Young fast growing companies are typically focused on

This preview shows page 3 - 5 out of 27 pages.

dividend policy of the company. Young, fast-growing companies are typicallyfocused on reinvesting earnings in order to grow the business. As such, theygenerally sport low (or even zero) dividend payout ratios. At the same time,larger, more-established companies can usually afford to return a largerpercentage of earnings to stockholders. Also, another factor to be considered isthe type of industry in which the company is operating. For example, the bankingsector usually pays out a large amount of its profits. Certain other sectors likereal estate investment trusts are required by law to distribute acertain percentage of their earnings.Funds requirement of the company and its available liquidity is another factorwhich is considered while determining the pay-out.
Some companies prefer to follow a fixed pay-out ratio policy irrespective of theearnings made.This is a welcome policy from the point of view of the investors. But, thecompany should take into account various important factors such as its need forfuture investment and growth, cash requirements and debt obligations.Answer 3: The financial position of a concern is mainly judged by its currentratio, acid test ratio, working capital turnover, fixed assets to net worth.In the given case of Bharat Auto Accessories Ltd, the current ratio has gone upfrom 265% to 302% over a period of three years. It is a measure of the degree towhich current assets cover current liabilities (Current Assets /Current Liabilities).A high ratio indicates a good probability the enterprise can retire current debts.However, the acid test ratio has gone down from 115% to 99%, which is not avery good sign. It is a measure of the amount of liquid assets available to offsetcurrent debt (Cash + Accounts Receivable / Current Liabilities). A healthyenterprise will always keep this ratio at 1.0 or higher. Also, the fixed asset to networth ratio is 16.4% for Yr. I and hasgone up to 22.7% for Yr. III. This ratio is a measure of the extent of anenterprise's investment in non-liquid and often over valued fixed assets (FixedAssets / Liabilities + Equity). A ratio of .75 or higher is usually undesirable as itindicates possible over-investment.The operating efficiency of a concern can be viewed by its receivables turnover,average collection period, inventory turnover, operating expenses to net sales.The receivables turnover has gone down from 9.83 to 7.20, reflecting thatexpenses as a percentage of revenue or earnings has gone down over the three-year period, which is a good sign. An increasing average collection periodindicates that the concern is offering too liberal credit terms and has inefficientcredit collection. The inventory turnover has gone down from 6.11 to 5.41 timesindicating declining sales and excessiveinventory which again reflects poor operating efficiency.The operating expense to net sales has increased from 22% to 25% whichindicates that the organization has lowered its ability to generate profits in caseof declining revenues.The indicators of profitability are income per equity share, net income to net

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture