A STUDY ON FINANCIAL PERFORMANCE OF RSB METAL STAMPING

USING RATIO ANALYSIS

A PROJECT REPORT
Submitted in partial fulfillment of the requirements
for the award of the degree of
Bachelor of Commerce (Accounting & Finance)

SUBMITTED BY
B KARTHIKEYAN
(2213141034022)

Under the guidance of

Ms. RENUKA
ASSISTANT PROFESSOR
B.COM ACCOUNTING & FINANCE

GURU NANAK COLLEGE

(AUTONOMOUS)
Affiliated to University of Madras | Accredited at ‘A++’ Grade by NAAC
Approved by AICTE | An ISO 9001 2015 Certified Institution
Guru Nanak Salai, Velachery, Chennai – 600 042.
MARCH – 2025

GURU NANAK COLLEGE

(AUTONOMOUS)
Affiliated to University of Madras
Accredited at ‘A++’ Grade by NAAC | An ISO 9001 2015 Certified Institution
Guru Nanak Salai, Velachery, Chennai – 600 042
SCHOOL OF COMMERCE: B.COM. A&F
 BONAFIDE CERTIFICATE

This is to certify that, this is a Bonafide record of work done by B KARTHIKEYAN, 2213141034022

of for the Final Year Project during the Academic Year 2024-25.

PROJECT GUIDE HEAD OF THE PROGRAMME

Submitted for the Project Viva Voce Examination held on ________________ at

GURU NANAK COLLEGE (Autonomous), Guru Nanak Salai, Velachery, Chennai -

600 042.

Internal Examiner External Examiner

Date: Date:
 DECLARATION

I B KARTHIKEYAN (2213141034022) studying III Year (B.Com Accounting & Finance)

at Guru Nanak College (Autonomous), Chennai hereby declare that this the Report of my Project

entitled, (A STUDY ON FINANCIAL STATEMENT ANALYSIS OF RSB METAL

STAMPING.) is the record of the original work carried out by me under the Guidance and

Supervision of Ms. RENUKA towards the partial fulfillment of the requirements of the award of the

Degree of BACHELOR OF COMMERCE (ACCOUNTING & FINANCE). I further declare that this

has not been submitted anywhere for the award of Degree/Diploma or any other similar to this before.

PLACE: CHENNAI B KARTHIKEYAN

DATE: 2213141034022
 ACKNOWLEDGEMENT

I would like to thank the Principal Dr. T. K. Avvai Kothai and Vice Principal

Dr. Anitha Malisetty for providing the necessary resources and facilities for the completion of

this project.

My sincere thanks to (NAME OF THE SCHOOL DEAN) for their support.

I extend my deepest thanks to (Dr. S. Amudha Lakshmi M.Com, M.Phil, Ph.D.

(HOD)) whose guidance, support, and encouragement were invaluable throughout this endeavor.

Her expertise and insights have been instrumental in shaping this project and enhancing its

quality.

I owe my Guide (MS. Renuka) a debt of gratitude for her invaluable guidance, patience,

and encouragement. Her mentorship has been a beacon of light, steering me through the

complexities of this project and helping me realize my potential.

I also like to extend my thanks to the Faculty Members (NAME OF THE FACULTY

MEMBERS who helped in project), for their valuable suggestion during the course of the study

of my project.

Last but not least, I thank my family and friends for their unwavering encouragement

and understanding during this journey.

certificate
table of content
list of table
 Chapter – 1
Introduction to Ratio Analysis
1.1 Introduction to Ratio Analysis

Analysis means establishing a meaningful relationship between various items of the two financial statements
with each other in such a way that a conclusion is being drawn. By financial statements by means of two
statements

* Profit and loss account or Income Statement

* Balance Sheet or Position Statement

These are prepared at the end of a given period of time. They are the indicators of profitability and financial
soundness of the business concern. The term financial analysis is also known as analysis and interpretation of
financial statements. It refers to the establishing meaningful relationship between various items of the two
financial statements i.e. Income statement and Position statement. It determines financial strength and
weakness of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of
an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the
efficiency, profitability, financial soundness and future prospects of the business units.

