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WORKING CAPITAL MANINAGEMENT
AND
RATIO ANALYSIS IN TRG Industries Pvt. limited.”
A Project Report Submitted In Partial Fulfillment of the
Requirement for the Award of the Degree of MBA
BY
Deepak Singh Rawat
1
CONTENT
S.No Particulars Page No
1. Introduction 1-5
2. Objective 5
3. Review of Literature 6-42
4. Research Gap 43
5. conclusion 44
6. References 45-48
2
A project usually falls short of its expectation unless guided by the right
person at the right time. Success of a project is an outcome of sincere efforts,
channeled in the right direction, efficient supervision and the most valuable
professional guidance.
First, I would like to extend my sincere thanks to Mr. Kailash Chander (Sr.
Manager Finance TRG, JAMMU) and MR.R.K.Gupta for providing me an
opportunity to undertake my research. I would like to thank and express my
deep gratitude towards MR.SANJAY RAINA for his guidance, support, and
encouragement without which I couldn’t have completed my research, I
gained a lot of valuable knowledge, which I am sure will help me in my future.
This project would not have been completed without the direct and indirect
help and guidance of such luminaries. They provide me with the necessary
resources and atmosphere conductive for healthy learning and training.
At the outset I would like to take this opportunity to gratefully acknowledge the
very kind and patient guidance I have received from my project guide.
Lastly, I would like to thank my colleagues and friends who gave me fruitful
information to accomplish my project.
DECELERATION
3
I, the undersigned declare that the project report entitled “working capital
analysis and ratio analysis of TRG Industries Pvt. limited written and
submitted by me to the DEPARTMENT OF BUSINESS MANAGEMENT,
H.N.B Garhwal University, Srinagar, Garhwal(uttarakhand). In partial
fulfillment for the award of degree of Master of Business Administration under
the guidance of ________________ is my original work and the conclusion
drawn there in are based on material collected by myself.
Place:
Date: (Deepak Singh)
CERTIFICATE
4
This is certify that the project report entitled “Working Capital Management
And Ratio Analysis” which is being submitted here with the award of Master
Of Business Administration of HNB Garhwal University(Centeral University) is
the result of original research work completed by Mr. Deepak Singh Under my
supervision and to the best of my knowledge and belief the work embodied in
the project report has not formed earlier the basis for the award of any degree
or similar title of this or any other university or examining body.
Place:
DATE:
5
INTRODUCTION
1.1 Basic theoretical concept and context of the working capital
management
1.2 Need of the study of working capital management
1.3 Type of working capital management
1.4 Uses of working capital
1.5 Objective Of The Project
1.1Basic theoretical concept and context of the Working
capital management
6
In day to day working of business concern, Working Capital plays an
important role, because Working Capital is required for payment of wages,
expenses, raw materials and payment to creditors. Whether a business firm is
earning profit or incurring loss or facing financial crises can be seen with the
help of quantum of Working Capital, due to shortage of Working Capital a
business firm is lame, if there is no sufficient Working Capital in business it
can not run smoothly. Due to this reason working capital management has
assumed greater importance in every business firm.
The Management of Working Capital is concerned with the management
of the firm’s current accounts, which includes current assets and current
liabilities. Working Capital plays equivalent vital role in the business as blood
plays in the human body. Shortage fixed can be tolerated by a business
concern for short period but shortage of working capital can create lots of
serious problems within a period of few days.
In this modern area of cut – throat competition, it has become essential
to provide certain facilities to customers to capture the market; the credit
facility is one of them. Thus working capital is required as there is a time gap
between credit self and collection proceeds from the customers.
Concept of Working Capital Management
Working Capital means the funds available for day-to-day operation of an
enterprise. There are two concepts of Working Capital.
7
(1) GROSS WORKING CAPITAL
(2) NET WORKING CAPITAL
1 GROSS WORKING CAPITAL –
This concept implies the total of all current assets of a business firm. A
current asset is that asset which can be converted in to cash within an
accounting year or an operating cycle. The current asset includes cash
and bank balance, debtors, bills receivables, prepaid expenses and
short-term investment.
2 NET WORKING CAPITAL
This concept of working capital is the difference between current assets
and current liabilities. The current asset include cash and bank balance,
debtors, bills receivables, prepaid expenses and short-term investment
and current liabilities can be explained as those liabilities which are
expected to mature for payment within an accounting year and include
creditors, bills payable, outstanding expenses, bank overdraft and short-
term loans.
The net working capital can be negative or positive. If current assets
exceed current liabilities, the difference is positive net working capital and
8
when current liabilities exceed current assets, and when current liabilities
exceed current assets, the difference is negative working capital.
The working capital can also be divided into categories:
1 Fixed working capital
2 Fluctuating working capital
Every business requires some minimum amount of working capital inspite
of the level of operations, throughout the year. This amount represents the
fixed amount of working capital.
In many business firms, the levels of operations fluctuate from time to time
depending upon the demand pattern. In case, demand picks up in a particular
season, the need for working capital also increases and during low demands
period, the need for working capital also comes down.
Both gross and net concepts have their own significance for management.
The gross concept of Working Capital is a going concern concept, because
current assets are necessary for the proper utilization of fixed assets. The net
concept of Working Capital shows the financial soundness and liquidity of a
firm. This concept creates the confidence to the creditors about the security of
their amounts.
1.2 Need of the study of working capital management
9
Funds are required for an enterprise for day to day running. These funds
are generated usually through sales. However, sales don’t convert into cash
instantaneously. This is always time gap between the sales activity and
receipt of cash. Working Capital is required for this period in order to sustain
operating activity of an enterprise.
Therefore, it is clear that Working Capital is required because of time gap
between sales and actual realization of cash. This time gap is technically
termed as operating or cash cycle of business.
OPERATING CYCLE
The continuous flow from cash to suppliers to inventory, to accounts
receivable and back into cash is what is called the term cash cycle refers to
the length of time necessary to complete the following cycle of events:
1. The raw material and stores inventory stage
2. The working progress inventory stage
3. The finished goods inventory stage
4. The receivable stage
Conservative Working Capital Policies:
A conservative polices suggest to carry higher level of current assets in
relation to sales. Surplus current assets enable the firm to absorb sudden
variation in sales, production plan and procurement time without disrupting
production plans. Additionally, the higher liquidity levels reduce the risk of
insolvency.
But lower risk translates in to lower return. Large investment in current assets
leads to higher interests, carrying cost and encouragement for sufficient. But
10
conservative policy will enable the firm to absorb the day-to-day business
risks. It assures continuous flow of operation and eliminates worry about
recurring obligations. Under this policy long term financing covers more than
the total requirement for working capital. The excess cash is invested in short-
term Marketable securities and in need; the securities are sold off in the
market to meet the urgent requirement of working capital.
Working Capital Cycle
1.3 Type of Working Capital
11
RAW MATERIAL
WORK-IN-PROCESS
ACCOUNTS RECEIVABLE
CASH
To run an organization well, it is necessary to maintain funds in the
organization. Generally, Working capital of every business firm may be of
many types:
Permanent, fixed or regular Working Capital
Flexible or Temporary variable Working Capital
Seasonal Working Capital or Special Working Capital
Negative Working Capital
Cash Working Capital and
Balance Sheet Working Capital
Permanent, Fixed or Regular Working Capital
This working capital is the minimum quantity, which required running the
organization every time; it also refers to the hard care Working Capital. If this
quantity of Working capital is not maintained then the business may be greatly
handicapped in day to day working. It is that the minimum level of investment
in the current assets that is caved by the business at all times to carry out
minimum level of its activities. This part of Working Capital is as permanent as
the investment in fixed assets.
Flexible or Temporary Working Capital
It refers to that part of total Working Capital, which is required by a business
over and above permanent Working Capital. It is also called as variable
Working Capital. Such type of Working Capital represents such amount of
additional current assets which are required at different times during an
accounting period of additional inventory
and cash balance to cover the pick selling period as assured by changed
circumstances since the volume of temporary Working Capital keeps on
12
fluctuating from time to time according to the business activities it may be
finance from the short term services. This type of Working capital changes
with the charge into operational activities.
Seasonal Working Capital or Special Working Capital
It refers the extra Working Capital, which are required due to additional
demand on some special occasions. This working Capital is also additional
amount of current assets like cash, receipts and inventory, which are required
during the accounting period of a business concern. Additional Working
Capital may also be needed on account certain abnormal circumstances and
it is termed as special Working Capital. Thus, this type of Working Capital is
needed to meet extra ordinary requirements or contingencies. The
classification of the seasonal Working Capital as regular and variable is also
helpful in arranging finance for the business firm.
Negative Working Capital
Negative Working Capital is when current liabilities exceed current assets.
This position is not accurate theoretically and occurs when a business firm is
nearing a crisis. If any business concerns to pay his liabilities, then it is called
Negative Working Capital.
Cash Working Capital
This Working Capital is calculated at the time shown in profit and loss account
of a business. It is the real flow of money or value at accurate time and is
considered to be most realistic approach to Working Capital.
Balance Sheet Working Capital
13
It is that Working Capital which is calculated from the items appearing in the
balance sheet of organization.
1.4 Uses of working capital
Business Losses
Working capital is also used to finance operational losses of companies.
On the other hand if a company is in profit then fund is created.
Redemption of share capital and debentures or repurchase of debentures,
when cash is paid to redeem preference shares or debentures or
repurchase the debentures, the result is that Working Capital is reduced.
Payment Of Dividend In Cash
There are two ways of dealing with proposed dividend and the subsequent
payment. If the proposed dividend is treated as a current liability, actual
amount will not be shown as a use of funds.
Payment Of Taxes
Working Capital is also used to pay the taxes. When tax is paid from
Working Capital, there is reduction in Working Capital and this means use
of working capital.
Purchase Of Fixed Assets
The purchase of fixed assets such as plant machinery either reduces
current assets or increase current liability
14
Profile of the Organization
2.1 Name / Address and Location of the company
2.2 Vision and mission of the organization
2.3 Historical Background of the organization
2.4 Organogram
2.5 Different product profile of the organization
2.6 Current status of the company
2.7 Any special award
15
2.1Name / Address and Location of the company
TRG (TEJ RAM GROUP INDUSTRIES RPIVATE LIMITED) is located in
some states of India but its corporate & registered office is situated in
Delhi (TRG INDUSTRIES PRIVATE LIMITED ENGINEERS &
CONTRACTORS An ISO 9001 : 2000 E – 461, Greater Kailash –II, New
Delhi - 110048)
2.2 VISION AND MISSION OF THE ORGANIZATION
“Every journey has a destination. To get to that destination, you need a vision. Ours is an ambitious one”
VISION
To evolve as a predominant defining force in the Infrastructure industry
MISSION
To set new standards in quality and time bound delivery
16
2.3 Historical Background Of The Organization
LALA SHRI RAM
“If charity was his passion, humanity was his religion”- The Hindustan
Times (January 12, 1963)
Nothing can better sum up the homage paid to great son and
philanthropist of Delhi, barely Lalaji, Lala Shri Ram who began as a humble
worker and went on to set up one of India’s largest business house the DCM
Group. Not only did Lalaji achieve great height in business enterprises; he
also participated in full measure in the crucial early stages of nation building.
Everyone is familiar with the name of multiple facets of the industries and
institutions on which he left his imprints – be it the DCM limited, Bengal
potteries, Jay Engineering works, many sugar mills, Sindri Fertilizers the Sady
Shri Ram collage, Delhi school of Economics and umpteen others.
Born into family of Agrawal, Shri Ram, in the 79 years of his life, built
an industrial empire manufacturing a vast variety of goods like – textiles,
sugar, alcohol, heavy chemicals, vanaspati, pottery, fans sewing machines,
electronic motors and capacitors. The industrial legacy that he left behind was
valued at Rs. 600 million at the time of his death. Shri Ram gads this uncanny
ability to spot the right man for the right job a rare quality that contributed to
his success. So sure was Shri Ram with this instinct that once he made up his
mind about the man, he gave that man every altitude, there after his sole
concern was with the results. But his principle was “the more, the merrier”.
17
While just in his thirties, Shri Ram got himself if know in the industrial
as well as the educational circles. He was nominated to the Delhi Municipal
committee. He was also instrumental in setting up several prestigious
institutions of higher learning and arts such as the Lady Shri Ram College and
Delhi school of economics, Shriram center for performing arts etc.
Chronological History
The Delhi Cloth & General Mills Co. Ltd. (DCM) was founded in 1889
with the establishment of a Spinning Mill at there after, the company
expanded and diversified into large segments of industry areas and played a
leading role in the industrialization of India.
Company Milestones
1889 … Delhi Cloth Mill No. 1
1925 … Delhi Cloth Mill No. 2
1928 … Delhi Cloth Mill No. 3
1932 … Daurala Sugar Works
1935 … Lyallpur Cotton Mils, Lyallpur (Pakistan)
1938 … Daurala Confectionery Works
1940 … Barhni Sugar Works (Rename Mawana Sugar Works in
1949)
1941 … DCM Chemical Works
1945 … Daurala Distillery
1945 … DCM Vanaspati Manufacturing World
1948 … Swatantra Bharat Mills
18
1956 … Hissar Textile Mills
1956 … DCM Silk Mills
1961 … DCM Engineering & Development Works
1963 … Rajasthan Vinyl & Chemical Industries
1964 … Rajasthan Rayon’s (Now Shriram Rayon’s)
1969 … Fertilizer Plant
1987 … Cement Plant
2.4 Organogram
19
Chairman & Senior Managing Director
Ajay S. Shriram
Vice Chairman & Managing Director
Vikram S. Shriram
Chemical Group
Desgn: Sr ED chemical
SK.Agarwal
Company Law
B L Sachdeva
Corporate Hr
Sushil Baveja
Public Relation
Neelam Anand
Deputy Managing Director
Rajiv Sinah
Director Sugar
Ajit S. Shriram
Sugar
Desgn: ED Sugar
S. Radhakrishnan
Corporate Finance
Desgn: Sr. VP & CFO
JK Jain
Corporate IT
Kamal Karnatak
Kota Desgn: ED & Residential Head- kota
KK. Kaul
Agri Business SBUDesgn: President & BHS. Chakravarty
Plastics SBU
Desgn: Senior VP & SBU Head
Rajat Mukerjei
Agri Retail
Desgn: President & BH
Rajesh Gupta
Building Product
Desgn:Sr VP & BH
Sandeep Mathur
Shriram Polytech LTDDesgn: Sr VP & BHDr. G Mukhopadhyay
Energy Services
Desgn: CEPower/ Energy
Dr, G C. Datta Roy
Internal Audit & Risk Management
S S. Gaur
Textiles/Real Estate
Desgn: Chief Ed
S D. Omchart
2.5 Different Product Profile of the Organization
The main business units of DSCL are:
Agri Businesses: Sugar, Urea, Agri Inputs, Shriram Bioseed, and Hariyali
Kisaan Bazaar
Energy Intensive Businesses: Chemicals, PVC Resins, Cement
Value Added Businesses: Fenesta™ Building Systems, PVC
Compounds, and Energy Services
Agri Business:
Agri business is a key growth driver of DSCL. Agri business offers comprise
agricultural inputs, both manufactured and merchandised, outputs, distribution
and services. Agri-inputs include Urea, Seeds and Pesticides manufactured
by us. And marketing of other agri inputs like SSP, nutrients such as Zinc
Sulphate, soluble fertilizers etc.
Agri outputs are manufacturing and marketing sugar and its by-products –
Molasses and Bagasse. With the objective to move towards providing total
“Solutions” to the farmers, we have initiated a “Rural Retailing
, Hariyali Kisaan Bazaar”. We offer multiple products and services to the rural
and farming community, including agri inputs, diesel and petrol (under alliance
with BPCL), consumer goods, durables, apparels, insurance, agronomy
advisory, credit, and contract farming as a part of this initiative. All of our agri
business activities are supported by a strong “Shriram” brand equity that our
products enjoy in the marketplace. We now have more than 6,000 retailers,
around 900 wholesaler’s .We offer online agronomy services to farmers
through– Shriram Krishi Vikas Kendra’s.
Sugar:
Sugar functioned as an independent company within our Group until March
2004 when they were merged in DSCL. We have a combined installed
capacity of 33,000 (tones crushed daily and a power generating capacity
(Bagasse based) of 70 MW.
20
Which is being further expanded to 94.5 MW, with an exportable surplus of
46 MW for the grid. All our sugar plants are self-sufficient to meet their own
power requirements from Bagasse. We are also exporting power to the UP
state grid.
Urea:
We are amongst the first “urea” manufacturers in the country starting way
back in the 1960's. Our fertilizer operations are characterized by highly
optimized production process delivering high capacity utilization & proven
abilities in erection, commissioning, and operation & troubleshooting of
Ammonia/Urea plant. Urea plant has capacity of about 700 TPD of ammonia,
which is an ingredient in the Urea manufacturing process. We are the lowest
cost naphtha-based urea manufacturer in the country. Located within our Kota
manufacturing complex, our urea plant benefits from access to efficiently
generated captive power and robust technical resources that reduce our cost
of manufacturing.
For the past several years we have been able to manufacture urea in a
profitable manner with naphtha as the feedstock .The facility can now accept
dual feedstock of naphtha and gas in any proportions. Meanwhile, the
Company has started running the plant on gas from Sep ’07 onwards. This
will further reduce our cost of production.
Shriram Bioseed:
DSCL offers a range of hybrid seeds in the country via its 100% subsidiary
Shriram Bioseed Genetics India Ltd. At present, the Company markets Corn,
Bajra (Pearl Millet), Jowar, Paddy, BT Cotton and Sunflower in India. Our
seed business is a strong R&D-led operation that develops, produces and
markets high quality hybrid seeds. Established as one of the country's top
three players in the hybrid corn seeds market
The Company marketing and distribution set up provides a ready platform to
sell the hybrid seeds, thus substantially lowering the cost of operations and
time-to-market for new products.
21
Hariyali Kisaan Bazaar:
It is a pioneering micro level effort, which is creating a far-reaching positive
impact in bringing a qualitative change and revolutionizing the farming sector
in India. DCM Shriram Consolidated Ltd. (DSCL), capitalizing its over 35
years of experience in the agri-input markets & first hand knowledge of Indian
farmers, is setting up a chain of centres aimed at providing end-to-end ground
level support to the Indian farmer & thereby improving his "profitability" &
"productivity".
Chemicals:
Our chemicals business comprises chlor-alkalis and related chemicals
including caustic soda lye & flakes, liquid and gaseous chlorine, hydrochloric
acid, stable bleaching powder, compressed hydrogen and sodium
hypochlorite. The company, which is also the third largest manufacturer of
Chlor-Alkali in the country, has manufacturing facilities at Kota, Rajasthan
(1,13,750 TPA) and at Bharuch, Gujarat (62,500 TPA) both based on the
environmentally sound membrane cell technology. DSCL is both one of the
lowest cost and most efficient manufacturers of Chlor-alkali in the country.
The company also has 12.5 million cubic meters bottling capacity for
Hydrogen produced at the complex and a 9,900 TPA capacity for stable
bleaching powder.
Captive Power Generation:
The Chemicals business being highly energy intensive is vulnerable to the
availability and cost of power with such costs constituting two-thirds of all
direct costs. Whereas around 35-40% of the capacity in India is based on
purchased power, DSCL already has in place a reliable and un-interrupted
source of captive power that it is augmenting further. The company operates
two captive power facilities that cater to the needs of its Chemicals business-
a coal-based facility at Kota rated at 125 MW and a 24 MW DG set operation
that runs on furnace oil at its Bharuch facility.
Large Captive Consumption of Chlorine:
22
In the chlor-alkali business, the two co-products – chlorine and caustic soda –
have varying demand cycles. This leads to surpluses of chlorine or caustic
soda, depending upon the business cycle and demand conditions. Any
surplus of caustic soda is easier to manage, but a surplus of chlorine, which is
hazardous in nature, can pose a challenge to manufacturers, as they will
either need to invest to utilize the surplus chlorine or sell it at unprofitable
prices by reducing operating rates. We have a large captive consumption of
chlorine within our manufacturing facilities, because we use it to produce
other value added products. This advantage emanates from our integrated
manufacturing, which also makes us one of the most efficient players in the
sector.
Caustic Soda:
Caustic Soda is a basic product very widely used in diverse industrial sectors,
either as a raw material or as an auxiliary chemical. It is produced along with
chlorine. It is mainly used in the manufacture of pulp and paper, newsprint,
viscose yarn, staple fiber, Aluminum, cotton, textiles, toilet and laundry soaps,
detergents, dyestuffs, drugs and pharmaceuticals, vanaspati, petroleum
refining. Caustic soda is produced in two forms - lye and solids (flakes or
granules). We manufacture Caustic soda through more environmentally
friendly membrane technology.
Chlorine:
Chlorine is co-produced with caustic soda in the electrolysis of brine. For
every ton of caustic soda produced, 0.886 tons of chlorine is also produced.
Being a gas and also due to its hazardous nature it cannot be transported
over long distances. It is used in the manufacture of products like vinyl’s,
pharmaceuticals, water disinfectants, agrochemicals, additives in oil and
detergents, refrigerants, photographic chemicals, adhesives, inks and
coatings. Chlorine gas cannot be produced commercially without producing
caustic soda, so chlorine and caustic soda are known as "co-products," and
their economics are inextricably linked.
PVC Resins
23
The Company has a 70,000 TPA (after the recent expansion), PVC resins
facility at its integrated manufacturing complex at Kota, Rajasthan. The
Company utilizes the calcium carbide route to produce PVC resins whereas
all other manufacturers use the ethylene/EC/VCM route. Chlorine and calcium
carbide, the two key inputs in the manufacture of PVC resins are produced by
the Company at the integrated manufacturing complex itself.
After catering to captive consumption, DSCL sells the calcium carbide to other
companies in the chemicals and steel industry. Also, the Company further
processes the waste sludge produced during the manufacture of calcium
carbide to make cement. Of the PVC resins made, the Company is able to
consume between 20-25% through its PVC Compounding division, selling the
rest to other manufacturers and compounders.
Calcium Carbide:
Calcium carbide (CaC2) is manufactured by mixture of lime and carbon in
electricfurnace. The company has enhanced its manufacturing capacity of
Calcium carbide from 66,500 TPA to 1,12,000 TPA by commissioning its state
of the art 30 MVA electric furnace in July 2005.The company utilizes its
Calcium carbide captivity for the manufacture of PVC resins and also sells in
the market to the various industrial users.
Our Key Competitive strengths in this industry are:
Strong Brand image of Shriram Calcium carbide.
Competitive cost structure based on Captive coal based power.
Fenesta Building System:
(Contemporary Window Systems - an application adding value) Today with
technological advancements, a material dominating the western construction
& building industry is UPVC - unplasticized poly vinyl chloride.
To bring the global advantage to the Indian consumer, DSCL in technical
collaboration with Specters Window Systems, UK has launched Fenesta, a
contemporary range of UPVC windows & doors that promise consistent
24
quality production, elegant designs, completes technical support and is
backed by an unprecedented warranty.
PVC Compounds:
DSCL, through its integrated operations has a presence in the entire plastics
value chain encompassing PVC resins, PVC Compounds and value added
products like the Fenesta™ window systems, thereby offering a complete
range of products and solutions covering multitudes of industries and sectors.
DSCL is one of the largest organized players for PVC compounds and has its
manufacturing facility based at Kota. The Company at present has a
compounding facility of 23,400 MT. DSCL has also set up Innovative Polymer
Application Center (i-PAC) to undertake R & D activities, various application
areas and develop new and innovative high end value added products.
Dscl Energy Services Co. Ltd (Dscl Esco):
A total energy solution practitioner is established to revolutionize the
knowledge sector with pioneering concepts in Energy Management’.
Launched in 1999, we are focused at leveraging the learning’s developed
from continuous energy cost reduction in our own energy intensive
manufacturing units like Fertilizer, Chemicals, Plastics, Cement, Sugar and
Power generation. With our widest brand of offerings, we serve as an
extended arm to many industries and commercial buildings by providing them
energy management services in India and abroad.
