A STUDY ON “FINANCIAL ANALYSIS AND LEVERAGES”

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

C H A P T E R 1

INTRODUCTION

INTRODUCTION:-

FINANCE A CONCEPT:-

The great industrialist of modern times Mr.Henry Ford once said Money

is an Arm or a Leg, you either use it or lose it.

This statement though apparently simple, is very meaningful. It brings

home the significance of money or finance in modern day world of global

business.

In modern times finance is the basic foundation upon which all other

economic activities are carried on. It is the master key which provides access to

all the resources being employed either in manufacturing or merchandising

activities.

The Sanskrit saying Arthah Sachivah, which means Finance reigns

supreme, speaks volume for the importance and significance attached to the

finance function in a company.

It has rightly been said that Business needs Money to make more

money.

However, it is also true that money begets more money, only when it is

properly managed. Hence, efficient management of every business enterprise is

closely linked with efficient management of its finances only. In conclusion we

can say that: Finance is regarded as The life line of a business enterprise.

Finance is the backbone of every business.

Acharya Institute of Graduate Studies 1


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MEANING OF FINANCE AND BUSINESS FINANCE:-

Finance is one of the major elements, which acts as a catalyst for the overall

growth of the economy. Finance is the lifeblood of the economic activity.

Finance refers to the application of skills for manipulated use and control of

money. The term Business finance involves Raising of funds and their effective

utilization keeping in view the overall objectives of the firm.

Business Finance explains the two terms, Business and Finance. In

common parlance the word Business refers to merchandising the operation of

some sort of a shop or store, large or small.

Business Finance refers to that activity which is concerned with the

acquisition and application of funds in the process of meeting financial needs

and overall objectives of a business enterprise.

DEFINITIONS:-

According to Bonneville and Dewey, Financing consists in raising,

providing and managing of all the money or funds of any kind used in

connection with the business.

According to Prather and Wert, Business Finance deals primarily with

raising, administrating and distributing funds by privately owned business units

operating in non-financial fields of industry.

According to H.G. Gathman and H.E. Dougall, Business Finance can be

broadly defined as the activity concerned with planning, raising, controlling and

administrating of funds in the business.



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FUNCTIONS OF BUSINESS FINANCE:-

Finance functions can be classified into two types and they are:

Recurring Finance Function and

Non-Recurring Finance Function.

Recurring Finance Function -

Recurring finance function encompasses all such financial activities

which are regularly carried out for the efficient conduct of the operations of a

firm, such as:

a) Planning of funds

b) Raising of funds

c) Allocation of funds

d) Allocation of income

e) Control of funds

Non Recurring Finance Function

This refers to the use of financial activities that a functional activity has

to prefer very rarely, preparation of financial plan at the time of promotion of

the company or its product for the first time. The financial readjustment is done

at the time of liquidity crisis and valuation of the firm at the time of merger.

Successful handling of all such problems requires high level of financial

skills and understanding of principles and techniques of finance from recurring

to non-recurring situation.



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Meaning of Financial Management:

Financial Management is a specialized function directly associated with

the top management. The significance of this function is not only seen in the

Line but also in the capacity of Staff in the overall administration of the

company.

The management makes use of various financial techniques, methods and

devices for administrating the financial assets of the firm in the most effective

manner.

Financial management also includes Anticipating Financial Needs,

Acquiring Financial Resources and finally Allocating of Funds in Business,

which refers to three As of financial management.

Definitions of Financial Management:-

According to Joseph and Massie, Financial Management is theoperational activity of a business i.e. responsible for obtaining and effectively

utilizing the funds necessary for efficient operation.

According to Archer and Ambrosia, Financial Management is the

application of the planning and control functions to the finance function.

Objectives of Financial Management:-

The twin objectives of financial management are Profit maximization and

Wealth maximization.



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1) Profit Maximization:

Financial management is concerned with efficient use of resources,

mainly capital funds. Profit maximization is a term which denotes the

maximum profit to be earned by an organization in a given time period. Earning

Profits (OR) Profit Maximization by a company is a social obligation. Profit is

the only means through which the efficiency of a company is measured.

Points in Favour of Profit Maximization:-

a) Profit is a barometer through which the performance of a business unit

can be measured.

b) Profit enables the business to venture into risk taking.

c) It ensures to maximize welfare of shareholders, employees and creditors.

d) It increases the confidence of management in expansion and

diversification program of the company.

e) It attracts investors to invest their savings in different securities from

time to time.f) It indicates the efficient use of funds for different purposes.

Points against Profit Maximization:-

a) Profit maximization does not consider the elements of risk.

b) Profit is not a clear term, because it may be accounting profit, economic

profit, profit before tax, profit after tax, net profit, gross profit or

Earnings per share.

c) It encourages corrupt practices to increase the profits.

d) It does not consider the impact of time value of money.



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e) The true and fair picture of the company is not reflected through profit

maximization and there are other parameters which are equally

important.

f) Profit maximization attracts cut-throat competition.

g) Huge profits attract unnecessary government intervention.

h) It is a narrow concept and it affects long-term liquidity of the company.

2) Wealth Maximization:

Wealth maximization is also called Value Maximization. It refers to

the gradual growth of the value of assets of the company over a period of time.

It is the net present value of a financial decision. Any financial action results in

positive NPV, which creates wealth to the organization. If NPV is negative, it

reduces the existing wealth to the shareholders.

Wealth maximization is symbolically expressed as W = NP, where as

W = Wealth of the firm

N = Number of shares owned

And P = Price per share in the market.

The goal of financial management should be such that it should be

beneficial to all those who are involved in the company such as owners,

management, employees, customers, suppliers, etc..



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Points in Favour of Wealth Maximization:-

a) It is a clear term and only present value of cash flow is taken into

consideration.

b) It considers the concept of time value of money. The present value of

cash inflow and outflow helps management to achieve the overall

objective of a company.

c) The concept of wealth maximization is universally accepted, because, it

takes care of interest of financial institutions, owners, employees and

society as well.

d) It guides the management in framing consistent strong dividend policy to

reach maximum returns to the equity shareholders.

Points against Wealth Maximization:-

a) The objective of wealth maximization is a prescriptive one and not

descriptive one.

b) The objective of wealth maximization faces some difficulties between

shareholders and management paving the way for conflict of interest.

Functions of Financial Management:-

1. Profitability

2. Diversification

3. Growth

4. Survival



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5. Market Share

6. Cost Control / Reduction

7. Managing Competition.

MEANING OF FINANCIAL ANALYSIS:-

The most important step of accounting is the analysis and interpretation

of the financial statements which results in the presentation of numerous data

which in turn helps different categories of people in forming an opinion about

the financial position of a business and as well as about its profitability.

The most important objective of the analysis and interpretation of

financial statements are to understand the significance and meaning of such

financial statement datas to know the exact strength and weaknesses of a

business unit. In a way it establishes strategic relationship between the items of

the balance sheet, profit and loss account and other operative data, which is

very meaningful.

Definition of Financial Analysis:

According to Myres, Financial statement analysis is largely a study of

relationship among the various factors in a business as disclosed by a single set

of statement and a study of the trend of these factors as shown in a series of

statements.



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2. To judge the present and future earning capability or profitability of the

business.

3. To identify the relevant important components of the financial position of

the business.

4. To judge the operational efficiency as a whole and of its various

components or departments.

5. To assess the short as well as long-term liquidity position of the firm for

the benefit of the debenture holders and trade creditors.

6. To have a comparative study between different departments or cost

centers.

7. It helps in building a database for making future forecast and preparing

budgets.

8. It also helps in predicting possible bankruptcy and failure.

9. It provides decision makers a whole lot of information about the business

to be used as a tool in decision making.

PROCESS OF FINANCIAL ANALYSIS:-

The analysis of financial statements is a process of evaluating the

relationship between components of financial statements to obtain a better

understanding of the businesses position and performance. The functional

analysis is the process of selections, establishing relationship and evaluation.

1) The primary task of the financial analyst is to select the informationrelevant to the decision under consideration from the total information

contained in the financial statements.



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2) The secondary step is to arrange the said information in a highlight,

significant enough to establish a relationship.

3) The final step is interpretation and drawing of inferences and

conclusions.

TYPES OF FINANCIAL ANALYSIS:-

On the basis of nature of the analysis:-

a) External analysis

It is made by those persons who are not connected with the business.

They do not have access to the detailed information of the company and have to

depend mostly on published statements or records. Such type of analysis are

made by investors, credit rating agencies, government agencies and research

scholars.

b) Internal analysis

It is made by those persons who have full access to the books of

accounts. They are a part of the business enterprise. Analysis of the financial

statements and / or other financial data for managerial purposes for internal

consumption only. The internal analyst can give more reliable result than the

external analyst because of the access to a whole gamut of information

available to him.

On the basis of objectives of analysis:-

a) Long-term analysis



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This study is conducted to assess the long-term financial stability,

solvency, liquidity, profitability, (or) Earning capacity of a business unit. The

purpose is to know whether in the long run the business entity will be able to

earn minimum amount which will be sufficient enough to maintain a reasonable

rate of return on the investment so as to provide the requisite funds required for

modernization, growth, and expansion of business apart from meeting its cost of

capital. It also helps in long-term financial planning.

b) Short-term analysis

This study is conducted to determine short-term solvency, stability,

liquidity and earning capacity of the business. The purpose of this analysis is to

know whether in the short run a business will have adequate funds to meet its

short term obligations which are very vital for conducting the day to day

operations. It also helps in short-term financial planning.

On the basis of models operated by analysis:-

a) Horizontal (or) Dynamic analysis

It is made to review and analyze financial statement of number of years. It is

useful for long-term trend analysis.

b) Vertical (or) Static analysis

It is made to review and analyze the financial statement of one particular

year only, for example ratio analysis.