1.2 Definition of Ratio Analysis

An analysis of financial statements with the help of 'ratio' is termed as ratio analysis. In other words, it
is a technique of calculation of a number of accounting ratios from the data contained in the financial
statements, the comparison of the accounting ratios with those of the previous years or with other
business concerns engaged in similar line of activities or with those of standard or ideal ratios and the
interpretation of the comparison (i.e., drawing conclusions from the comparison of the accounting
ratios).

1.3 Objectives of the study

 To calculate the important financial ratio of the organisation as a part of the ratio analysis
thereby to understand the changes the needs and trends in the firm's financial position.
 To assess the performance of RSB Metal Stamping on the basis of earnings and also to evaluate
the solvency position of the company.
 To identify the financial strengths and weaknesses of the organization.
 To give the appropriate suggestions to the investors. To help them to make more informed
decisions.
1.4 Need For The Study

1. Understanding Financial Health

 Ratios provide a clear picture of a company’s financial health by evaluating key aspects like
profitability, liquidity, and solvency, which helps identify strengths and weaknesses in financial
performance.

2. Facilitating Decision-Making

 Financial ratios serve as a vital tool for investors, creditors, and management, helping them
make informed decisions regarding investments, loans, or operational strategies based on
objective data.

3. Performance Comparison

 Ratios enable comparisons between companies, industries, and even historical performance,
giving insights into whether a company is improving, stagnating, or declining relative to its
peers and past performance.

4. Identifying Operational Efficiency

 Ratios such as return on assets (ROA) and inventory turnover provide insights into how
efficiently a company is utilizing its resources, helping management optimize operations.

5. Risk Management

 Ratios help assess the company’s ability to manage financial risk, such as its capacity to meet
debt obligations or handle fluctuations in the market, ensuring long-term stability

1.5 advantages of Ratio Analysis

 Ratio analysis facilitates the comprehension of financial statements and thereby evaluation of
several aspects such as financial health, profitability and operational efficiency.
 It makes it easy to grasp the relationship between various items and helps in understanding the
financial statements.
 It helps in providing a comparative study of various business concerns.
 It helps in understanding the changes that have taken place between two periods of time.
 It helps in investment decisions in the case of investors and lending decisions in the case of
bankers and financial institutions.
1.6 Limitations of Ratio Analysis

 Ratio analysis is based on financial statements which are themselves subject to several
limitations. Hence, any ratio analysis based on such statements would suffer from similar
limitations.
 Ratios are inter-related and therefore a single ratio cannot convey any meaning. It has to be
interpreted with reference to other related ratios to draw meaningful conclusions.
 Ratio analysis is the quantitative measurement of the performance of the business. It ignores
the qualitative aspect of the business concern, howsoever, important it might be.
 Ratios are inter-related and therefore a single ratio cannot convey any meaning. It has to be
interpreted with reference to other related ratios to draw meaningful conclusions.

1.7 CLASSIFICATION OF RATIOS

Accounting Ratios may be classified as under:

1. Traditional ratios
2. Functional ratios

Traditional Ratios

 Balance sheet ratios or financial ratio: These ratios deal with relationship between two items
or group of items which find place in the balance sheet. e.g., Current ratio, Liquid ratio, Debt-
equity ratio, Proprietary ratio, Fixed assets ratio, etc.
 Profit and loss account ratios or operating ratios: These ratios deal with the relationship
between the items or group of items which are available in the profit and loss account. e.g.,
Gross profit ratio, Operating ratio, Operating profit ratio, Expenses ratio, Net profit ratio, etc.
 Composite or inter-statement ratios: These ratios deal with relationship between items,
either from the profit and loss account or from balance sheet e.g., Stock turnover ratio, Debtors
turnover ratio, Creditors turnover ratio, Fixed assets turnover ratio, Return on capital employed,
etc.