Textiles:
The textile group comprising of Swatantra Bharat Mills and DCM Silk Mills
earlier situated in 112 acres of prime land in the heart of Delhi has relocated
to Tonk, Rajasthan. Pursuant to the relocation, the modern facility at Tonk is
operating successfully.
2.6 Current Status Of The Company
25
The company reported satisfactory growth in a challenging macro
operating scenario. All businesses reported healthy operational
performance driven by implementation of expansion plan and swing
capabilities to maximize earnings. The key highlights of the FY2009 are as
follows:
Net Revenues at Rs. 3439 crore registered a growth of 36% over a
last year
1 Growth was driven by Agri businesses which include Agri
input, Fertilizers and Sugar. These businesses achieved
37% increase in revenue.
2 The Chloro Vinyl Business which include Chlor Alkali
(Chemicals), PVC resins and power, registered 21%
increase in turnover driven by expanded Chlor-Alkali
facilities.
3 Hariyali Kisaan Bazaar, part of rural value chain, grew
volumes at existing as well as new outlets. The number of
outlets reached 301 across 8 states
PBIT was up by 153% at Rs. 223 crore compared to Rs. 88 crore
last year. The segment wise PBIT performance was as under
Particulars F.Y 2009 F.Y 2008
26
Rs. crore % of total Rs. crore % of total
Agri Business
Urea 25.8 7.
2
19.
7
9.9
Agri inputs 23.1 6.
4
7.
3
3.7
Sugar 87.9 24.
4
(5.0) (2.5)
Sub total 136.7 38.
0
22.
0
11.1
Chloro-Vinyl 197.5 54.
9
149.
0
75.0
Cement 25.5 7.
1
27.
6
13.9
Total 359.7 100.
0
198.
6
100.0
Hariyali kisaan Bazaar (64.6
)
(29.6)
Other Businesses (3.5
)
(17.5)
Unallocated
Expenditure
(68.8
)
(63.6)
Grand Total 222.8 87.9
27
1. Agri Businesses witnessed turnaround with a 522% increase PBIT at Rs.
137 Crore. Sugar and Agri Inputs business provided the major thrust.
2. In Chloro – Vinyl business PBIT was up 33% at Rs. 139 crore, due to
higher volume in chlor-Alkali (segment of this product) consequent to the
capacity expansion to 765 TPD and completion of 48 MW Coal based
captive power plant and the swing capability to sell more power then when
downstream products primarily PVC resins(part of this segment) witnessed
stress.
3. The Hariyali kisaan Bazaar witnessed higher losses, consequent to
accelerate pace of expansion, which was as per plan.
4. Fenesta Building System achieved operating breakeven during the year
PAT for the year stood at Rs. 101.79 Crore as compared to a loss of
Rs. 3.03 crore (without exceptional items) in the corresponding period last
year. PAT also takes into account Deferred Tax credits relating to previous
period.
BUSINESS-WISE PERFORMANCE AND OUTLOOk
28
29
2.7 Any Special Awards
1993-94 NPC Runner up Award for, “Best Productivity Performance in
Cement Industry”
1994-95 NPC Award for, “Best Productivity Performance in Cement
Industry”
1995-96 FAI’s Runner Up Award for, “Best Production Performance of
Nitrogenous n Fertilizer Unit”
1996-97 NPC Award for, “Second Best Productivity Performance in
Fertilizer Industry”
1998-99 SAP R-3/SAP Star Customer Award 1998’
1999-0 NCCBM Award for, “Best Improvement in Thermal Energy
Performance in Cement Industry”
2000-01 National Award for Energy Efficiency-SFC Kota & SAC Bharuch.
2001-02 National Award for Oil Conservation-SAC Bharuch.
30
2002-03 First TERI (TATA Energy Research Institute) Award for environment
conservation- SAC Bharuch.
2002-03 2nd Rank in Over all environment Rating of the Indian Caustic-
Chlorine Sector By Center for Science & Environment (CSE), Under
Their Green Rating Project.
2002-03 National Award for Oil Conservation By Ministry of Petroleum &
Natural Gas, Govt. of India for Unique and Innovative Efforts in
Energy Conservation for SAC Bharuch.
2002-03 National Award To DSCL ESCO’ as Best Esco Company in India
By Ministry of Petroleum & Natural Gas Govt. of India.
2003-04 National Award for Pollution Control & Rajiv Gandhi Environment
for Clean Technology For SAC Bharuch
2004-05 National Award for, “Public Recognition of Outstanding Activity
for Prevention & Control of Pollution”
31
Research Design and Methodology
3.1 Research Methodology
3.2 Objective of Research
3.3 Source of Data
3.4 Limitation of Research
32
3.1 Research Methodology
The design of the research project, popularly know as the “research design”.
Research design is a basis of framework, which provides guideline for the rest
of research process. It is the map of blue print according to which, the
research is to be conducted. The research design specifies the method of
study. There are three basic types of research design via: exploratory,
descriptive and environmental. A research design helps to define the problem,
method of data collection and analysis, time and requirement for the project to
estimate the expenses to be incurred. It is purely and simply the framework or
plan for a study that guides data collection .This project based descriptive and
statistical research design.
3.2 Objective of Research
To study the applicability and concept of ratios analysis.
To calculate various relevant financial ratios of the company and
determine the relevant financial position of the company.
33
Scope of Research
At DSCL our vision is to build world class organization in focused
business, which is profitable, with a culture of being quality
driven, responsive to change and highly competitive.
The scope of the study was extended for five financial years
o 2003-2004
o 2004-2005
o 2005-2006
o 2006-2007
o 2007-2008
o 2008-2009
3.3 Sources of Data
Primary Sources
General discussion with staff members
General discussion- discussing daily patterns and day to day working
of finance section.
34
Secondary Sources
Annual report of TRG for 2007-08.
Credit monitoring arrangement (CMA) data files, which is prepared
annually.
Quarterly information system (QIS)
Quarterly monitoring system (QMS)
Intranet
Limitations of Study:
As it is a private company, some of the information are being kept
confidential and was not disclosed for the study.