TECHNIQUES OF FINANCIAL ANALYSIS:-

The analysis and interpretation of financial statement is used to determine

the financial position and operational status as well. A number of techniques are



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used to study the relationship between different statements. The following

methods of analysis are used:

Comparative Financial Statements:

The comparative financial statements are statements of the financial

position at different periods of time. The different elements of financial position

are shown in a comparative form, so as to facilitate easy comparison. Both the

profit and loss account and Balance sheet can be prepared in the form of

comparative financial statements.

Comparative Income Statements:

The income statement discloses net profit or net loss or account of

operations. A comparative income statement will show the absolute figures for

two or more periods. The absolute changes from one period to another and if

required the changes in items of percentages can be seen. Since the figures for

two or more periods are shown side by side, with the help of this we can

quickly ascertain whether sales have increased or decreased, whether cost of

sales have increased or decreased etc. Therefore, only a glance of data

incorporated in this statement will be helpful to arrive at useful conclusions.

Comparative Balance Sheet:Balance sheet of two or more different dates can be used for comparing

assets and liabilities and finding out increase or decrease in those items.

Therefore, in a single balance sheet the emphasis is on present position, it is the



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change in the comparative balance sheet which attracts attention. This type of

balance sheet is very helpful in studying the trends in a business concern.

Common size Financial Statements:

Common size financial statements are those in which figures reported are

converted into percentage to some common base. When this method is pursued,

the income statement exhibits each expense item or group of expense items as a

percentage of net sales, and net sales are taken at 100 percent. Similarly, each

individual assets and liability classification is shown as a percentage of total

assets and liabilities respectively. Statements prepared in this way are referred

to as common size statements.

Common size statements are prepared for one business entity over the

years which would highlight the relative changes in each group of expenses,

assets and liabilities. These statements can be equally useful for inter-firm

comparisons, given the fact that absolute figures of two firms of the same

industry are not comparable.

Trend Percentages:

Trend percentages are very much helpful in making a comparative study

of the financial statements over a period of several years. The way of

calculating trend percentages involves the calculation of percentage relationship

that each item bears to the same item in the base year. Each item of base year is

taken as 100 and on that basis the percentages for each of the items of each of

the years are calculated. These percentages can be taken as index number



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showing the relative changes in the financial data resulting with the passage of

time.

This method is very much useful, analytical device for the management,

since by substitution of percentages for large amounts, brevity and readability

are achieved.

Fund Flow Statement:

Funds flow statement is a financial statement, which indicates the various

means by which the funds have been obtained during a certain period and the

way in which these funds have been put to use during the same period.

In short, it is the statement, which shows the movement of funds between

two balance sheet dates.

The fund flow statement is called by different names, such as statement

of sources and application of funds, statement of changes in working capital.

Cash Flow Statement:

Cash flow statement shows the movement of cash and their causes during

the period under consideration. It may be prepared annually, half yearly,

quarterly, monthly, fortnightly or even weekly.

Cash flow statement is prepared to show the impact of financial policies

and procedures adopted by the business on the cash position. It takes into

account all such transactions which have a direct impact upon cash.



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It deals with the inflow and outflow of cash between two balance sheet

dates. In other words, a statement of changes in a financial position of a firm on

cash basis is called cash flow statement.

Leverage Ratios:

Leverage refers to an increased means of accomplishing some purpose.

In financial management, it refers to employment of funds to accelerate rate of

return to owners. It may be favorable. An unfavorable leverage exists if the rate

of return remains to be lower. It can be used as a tool of financial planning by

the management.

LEVERAGE DEFINITION:-

Leverage is defined as the action of a lever, and mechanical advantage

gained by it.

Christy and Roden defines Leverage as the tendency for profits to

change at a faster rate than sales. It is a relationship between equity share

capital and securities and creates fixed and dividend charges.

Leverage is also known as gearing. According to James Horne,

Leverage is the employment of an asset or funds for which the firm pays a

fixed cost or fixed return.

TYPES OF LEVERAGES:-

Leverage types are of 3 types.

1. Financial Leverage



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in profits because of variation in sales. It may be noted carefully that the degree

of operating leverages goes on decreasing with every increase in sales volume

above the break-even point. It is calculated by the following formulas.

Contribution

Operating Leverage =

EBIT / Operating Profit

Percentage change in Income

Degree of operating leverage =

Percentage change in Sales

The total costs of operations of a business may be grouped into 3 categories:

(i) Operating Fixed Cost is the cost which in aggregate tends to be

unaffected by variations in volume of output. The amount of fixed cost

tends to remain constant for all volumes of production within the

installed capacity of the plant. E.g. Factory Managers salary, Factory

rent, Administrative Staff Salary etc.

(ii) Operating Variable Cost is that cost which in aggregate tends to vary

directly with variations in volume of output. Such costs increases as the

production goes up, it decreases when production falls. E.g. materials,

wages, etc.



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(iii) Semi variable/ Semi-fixed Operating Cost is that cost which is partly

fixed and partly variable. E.g. Repairs and maintenance, power

consumption, etc.

3) COMBINED LEVERAGE:

This leverage shows the relationship between a change in sales & the

corresponding variation in taxable income.

It is the product of both financial leverage & the operating leverage. It is

also called as composite leverage. It is calculated by using the following

formulas.