Functional Ratios

 Profitability Ratio: It refers to the analysis of profits in relation to revenue from

operations or funds (or assets) employed in the business and the ratios calculated to meet this
objective are known as ‘Profitability Ratios.
 Liquidity Ratios: To meet its commitments, business needs liquid funds. The ability of the
business to pay the amount due to stakeholders as and when it is due is known as liquidity, and
the ratios calculated to measure it are known as ‘Liquidity Ratios’. These are essentially short-
term in nature.
 Solvency Ratios: Solvency of business is determined by its ability to meet its contractual
obligations towards stakeholders, particularly towards external stakeholders, and the ratios
calculated to measure solvency position are known as ‘Solvency Ratios’. These are
essentially long-term in nature.
 Activity (or Turnover) Ratios: This refers to the ratios that are calculated for measuring the
efficiency of operations of business based on effective utilization of resources. Hence, these are
also known as ‘Efficiency Ratios’.

I. Profitability ratios

Profitability ratios are financial metrics used to assess a company's ability to generate profit
relative to its revenue, assets, or equity. These ratios help evaluate how efficiently a company is
using its resources to produce profit.

a) Gross profit ratio

This ratio is also known as “Gross Margin Ratio”or “Trading Margin Ratio”. It shows the
relationship between the gross profit to net sales and is generally expressed in percentage.
In other words, it expresses the gross margin as a percentage of sales. It is calculated as
under:

Gross profit ratio = (Gross profit /Net sales)*100

Where,
Gross profit = Net sales - Cost of goods sold

Cost of goods sold = Opening stock + Purchases (net) + Direct expenses - Closing stock

Net Sales = Total sales - Sales returns.

b) Net profit Ratio

This ratio is also known as "the net profit to sales ratio" or "net profit margin". It measures
the rate of the net profit per unit of sales. It is determined by dividing the net profit to the
net sales for the period. Its formula is as follows:
 Net profit ratio = (Net profit/Net sales)*100

Net profit may be net profit before tax or net profit after tax. Accordingly,
this ratio may have two approaches:

i. (Net profit before tax/Net sales)*100 (or) (PBT/Net sales)*100

ii. (Net profit after tax/Net sales)*100 (or)(PAT/Net sales)*100

c) Operating profit Ratio

Operating profit ratio is a variation of net profit ratio. It measures the relationship between
operating profits and sales. It may be calculated as under:

Operating profit ratio = (Operating profits/ Net sales)*100

Operating profit is calculated by subtracting the operating expenses, that include cost of
goods sold, office and administration expenses, and selling and distribution expenses
relating to the business, from the operating revenues. It, therefore, does not take into
account non-operating expenses and non-operating incomes. Financial expenses like
interest, taxes and dividend, provision for taxation, losses such as losses due to theft or fire
or extraordinary revenues or capital receipts are excluded from its ambit. Thus, operating
net profit is ascertained as under:

Operating net profit = Net profit + Non-operating expenses - Non-operating incomes (or)
= Gross profit + Operating incomes - Operating expenses.
d) Operating ratio
This ratio measures the extent of cost incurred for making the sale. In other words, this ratio
matches cost of goods sold plus other operating expenses, on the one hand, with net sales,
on the other. It is calculated as follows:

Operating ratio = (Cost of goods sold + Operating expenses/ Net sales)*100

e) Expense Ratio
Expenses ratio are those ratios which are computed to ascertain the relationship between
various components of cost and sales. These ratios disclose the portion of sales revenue
consumed by various expenses. Such ratios are calculated by relating individual operating
expenses to sales. Following are the various expenses ratios:
(i) Raw materials used to sales = (Direct material cost/Net sales)*100
 (ii) Ratio of labour to sales = (Direct labour cost/Net sales)*100