All the information was collected from companies balance sheet which
has its inherent limitations
35
Finding and suggestion
4.1 Conclusion and suggestion
4.2 Learning
4.3 Ratio analysis
36
4.1 Conclusion and suggestion
A different aspect of Working Capital management in TRG has been
analyzed. Through various analysis for example analysis of inventory
management, analysis of cash management, analysis of receivables, analysis
of Working Capital Finance etc.
Different analysis show different picture. For example inventory management
analysis may show an efficient management of inventory, Therefore, it
becomes essential for us to fuse all the pictures drawn from different analysis
and create a realistic and complete image of the Working Capital
management of the company.
The size of Working Capital of the company, excepting the year 2000-2001 of
the study period has always been increasing in comparison of turnover.
The state of affairs at inventory front was good. Analysis of inventory structure
reveals that a large amount of inventory is blocked in stores and spare parts,
the stock inventory has been maintained on FIFO (First in First out) basis at
cost price or market price whichever is lower. Similarly stock of goods in
process is less as comparison to last two years which means that, as they
37
accomplish their given contract, they get their contract money in time,
Revenue of contract has been recognized by reference to work done and bills
accepted by the Project Authorities and raw material are also largely
maintained. Although management has tried to decrease its investment in
inventories still it caused an increase in Working Capital of TRG.
Regarding cash management, company has substantial amount of loans and
advances thus cash balance has lowered. Cash volume has increased and
decreased with increase and decrease in sales respectively showing that
company is in sound position of Working Capital regarding the aspect of cash
management. The current & quick ratio of the company is also above from the
standard.
Composition of receivables reveals that TRG has taken preferential interest in
trade receivables compared to loan and advances that is a good for this
company. Receivables constitute a major role for Working Capital so some
special techniques should be invented.
The term finance of Working Capital in TRG has good provisions. The main
source of Working Capital is secured loan. Thus the dependence of company
for its Working Capital finance has increased towards secured loans.
We can say that TRG has maintained its Working Capital in efficient way,
regarding the consequences of slow collection policy. To be on safer side
company must review the position of inventory through periodical inventory
reports. On the other hand, it must fix Economic order quantity for inventory.
38
Thus company must examine each and every aspect of Working Capital
thoroughly and rectify the small loopholes in the management. This makes it
more efficient & successful.
4.2 Learning
Fund Management and Its Allocation:
Started with daily bank balance, which then circulated to finance officer
and account officer for consideration.
Follow up with J&K Bank, Jammu BahuPlaza for keeping minimum
balance in cash credit account resulting saving in interest cost
Fund transfer through net at day end for better utilization or minimum credit /
debit balance
4.3 Ratio Analysis
Definition: A ratio can be defined as “the indicated quotient of two
Mathematical expression", and as “the relationship between two or more
things".
Importance of Ratio Analysis
As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that it presents facts on a
comparative basis and enables the drawing of inferences regarding the
performance of a firm. Ratio analysis is relevant in assessing the
performance of a firm in respect of the following aspects.
Liquidity Position
Operating efficiency
39
Overall profitability
Trend Analysis
Liquidity Position
A firm can be said to have the ability to meet its short-term liabilities if it has
sufficient liquid funds to pay interest on its short maturing debt usually within a
year as well as to repay the principal. This ability is reflected in the liquidity
ratios of a firm. The liquidity ratios are particularly useful in credit analysis by
banks and other suppliers of short-term loans.
Operating Efficiency
Yet another dimension of the usefulness of the ratio analysis, relevant from
the viewpoint of management is that it throws light on the degree of efficiency
in the management and utilization of its assets. The various activity ratios
measure this kind of operational efficiency. In fact, the solvency of a firm is, in
the ultimate analysis, dependent upon the sales revenues generated by the
use of its total assets as well as its components.
Overall Profitability
Unlike the outside parties which are interested in one aspect of the financial
position of a firm, the management is constantly concerned about the over all
profitability of the enterprise. That is, they are concerned about the ability of
the firm to meet its short term as well as long-term obligations to its creditors,
to ensure a reasonable return to its owners & secure optimum utilization of the
assets of the firm.
Trend Analysis
Finally, ratio analysis enables a firm to take the time dimension into account.
In other words, whether the financial position of a firm is improving or
deteriorating over the years. This is made possible by the use of trend
40
analysis. The significance of a trend analysis of ratios lies in the fact that the
analysts can know the direction of movement that is, whether the movement
is favorable or unfavorable.
Limitations of Ratio Analysis
Financial statement analysis can be a very useful tool for understanding a
firm's performance & condition. However, there are certain problems & issues
encountered in such analysis, which call for care, circumspection & judgment
in such exercise.
1. Heuristic & Intuitive Character
Most of the ratios we have computed & interpreted have been
proposed in a somewhat heuristic or intuitive fashion. The ratio is often
not related logically to a well-defined theoretical framework. Instead
they have been suggested in a somewhat impressionistic manner.
2. Development Of Benchmarks
Many firms, particularly the larger ones, have operations spanning a
wide range of industries. Given the diversity of their financial
performance & condition. Hence, it appears that meaningful
benchmarks may be available only for firm that have a well-defined
industry classification.
3. Window Dressing
Firms may resort to window dressing to project a favorable financial
picture. For example a firm may prepare its balance sheet at a point
when its inventory level is low.
4. Price Level Changes
Financial accounting, as it is currently practiced in India & most other
countries, does not take into account price level changes. As a result,
41
balance sheet figures are distorted & profits misreported. Hence,
financial statement analysis can be vitiated.
5. Interpretation Of Results
Though industry averages & other yardsticks are commonly used in
financial ratios, it is somewhat difficult to judge whether a certain ratio
is good or bad. A high current ratio for example, may indicate a strong
liquidity position (something good) or excessive inventories (something
bad).
6. Correlations Among Ratios
Several ratios have some common element (sales, for example, are
used in various turnover ratios) & some items tend to move in harmony
because of a certain common underlying factor.
7. Variations In Accounting Policies
Business firms have come latitude in the accounting treatment of items
like depreciation, valuation of stocks, research & development
expenses, foreign exchange transactions, investment, sales,
preliminary & pre-operative expenses, provision of reserves &
revaluation of assets.
