Select Financial Ratios and Their Relationship with Growth in Sales- A study of the Non-Financial Companies of the Nifty 50 Index

Abstract

Measurements of parameters are crucial for control, management and eventual improvement of processes (Harrington, 1991). Ratio analysis is a systematic use of ratios to interpret assess the performance and status of a firm ( Khan and Jain, 2011). As a tool, it allows analysis of between components of financial statements to obtain a better understanding of the firm's position and performance (Metcalf and Titard, 1976). This paper attempts to focus on studying select financial ratios. and examining relationship (if any) amongst them as also their relationship with the growth in sales (as a measure o f growth/performance), using correlation and partial regression analysis. The sample for the study consists o f the non-financial Indian companies from the Nifty 50 index of the National Stock Exchange, for the 20-year period 2001-2010. A significant finding is the decrease o f debt as a source for financing assets of the sample companies over the period of the study (it may be noted here that debt is a cheaper source of finance). Amongst other findings few notable ones are strong correlations between D/TA (debt to total assets) and ICR (interest coverage ratio), ROCE (return on capital employed) and D/E (debt to equity), and NPM (net profit margin) and ROCE. The select financial ratios have no statistically significant impact on the growth in sales for the sample companies.