(iii) Ratio of factory expenses to sales = (Factory expenses/Net sales)*100

(iv) Ratio of office and administration expenses to sales =

(Office and administration expenses/Net sales)*100

(v) Ratio of selling and distribution expenses to sales = (Selling and distribution
expenses/Net sales)*100

II. Activity/turnover/performance ratios

Activity, turnover, or performance ratios are financial metrics that measure how efficiently a
company is using its assets to generate sales and profits. These ratios assess the operational
efficiency of a company by showing how well it is utilizing its resources to generate revenue .

a) Capital turnover ratio

This ratio shows the efficiency of capital employed in the business by computing how many
times capital is turned over in a stated period. This ratio is calculated by using the following
formula:
Captial turnover ratio = (Cost of goods sold or sales/Capital employed)

b) Fixed assets turnover ratio

This ratio establishes the relationship between sales or cost of goods sold and fixed assets. It
determines whether the investments made in fixed assets has really helped in generating sales.
It is used to effect improvement, if any, in sales due to increased investment in fixed assets it is
calculated by using the following formula:

Fixed assets turnover ratio = Cost of goods sold or sales/Net fixed assets

Here, Net fixed assets = Gross fixed assets - Total depreciation.

c) Working capital turnover ratio

Working capital means excess of current assets over current liabilities. Working capital is
closely related to sales. Working capital turnover ratio indicates the number of times the
working capital is converted into sales. It is calculated with the help of the following formula:

Working capital turnover ratio = Cost of goods sold (or) sales/Net working capital
d) Stock turnover ratio
This ratio is also known as "inventory turnover ratio" or "stock velocity ratio". It establishes
relationship between average stock at cost and cost of goods sold. It is calculated by applying
the following formula:

Stock turnover ratio = Cost of goods sold/Average stock

Where,
Average stock = Opening stock + Closing stock/2
If there is no opening stock, closing stock can be taken as average stock.

e) Debtor turnover ratio

This ratio is also known as "Ratio of Net Sales to Gross Receivable" (or) "Receivable turnover"
(or) "Debtors velocity" expresses the relationship between net credit sales and average accounts
receivable. It measures the number of times the receivables are rotated in a year in terms of
sales. It also indicates the efficiency of credit collection and efficiency of credit policy. It is
calculated by applying the following formula:

Debtors turnover ratio = (Net credit sales/Average accounts receivable)

Where,
Accounts receivable = Debtors + Bills receivable

Average accounts receivable = (Opening A/R + Closing A/R)/2

Where, (A/R = Account receivable)

If information relating to credit sales and average debtors is not available, the ratio can be
worked out as follows:

Debtors turnover ratio = Total sales/Closing debtors

f) Creditor turnover ratio

This ratio is also known as accounts payable ratio or creditors velocity. It expresses the
relationship between credit purchases and average accounts payable. It may be calculated as
under:
 Creditors turnover ratio = Net credit purchases/Average accounts payable
where,
Accounts payable = Creditors + Bills payable.

Average Accounts payable = (Opening A/P + Closing A/P)/2

where, (A/p = Accounts payable)

In case, the details regarding credit purchases, opening and closing

creditors are not given, the ratio may be calculated as follows:

Creditors Turnover ratio = Total purchases/Closing creditors

III. Liquidity ratios

Liquidity or short-term solvency refers to the ability of a business concern to pay off its short-
term liabilities. Liquidity ratios are those ratios which are computed to evaluate the capacity of
the company to repay its short-term liabilities. These ratios indicate the short-term financial
position of the company by relating short-term resources with short-term obligations.

a) 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 an indicator of the company's ability to
meet its short-term obligations. It matches the total current assets of the company against its
current liabilities. It is calculated on the basis of the following formula:

Current ratio = Current assets/Current liabilities

Current Assets = Cash in hand + Cash at bank + Short-term investments

+ B/R + Debtors + Short-term loans and advances + Stock (stock of finished goods + stock of
raw materials + work-in-progress) + Prepaid expenses.