Data Analysis and Interpretation
Ratio analysis is a power full tool of financial analysis. In financial
analysis a ratio is used as a benchmark for evaluating the financial position &
performance of a firm. The absolute accounting figures reported in the
financial statements do not provide a meaningful understanding of the
performance & financial position of a firm.
42
An accounting figure conveys meaning when it is related to some other
relevant information. The relationship between two accounting figures,
expressed mathematically, is known as Ratio. A ratio helps to summarize
large quantity of financial data & to make qualitative judgment of the firm's
financial performance.
A ratio can be defined as “the indicated quotient of two Mathematical
expression", and as “the relationship between two or more things".
Liquidity Ratio
Liquidity ratios study the firm's short-term solvency & its ability to pay off the
liabilities. These include:
1) Current Ratio 2) Liquid Ratio
Liquid Ratios as a group are intended to provide information about a firm's
liquidity & the primary concern is the firm's ability to pay its current liabilities.
Consequently, these ratios focus on current assets & current liabilities.
1. Current Ratio
CURRENT RATIO = Total current assets/Total current liabilities
This ratio is calculated by dividing current assets by current liabilities. Current
ratio is known as ‘solvency ratio’ as it indicates how the expected current
claims are covered by current assets.
Current assets mean assets, which have been purchased in order to convert
them into cash or into other current assets with in a period of normally one
year. These assets include cash and bank balance, short-term investment, bill
receivables, debtors, short-term loan, inventories and pre-paid expenses.
43
Current liabilities mean liabilities with short-term duration, which normally up
to one year from date of creation and are paid out of existing current assets or
by creating a new current liabilities. These liabilities includes, bank overdraft,
bills payable, creditors, provision for taxation, outstanding expenses,
unclaimed dividend, short-term loans, outstanding interest, advance payment
received and portion of a debt expected to mature within period of one year.
The ratio indicates the coverage of current assets to current liabilities. In other
words, it indicates the proportion of current assets available for meeting
current liabilities. Normally it should be expected current ratio should be 2:1,
which indicates that current assets should be twice compared to the current
liabilities
Total Assets
(Rs. In Crores)
Particulars Inventory Sundry
debtors
Cash
balance
Loans and
advances
Total
2004-2005 1.62 3.23 9.59 13.32 27.76
2005-2006 6 .09 14 11.58 31.67
2006-2007 4.62 1.71 13.69 14.96 34.98
2007-2008 5.98 2.93 15.92 11.84 36.67
44
Total Current Liabilities
(Rs. In Crores)
Particulars Provisions Other Liabilities Total
2004-2005 1.42 5.6 7.05
2005-2006 1.14 6.19 7.33
2006-2007 0.89 10.27 11.16
2007-2008 0.90 12.94 13.85
Current Ratio of TRG from 2004-2005 to 2007-2008
Year 2004-05 2005-06 2006-07 2007-08
Curren
t ratio
27.76/7.05
= 3.93
31.67/7.33
= 4.32
34.98/11.16
= 3.13
36.67/13.85
= 2.64
45
Interpretation:
TRG current ratio in 2004-05 was 3.93, which was very good as compaired to
the standard ratio. But later the ratio had increased to 4.32 in 2005-2006, at a
increase of 9.72% which is far more good to the ideal ratio of 2:1.but in 2006-
2007 it had fallen to 3.13, at a decline of 27.54% in 2007-2008 further it had
fallen to 2.64, another 15.65% decline but it is able to maintain its ratio near to
the standard ratio. But we at these ratio of 2006-2007 it has fallen to 3.13 and
in 2007-08 to 2.64 which is far better than ideal ratio, so from the above
graph and the table we can fabricate/say that company has very sound
position and sufficient assets to pay all his liabilities.
Quick Ratio/Liquid Ratio/Acid Test Ratio
Significance:
The ratio is a better tool to measure the ability to honor day to day
commitments. It is the ratio between the liquid assets and liquid liabilities.
From the balance sheet, liquid assets are calculated by deducting inventories
and prepaid expenses from current assets. Liquid liabilities are current
46
liabilities less bank overdraft. The formula for calculation of this ratio is as
follows:
Quick Ratio = Liquid assets / Total current liabilities.
Generally an ideal quick ratio is said to be 1:1. If it is more, it is
considered to be better. The idea is that for every rupee of current liabilities,
there should at least be one rupee of liquid assets. This ratio is a better test of
short-term financial position of the company than the current ratio, as it
considers only those assets that can be easily and really converted in to cash.
Stock is not included in liquid assets as it may take a lot of time before it is
converted into cash. Quick ratio thus is a more rigorous test of liquidity than
the ratio and when used together with current ratio, it gives a better picture of
the short-term financial position of the firm.
Quick Ratio of TRG from 2004-05 to 2007-08
Year 2004-05 2005-06 2006-07 2007-08
Quic
k
Ratio
2.61/0.90
=3.72
2.65/0.73
=3.68
30.18/11.16
=2.70
30.62/13.85
=2.21
47
Interpretation
The ideal liquid ratio is 1:1 from the analysis it is found that in year 2004-05
the liquid ratio was 3.72, which is quite high as comp aired to ideal ratio but in
2005-2006, it has become 3.68, which is also quite high above the ideal ratio.
Further it had fallen to 2.70 in 2006-2007, which is near the ideal ratio and
2007-08 it has fallen to 2.21 . It shows that the company is efficiently using its
liquid assets. It also indicates that the company is having sufficient funds to
meet its short-term liabilities.
3. Long Term Solvency Ratios
Significance
The financial position of the firm can be studied & analyzed in two
perspectives i.e. the short-term position which is known as the short-term
liquidity position, has already been discussed with the help of liquidity ratios.
In the following section the long-term financial position, its composition &
implications have been considered. The long-term sources of funds for any
firm comprise of the shareholder's funds & the long-term borrowings.
