. considering deposit (x) and cre d it d is b u rs e m e n t (y) as th e tw o variables is + 1. Therefore, this show s that, th e tw o varia b les are dire ctly related. It can be expressed as th e v a lu e o f d e p o sit increases, th e corresponding value of credit d isb u rse m e n t also in cre a se o r as the va lu e o f deposit decreases, the corresp onding valu e o f cre d it d isb u rse m e n t decrease. In short, the movement o f th e tw o varia b le s x and y is in th e sam e direction.