Combined Leverage = Operational Leverage x Financial Leverage.

O R

Contribution EBIT

Combined Leverage = X

EBIT / Operating Profit EBT

Contribution

=

EBT



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C H A P T E R 2

RESEARCH DESIGN

Meaning :

RESEARCH:-

According to D.Slesinger & M.Stephenson in the encyclopedia of Social

Sciences define research as The Manipulation of things, concepts or symbols

for the purpose of generalizing to extend correct or verify knowledge, whether

the knowledge aids in construction of theory or in the practice of an art.

RESEARCH METHODOLOGY:-

Research Methodology is a scientific and systematic way to solve

research problems. A researcher has to design his methodology i.e., in addition

to the knowledge of methods / techniques, he has to apply the methodology as

well. The methodology differs from problem to problem.

RESEARCH DESIGN:-



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According to Claire Selltiz and others A Research Design is the

arrangement of conditions for collection and analysis of data in a manner that

aims to combine relevance to the research purpose with economy in procedure.

A Research Design is a logical and systematic plan prepared for directing

a research study.

Title of the Study:-

A study on Financial Analysis and Leverage at

DYNAMATIC TECHNOLOGIES LIMITED. Bangalore

Statement of Problem:-

M/s Dynamatic Technologies Limited Bangalore and its subsidiary

companies are into manufacturing of different products with application in

varied industries as wide as hydraulic gear pumps to agricultural tractor

industry and agricultural equipment industry, supplying of aerospace

components to aviation industry and manufacturing technology driven items to

the defence sector.

The group is facing stiff competition in the market due to existence of

other domestic and foreign players who are competing very fiercely.

In this the DTL group should be in a position to analyze its financial and

leverage factors to take corrective steps well in advance to overcome

competitors by doing financial analysis. It helps to know the financial position



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of the DTL group. It involves in analyzing of various financial statements such

as profit and loss account, balance sheet, etcand the leverage analysis helps in

knowing the risk involved carrying on the operations at DTL.

Objectives of the Study:-

To study and analyze the financial performance of DYNAMATIC

GROUP.

To judge the present and future earning capacity or profitability of the

concern through leverage analysis.

To know the methodology used by DYNAMATIC GROUP in the profit

ratio.

To get the knowledge of the financial evaluation techniques and analysis

of annual reports in DYNAMATIC GROUP.

To highlight the steps that is required to improve the financial

performance and efficiency of the DYNAMATIC GROUP.

To find the growth rate of DYNAMATIC GROUP.

To come out with the findings and suggestions.

Scope of the Study:-



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The study is conducted at DYNAMATIC GROUP in Bangalore, for the

purpose of knowing the financial performance and analysis of its

performance through leverage ratios.

The study also covers the techniques to improve the level of financial

performance of DYNAMATIC GROUP.

The study also covers to find out the reasons for the fluctuations in the

financial analysis.

Review of Literature:-

The literature survey is connected or concerned with the problem. The

researcher should review and examine all available literature, theories, findings,

formulas, etc.; first we should make preliminary review prior to problem

selection, systematic review.

We have referred the literatures in academic journals, annual reports and

company reports.

Operational definition of concepts:-

Finance:- Finance can be broadly defined as the activity concerned with

planning, raising, controlling and administering of funds in the business.



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Debit:- Means the amount owned by or due from an account or charged to an

account for the benefit received by that account. In short, it means the benefit

received by an account.

Credit:- Means the amount owned to an account for the benefit given by that

account in the belief that its value will be returned at a later date.

Financial Statement:- Those statements which have a financial implication

could be broadly termed as financial statement.

Ex: - Comparative statements of cost of 2 products.

Costs benefit analysis statements of 2 projects, etc.

According to John N Myer :- Financial statement provides a summary of

the accounts of business enterprises, Balance Sheet reflecting assets and

liabilities and income statement showing the results of operation during a

certain period.

Growth Statement:- The Profit & Loss account and the balance sheet of the

company reflects the growth and progress made in financial terms with the

comparative figures for the previous year. The status of the company is truly

reflected in these statements and is being used by different segments of the

society for their own purposes.

Leverage :- Is the employment of asset or funds for which the firms pays a

fixed cost or fixed return.



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Types of Leverages:-

1) Operating Leverage:

Operating leverage shows the relationship between the changes in sales

and the changes in the fixed operating income. Operating Leverage has impact

mainly on fixed cost and variable cost and also on contribution.

The following equation is developed by R.W.Johnson.

2) Financial Leverage:

The process of variation in capital structure is called Financial Leverage

or trade on equity. The variation in capital composition will have an impact on

operating and taxable income of the company.

3) Combined Leverage:

This Leverage exhibits the relationship between a change in sales and in

corresponding variation in taxable income.


Operating Income

Financial Leverage =

Taxable Income

Contribution

Combined Leverage =

Taxable Income

Contribution

Operating Leverage = Operating Profit ( EBIT)


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OR

Ratio: Is an expression of quantitative relationship between two numbers. A

financial ratio is the relationship between 2 accounting figures expressed

mathematically.