Current liabilities = Creditors + B/P + Bank overdraft + Provision for taxation

+ Proposed dividend + Unclaimed dividends + Advance payment received + Outstanding
interest on loans and debentures + Outstanding expenses + Other liabilities payable within one
year

b) Liquid ratio
 This ratio is also known as the "acid test ratio" or "the quick ratio" or "the near money ratio". It
is only a variation of current ratio. Like current ratio, it measures the ability of the company to
meet its current obligations. It explains the relationship between liquid assets and current
liabilities. The formula for calculating the ratio is:

Liquid ratio = Liquid assets/Current liabilities

where,
Liquid assets = Current assets - (Stock + Prepaid expenses)

IV. Solvency Ratio

The term Solvency' refers to the ability of the company to repay its outside liabilities. The
outside liabilities are normally categorized into two i.e., short-term liabilities and long-term
liabilities.

a) Debt-equity ratio
This ratio is also called 'External-Internal Equity ratio. It is mainly calculated to assess the
soundness of long-term financial policies and to determine the relative stakes of outsiders and
owners (shareholders). It determines the relationship between debt and equity (shareholders
funds). It can be computed by using any one of the following formulae:

Debt-equity ratio = Total long-term debt/Shareholders' funds

Where,
Total long-term debt = Debentures + Term loans + Loan on mortgage +Loans from financial
institutions + Other long-term loans + Redeemable preference share capital.

Shareholders' funds = Equity share capital + Preference share capital +

Capital reserves + Retained earnings + Any earmarked surplus like provision for contingencies
etc. - Fictitious assets.

Debt-Equity ratio = Total long-term debt/Long-term funds

where,
Long-term funds = Share capital + Reserves and surplus + Debentures + Term loans + Loan on
mortgage + Loans from financial institutions + Other long-term loans - Fictitious assets.
Debt-equity ratio = Outsiders' funds/Shareholders' funds
where,
 Outsiders' funds = Debentures + Term loans + Loan on mortgage + Loans from financial
institutions + Other long-term loans + Redeemable preference share capital + All current
liabilities.
b) Fixed assets ratio
This ratio is also called ratio of capital or long-term funds to fixed assets. It establishes the
relationship between fixed assets and long-term funds. The main purpose of calculating this
ratio is to find out the proportion of long-term funds invested in fixed assets. It is calculated by
using the following formula:

Fixed assets ratio = Net fixed assets/Long-term fund

where,
Net fixed assets = Gross fixed assets - Total depreciation

Long-term funds = Equity share capital + Preference share capital + Reserves and surplus +
Debentures + Other long-term loans.

c) Ratio of current Assets to Fixed assets

This ratio establishes relationship between fixed assets and current assets. It is worked out as
given below:

Ratio of fixed assets to current assets = Fixed assets/Current assets

Summary

There are many types of ratios, viz., liquidity, solvency, activity and profitability ratios. The

liquidity ratios include current ratio and acid test ratio. Solvency ratios are calculated to

determine the ability of the business to service its debt in the long run instead of in the short

run. They include debt equity ratio, total assets to debt ratio, proprietary ratio and interest

coverage ratio. The turnover ratios basically exhibit the activity levels characterized by the

capacity of the business to make more sales or turnover and include Inventory Turnover,

Trade Receivables Turnover, Trade Payables Turnover, Working Capital Turnover, Fixed

Assets Turnover and Current assets Turnover. Profitability ratios are calculated to analyze the

earning capacity of the business which is the outcome of utilization of resources employed in

the business. The ratios include Gross Profit ratio, Operating ratio, Net Profit Ratio, Return
on investment (Capital employed), Earnings per Share, Book Value per Share, Dividend per

Share and Price/Earnings ratio.