Current Assets: Refers to cash and temporarily held assets (i.e., assets means

for conversion into cash within a short period of time say, one year). These

assets undergo changes frequently. So, they are called circulating, floating or

fluctuating assets, examples of current assets are cash in hand, cash at bank,

bills receivables, sundry debtors, closing stock, prepaid expenses, outstanding

income, temporary investments, etc.

Current Liabilities: Are those liabilities which are required to be repaid within

a short period of one year out of current assets. Example of current liabilities


Combined Leverage = Operating Leverage x Financial Leverage


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are bills payable, sundry creditors, bank over draft, short term loans borrowed,

outstanding expenses, incomes received in advance, etc.

EBIT: Earning before interest & tax is the difference between contribution &

fixed cost (or) is the excess of contribution over fixed cost is the earning money

before deducting the interest and tax.

EBT: Earning before Tax is the excess of EBIT over tax is the earning money

before deducting the tax but after deducting the interest.

Contribution: Is the difference between sales & variable cost. It is the excess

of selling price over the variable cost per unit.

C = Sales Variable Cost

C = Fixed Cost + Profit (or) Loss

Sales: Refers to the goods which are sold by business organization.

Sampling Method:

Sampling is simply the process of learning about the population on thebasis of the sample drawn from it we have adopted the method of field study.



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CHAPTER SCHEME

CHAPTER 1 : INTRODUCTION

This chapter consists of a brief introduction of the topic as well as the

importance of the topic in the present day scenario it contain short theoretical

background to the topic as the related issue that are involved which is connected

to the main theme of the study.

CHAPTER 2 : RESEARCH DESIGN

This chapter outlines the statement of problem, scope of the study,

objective need, sources of data, research design, sampling technique, limitation

of the study.

CHAPTER 3 : PROFILE OF THE D.T.L

This highlights the overall profile of the company and its development,

history of the company and present status of the company.

CHAPTER 4 : ANALYSIS AND INTERPRETATION

This chapter provides information regarding the technique used for

analysis supported by a descriptive interpretation which simplifies the figures

into clear words.



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MISSION :-

The companys mission statement states that :

It has been Companys endeavor to keep abreast of the changes, both

technological and societal, while chalking out the growth chart. Be it theISO or other International Certifications.

9000 certification for quality systems or the ISO 14000 certification for

environmental standards, they believe that their role in society is that of a

responsible and accountable organization that is actively contributing to

the society.

Companys value system too reflects the commitment to quality and

innovation in a societal context.

COMPANY BELIEVES IN :-

Integrity.

Being a quality driven organization.

Being knowledge based organization.

Raising the standard of living of all employees.

Being non parochial meritocracy.

Conforming to the highest environmental standards.

HR policy is an offshoot of this philosophy. It aims to :-

Work towards a knowledge based organization, which believes in

equal opportunities.

Transcend all barriers of dogmatism.

Align personal goals with the goals of the company, community,

country and the world.



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PRODUCT PROFILE

DYNAMATIC HYDRAULICS :-

DYNAMATIC HYDRAULICS is Asias largest producer of Hydraulic

Gear Pumps, and one of the Top Five worldwide manufacturers of a wide range

of sophisticated Hydraulic Valves and custom tailored hydraulic solutions

extending from simple Hydraulic pumping Units to Sophisticated marine power

Packs, Complex Aircraft Ground Support Systems to turnkey industrial

installations.

All these products are produced at State-of-the-Art manufacturing

facilities located at Bangalore, and assembly is done in an air filtered

environment to avoid initial contamination in the Applications.

AGRICULTURAL SECTOR :-

Hydraulic Gear Pumps manufactured by Dynamatic have varied

applications including Agricultural Tractors etc. Dynamatic is an original

Equipment Supplier to all tractor manufacturers in India including Mahindra &

Mahindra, Eicher Tractors, Punjab Tractors, Same Deutz-Fahr, Escorts Limited,

Bajaj Tempo Limited, L & T, John Deere, new Holland India, etc.

APPLICATIONS IN INDUSTRIES :-

The Company enjoys an overwhelming share of the Industrial Market for

Hydraulic Gear Pumps in the country. Dynamatic pumps are used in Machine

Tools and various other Fluid Power Systems. The Companys customers

include BEML, Godrej & Boyee, Macneill Engineering, HMT, BHEL, Telco

and Ashok Leyland amongst others.



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APPLICATIONS IN EXPORTS :-

Dynamatic exports its products to over 30 Countries and its export

segment is growing rapidly with the turnover growing strongly over the past

few years. Exports are expected to constitute 15 20 percent of the companys

turnover, in the next 2 years.

Dynamatic products are used as Original Equipment in USA, UK,

Canada and South Korea. The Company has developed specific products for

use as Original Equipment in the tractor markets in USA, Germany, Mexico

and Turkey.

DYNAMATIC AEROSPACE :-

DYNAMATIC AEROSPACE, a division of Dynamatic Technologies

Ltd., is a pioneer and a recognized leader in the Indian Private Sector for the

development of complex aero structures. Instituted in 1995, this division is

currently headed by Air Cmde, (Retd.) Ravish Malhotra, one of Indias two

cosmonauts.

Dynamatic Aerospace is one of the closely partnered Agencies of

national importance like Ministry of Defence, Hindustan Aeronautics Limited,

and other defence establishments on key projects including the Lakshya, Indias

Pilotless Target Aircraft.



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HJT-36 Intermediate Jet Trainer and Sukhoi MK1 30 Fighter Bomber

Products include the Wing and Rear Fuselage of the LAKSHYA, Ailerons

Flaps for the wings for the HJT-36 and Fins, Ventral Fins, Slats, Vertical &

Horizontal Stabilizer, Canards and Air Brakes for the Sukhoi 30 MK1 fighter

bomber.

Dynamatic Aerospace is considered to be one of the most reliable quality

vendors to the DRDO and was presented with the Creative partner Award for

the year 1998-99 by DRDO, ADE and ASIEO. The Aircraft division of HAL

in Bangalore also presented this division with the HAL Best Vendor Award

for 2002-03.

Dynamatic Aerospace has the largest infrastructure in the Indian Private

sector for manufacture of exacting Air Frame Structures and Precision

Aerospace Components. This is the first time such capabilities have been built

in the Indian Private Sector. The Division is now consolidating its position

through collaborations with International Aerospace majors on exports

initiatives.

DYNAMETAL :-

DYNAMETAL, a division of Dynamatic Technologies, produces high

quality Non-Ferrous Alloy and Castings for Industrial, Automotive and

Aerospace Applications.



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AREA OF OPERATION

Dynamic Technologies Limited has its operations in India as well as in

overseas.

GLOBAL

Dynamatic Technologies Limited has acquired the Hydraulic Business

Division (Sweden Unit) of Sauer Danfoss Limited, UK, through its subsidiary

Dynamatic Limited, UK.

NATIONAL

NATIONAL BRANCHES:- The company has its branches in the

following cities.

New Delhi.

Ahmedabad.

Chennai.

Coimbatore.

Secunderabad.

Mumbai.

Pune.

Kolkata.

OWNERSHIP PATTERN :-

Dynamatic Technologies Limited (DTL), a public company was

incorporated on 8th March 1973, promoted by Mr. J.K.Malhoutra, present

Chairman of DTL. It also has technical collaboration from Dowty Hydraulic



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ministry of defense. It is the world-leading provider of advanced military radar,

electronic warfare and other avionics systems.

SWOT ANALYSIS

STRENGTH

The company is Asias largest producer of Hydraulic Gear pumps and

one of the top five world wide.

Company is now supplying hydraulic gear pumps to all 14 tractor

manufacturers in India.

Over 85 percent of all agricultural tractors and construction equipment

produced in India are powered by pumps produced by Dynamatic Hydraulics.

The company has relentless drive to eliminate operational inefficiencies,

introduction of more value added products to enable the company to increase its

net profit by 52 percent.

The improved overall performance has been leveraged by the company to

negotiate substantial reductions in financial costs.

The company imparts training to workmen for working on multiple

machines along with combination of reengineering of processes, which has

constantly increased the productivity levels.



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CHAPTER 4

ANALYSIS AND INTERPRETATION

Table No. 1

TABLE SHOWING FINANCIAL LEVERAGES

Earnings before interest & tax (EBIT)

F.L. =

Earning before interest and tax interest & preference dividend

Year F.L.s % on the basis ofyear 2005-06

% of Increase or

decrease over the

previous year

2005 06 1.276 100% -

2006 07 1.263 99% - 1

2007 08 1.293 101% 2

2008 09 2.358 185% 84

2009 10 2.536 199% 14

ANALYSIS :

The owners equity (equity share capital & resources) are used as a basis

to raise loans on long term basis to expand the earnings of the stake holders

after making the interest payouts. Thus earnings should be sufficient enough to

match the earning of the share holders without going for long term debt

borrowings.

The above table shows that the F.L. for 2005 - 06 was 1.276 and

decreased to 1.263 in the next year, but for the next 3 years it is on the

increasing trend to 1.293, 2.358 and 2.536 respectively.



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GRAPH No. 1

GRAPH SHOWING FINANCIAL LEVERAGES

1.276 1.263 1.293

2.358

2.536

0

0.5

1

1.5

2

2.5

3

2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION:

It is inferred that the F.L is on the increase overall during the 5 years

period gradually. This trend shows that the company has been in a position to

use the long term debt borrowing and deploy it to gain sufficient income and

also pay the interest burden comfortably.



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GRAPH No. 4

GRAPH SHOWING ABSOLUTE LIQUIDITY RATIO

0.027

0.021

0.052

0.083

0.039

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION:

It is inferred that the ALR is way below the acceptable standards and this

is due to the company holding huge amount of current liabilities which have

grown to very high levels over the period without any corresponding increase in

the absolute liquid assets.



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Table No. 5

TABLE SHOWING CURRENT RATIO

Current Assets

Current Ratio =

Current liability

Particulars

/ years2005 06 2006 07 2007 08 2008 09 2009 10

Current

asset476194665 539066033 1056478451

124680500

01195468000

Current

liability248281899 347068391 816891159 697609000 698769000

Current

Ratio1.918 1.553 1.293 1.787 1.711

ANALYSIS :

The current ratio refers to the ability of the company to meet its current

liabilities through its current assets. As a matter of thumb rule this ratio should

be at 2:1, i.e., the current assets should be double the current liabilities and this

is considered as satisfactory.

The current ratio is below the standards during the entire period of study.

During 2005-06 it is marginally less at 1.918 and has decreased to 1.553 and

1.293 over the next 2 years. It has increased to 1.787 and 1.711 during 2008-09

and 2009-10 respectively.



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Table No. 6

TABLE SHOWING NET PROFIT RATIO

Net profit after tax

Net Profit Ratio = X 100

Net sales

Particulars 2005 06 2006 07 2007 08 2008 09 2009 10

Net Profit

(after

taxation)

87037518 99880743 185767326 312848000 390812000

Net Sales 933270356 1114428664 2743490827293658100

02977227000

N/P Ratio 9.326 8.962 6.771 10.653 13.126

ANALYSIS :

The net profit ratio establishes a relationship between net profit (after

taxes) and sales and reflects the efficiency of the management in all the

activities of the firm. This ratio indicates the overall measure of the companys

profitability, the higher the better.

While computing net profit after tax, other incomes have been excluded

even by the company.

The net profit ratio was at 9.326 during 2005-06 and decreased to 8.962

and 6.771 in the next 2 years respectively. During 2008-09 it increased to

10.653 and further increased to 13.126 in the last year.



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Table No. 7

TABLE SHOWING RETURNS ON SHARE HOLDERS

INVESTMENT IN %

Net profit after interest & tax

R O I = X 100

Share holder investment (ESC, PSC + R&S)

Particulars 2005 06 2006 07 2007 08 2008 09 2009 10

Net Profit

(afterinterest &

taxation)

87037518 99880743 185767326 312848000 390812000

Share

holders

investment

262967543 337976061 659101674134888400

01460685000

ROI Ratio 33.09 29.55 28.18 23.19 26.75

ANALYSIS :

Returns on share holders investment, popularly known as ROI is the

relationship between net profits after interests and tax and the shareholders

funds. The higher the percentage the better for owners of the investment.

The ROI ratio was at 33.09 during 2005-06 and decreased to 29.55,

28.18, 23.19, over the next 3 years. It increased marginally to 26.75 in the lastyear.



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Table No. 9

TABLE SHOWING EARNINGS PER SHARE

Net profit after tax - preference dividend

E.P.S =

No. Of equity shares

Particulars 2005 06 2006 07 2007 08 2008 09 2009 10

Net Profit after

tax (-)Preference

divided

87037518 99880743 188369553 51382000 108174000

No. of equity

shares4193560 4193560 4203677 5199000 5414703

Returns on

equity capital

ratio

20.76 23.82 44.81 9.88 19.98

ANALYSIS :

The earnings per share is a small variation of returns on equity capital

and is calculated by dividing the net profits after taxes and preferences dividend

by the total number of equity shares in the firm. The higher the EPS it would

be better for the equity share holders.

The EPS was at 20.76 during 2005-06 and increased gradually to 23.82

during 2006-07 and increased substantially to 44.81 during 2007-08. It nose

dived to 9.88 during 2008-09 and climbed back to 19.98 during 2009-10.



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Table No. 10

TABLE SHOWING DIVIDEND PAYOUT RATIO

Dividend per equity share

Dividend Payout Ratio =

Earning per share

Particulars 2005 06 2006 07 2007 08 2008 09 2009 10

Dividend per

equity 5 5 7.5 4 7.5

EPS 20.76 23.82 44.81 9.8 19.98

DPO Ratio 24 21 17 40 38

ANALYSIS :

Dividend payout ratio is calculated to find out the extent to which

earnings per share have been retained in the business by way of transfer to

reserves and surplus. Ploughing back of profits enables the company to pay

dividend more in future or use it for further expansion.

The dividend payout ratio has been very volatile due to fluctuations in the

EPS over the period even though dividend payments are very stable, the DPO

ratio was at 24% in the beginning and dropped to 21 and 17 in the next 2 years.

It increased to 40% during 2008-09 and marginally decreased to 38% during

09-10.



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Table No. 11

TABLE SHOWING RATIO OF RESERVES TO EQUITY SHARE

CAPITAL

Reserves and surplus

Ratio of reserves = X 100

To Equity share capital Equity share capital

Particulars 2005 06 2006 07 2007 08 2008 09 2009 10

Reserves and

surplus221031943 296040461 610994644

129473700

0

1406538000

Equity share

capital41935600 41935600 48107030 54147000 54147000

REC Ratio 527 706 1270 2391 2598

ANALYSIS :

This ratio establishes relationship between reserves and equity sharecapital. The ratio indicates that how much profits are generally retained by the

firm for future growth, higher the ratio generally better is the position of the

firm.

The REC ratio was at 527% during 2005-06. It has increased over the

next 4 years at a very high rate at 706, 1270, 2391 & 2598% respectively.



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GRAPH No. 12

GRAPH SHOWING DEBT EQUITY RATIO

2.6

2.71

3.42

2.19

1.9

0

0.5

1

1.5

2

2.5

3

3.5

2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION:

It is inferred that the ratio has gradually increased in first 3 years and

dropped down in the last two years.

This can be attributed to an increase both in the current liability and aswell as in the long term debt funds.

However overall the figures of debt are greater that the shareholder funds

which is not a positive trend.



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GRAPH No. 13

GRAPH SHOWING SOLVENCY RAITO

70

71

76

68

65

58

60

62

64

66

68

70

72

74

76

2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION:

It is inferred that the overall solvency ratio of the firm is very good and

even in the case of closure etc. the company can meet all the liabilities and stillhave assets to pay off the stake holders.

The margin of decline from 2005-06 to 2009-10 it at variant of 5% only

which is acceptable.



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GRAPH No. 14

GRAPH SHOWING PERSONNEL EXPENSES RATIO

12.82

12.37

10.79

12.93

14.27

0

2

4

6

8

10

12

14

16

2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION:

It is inferred that the percentage seems to be stabilized in 1st two years

and dropped is the 3rd year due to huge increase in net sales and stabilized

further in the next year and increased only marginally in the last year by a mere

1% .

The costs are reasonably and being managed very well by the firm within

acceptable levels.



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Table No. 16

TABLE SHOWING INVENTORY TURNOVER RATIO

Net sales

Inventory turnover Ratio = X 100

Opening stock + closing stock

2

Particulars 2005 06 2006 07 2007 08 2008 09 2009 10

Net sales 933270356 1114428664 2743490827293658100

02831023000

Avg. Inventory 136858839 159192566 251567957 371628000 400201000

Inventory

Turnover ratio6.82 7.00 10.90 7.90 7.07

ANALYSIS :

Inventory turnover ratio is normally calculated as sales / average

inventory or cost of goods sold / average inventory. It reflects whether

inventory has been efficiently used or not with a purpose to determine only

minimum funds have been locked in the inventory. This also refers to the

number of items the stock has been turned over during the period of evaluation

and the efficiency with which firm is able to manage its inventory.

The ITO ratio was at 6.82 during 2005-06 and dropped to 7.00 in the next

year. It increased to 10.90 during 2007-08. It reverted back to 7.9 and 7.07

during the next two years.



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Chapter 5

FINDINGS, SUGGESTIONS AND CONCLUSIONS

Findings :

1. It is observed that Financial Leverages at DTL has gradually increased

over a period of first 4 years and then taken a dip in the last year only

when compared to the fourth year. Overall the FL is very good for the

company as a whole.

2. The Operating Leverages at DTL has started of on a negative note in the

first year and has increased gradually over the second and third year

only. In the last year there is a decrease of the O.L. by 75% which is very

huge, even though on an overall it is still high.

3. It is observed that the Combined Leverage of DTL is showing an overall

increase with wild fluctuations in between. This is due to gradual

increase and decrease reflected in both Financial and Operating

Leverage.

4. The absolute liquid assets available with the company to discharge itscurrent liabilities is showing a fluctuating trend over the 5 years period,

which shows the inability to payoff fully in the event of a decision taken

by the management.



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Company can make efforts to reduce the current liabilities to the extent

possible so that the ALR shows better figures.

5. The standard for CR is 2:1 and the companys data shows a marginal

decrease from the accepted standards and efforts have to be put in by the

management to improve the business cycle and exercise control over both

trade debtors and trade creditors. This would improve its current ratio

well above the standards.

6. The company has seen an increase in both net profits (after taxation) as

well as net sales. In spite of this there has been a fluctuation in the NPR

due to probable increase in the operating expenses over the period and as

well as interest payments on heavy long term borrowings. The

management should make efforts to reduce costs in order to maximize

profits at enhanced level of operations, which is possible.

7. The ROI can be improved upon further by reducing external borrowing

and the payment of interest associated with it. Excess funds in reserve

and surplus can be utilized in a phased manner to reduce the debt

percentage in the financials of the company.

8. The return to the equity share holders has been very satisfactory with

very good returns and as well as better figure under the reserves and

surplus.



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BIBLIOGRAPHY

BOOKS:

Management accounting

By : Appnnaiah Reddy,Mukund Sharma

Finantical management theory & practice

By: Prasanna Chandra

Financial management

By; I.M. Pandey


By: P.V. Kulkarni, B.G. Satya Prasad

Business finance

By: Shashi K. Gupta, R.K.Sharma


By: Appannaiaha Reddy, Mukund Sharma

Cost & financial analysis

By: Shashi K. Gupta, Neethi Gupta, Anu Putney

Internet:

l i di
http://www.google.com/http://www.google.com/http://www.google.com/

Documents

A STUDY ON “FINANCIAL ANALYSIS AND LEVERAGES”