Thus to know about the long-term financial position of a firm following
ratios are calculated:
48
1. Debt-Equity Ratio
2. Proprietary Ratio
3. Interest Coverage Ratio
4. Fixed assets long term.
A. Debt-Equity Ratio
The Debt-Equity is the basic & the most measure of studying the indebt
ness of the firm. The Debt-Equity ratio is based on the assumption that the
extent to which a firm should employ the debt should be viewed in terms of
the size of the cushion provided by the shareholders funds. The Debt-Equity
ratio is based on the assumption that the extent to which a firm should employ
the debt should be viewed in terms of the size of the cushion provided by the
shareholders funds. The Debt-Equity ratio is calculated as follows:
Debt-Equity = Debt/Net worth
Or
= Long-term debt/shareholder's fund's
Significance:-
The ratio indicates the proportion of owner's stake in the business. Ideal ratio
is 2:1. Excessive liabilities tend to cause insolvency. The ratio indicates the
extent to which the firm depends upon outsiders for its existence. The ratio
provides the margin of safety to the creditors. It tells the owners the extent to
which they can gain benefits and maintain the control with the limited
investments.
49
Debt Equity Ratio Of From 2003-04 to 2007-2008
Interpretation:
The debt equity ratio of TRG in 2004-2005 was 1.57 and further it had risen to
the 2.04 in 2005-2006, it means that company’s debt in 2005-2006 are more
in compare to the previous year ratio. But in 2006-2007 the ratio has
increased to 2.75. In 2007-08 it further decreased to 1.53. It is over debtness .
B. Proprietary Ratio
Significance
This ratio focuses the attention on general financial strength of
business enterprise. This ratio is of particular importance to the creditors
who can find out proportion of shareholders funds in the total assets
employed in business. A low proprietary ratio will indicate greater danger
to the creditors. A ratio below 50% may be alarming for the creditors since
Year 2004-05 2005-06 2006-07 2007-08
Debt
Equity
Ratio
85.094/54.2
=1.57
119.136/58.4
=2.04
172.425/62.7
=2.75
99.6336/65.12
=1.53
50
they may have to suffer heavily, in the event of company's liquidation on
account of heavy losses. It is calculated as:
Proprietary Ratio = Shareholders fund/Total tangible assets x100
Proprietary Ratio of TRG from 2004-05 to 2007-08
Year 2004-05 2005-06 2006-07 2007-08
Proprietar
y Ratio
25.59/27.89
=91.7%
25.7/32.9
=78.0%
19.33/35.25
=54.9%
20.65/36.94
=55.9%
Interpretation
As there is the continuous decrease in proprietary ratio that is in 2004-2005 it
was 91.7% which has gone down to 78.0% in 2005-2006. Further it had gone
down to 54.9% in 2006 – 2007 and in year 2007 – 2008 there is rise of 1.82%
gone up to 55.9%. It implies that the proportion of shareholders in the assets
of the company is getting higher in last one year. This may be a good
condition for the creditors who have invested. So they will not suffer at the
time of winding up of the company.
51
C. Interest Coverage Ratio
Significance
It measures the ability of the firm to pay the fixed interest liability.
This ratio is calculated as:
EBIT/FIXED INTEREST CHARGES
Interest coverage ratio or the times interest earned is used to test the
firm's debt serving capacity. The interest coverage ratio is computed by
dividing earning before interest & taxes by interest. The interest coverage
ratio the number of times the interest charges are covered by funds that are
ordinary available for their payment. A higher ratio is desirable but too high
ratio indicates that firm is very conservative in suing debt & that it is not using
credit to the best advantage of the shareholder's. A lower ratio indicates
excessive use of debt or inefficient operations.
Interest Coverage Ratio of TRG from 2004-05 to 2007-08
Year 2004-05 2005-06 2006-07 2007-08
Interest
Coverage
ratio
103.62/15.7
=6.60
130.455/22.3
=5.85
104.92/34.4
=3.05
102.15/41.36
=2.47
52
Interpretation:
Interest coverage ratio is continuously falling from 2004 to 2008, it was 6.60 in
2004-2005. In 2005-2006 it had fallen to 5.85 and 3.05 in 2006-2007.Further it
had fallen to 2.47 in 2007-08 . Which show that the company is not paying the
Interest regularly and its Interest amount has increased as in comparison with
2004-2005.companies capacity to pay its interest from its EBIT is decreasing
so here the control measures should have taken.
D. Fixed Assets to Long Term Funds
Significance
This ratio explains whether the firm has raised adequate long term funds to
meet its fixed assets requirements. It is expressed as follows
Fixed assets/long-term funds
53
The ratio should not be more than 1.if less than one; it shows that the part of
working capital has been financed through long-term funds. This is desirable
to some extend because a part of working capital termed as core working
capital is less of fixed nature .the ideal ratio is 0.67.
Fixed asset include net fixed asset (original cost- deprecation to date) and
trade investments including shares in subsidiaries. Long term funds include
share capital reserve and long term loans.
The formula for calculating fixed assets to long term funds ratio is:
NET FIXED ASSETS / LONG TERM FUNDS
Fixed Asset Long Term of TRG from 2003-04 to 2008-09
Year 2004-05 2005-06 2006-07 2007-08
Fixed
Asse
t
Long
Term
22.17/43.28
=0.51
22.98/48.84
=0.47
22.18/46.24
=0.47
30.87/53.92
=0.57
54
Interpretation
In the year 2004-2005 the ratio was 0.51. Which is less then the ideal ratio of
0.67, in 2005-2006 the ratio fallen to 0.47 and remain constant in the year
2006-2007. But in 2007-2008 the ratio had increased to 0.57. From the
analysis it is found out that since last four years company is
investing/financing the purchases of fixed assets out of working capital which
is a wrong policy, so the control measures should have taken.
4. Profitability Ratio or Income Ratio
The main object of every business concern is to earn profits. A business must
be able to earn adequate profit in relation to the capital invested in it. The
efficiency and the success of a business can be measured with the help of
profitability ratios. We can understand more about these ratios by categories it
into the following: -
(A) Ratios Calculated on the Bases of Sales: - {Net Sales means (sales +
Income from Services)} these are as follows: -
55
I. Gross Profit Ratio
Significance
Gross profit ratio is difference between the net sales (sales less sales return)
and the cost of good sold. The ratio is calculated with the help of following
formula:
Gross profit Ratio = Gross profit / Net sales x 100
The ratio shows margin lefts after meeting the purchasing and manufacturing
cost. It measures the efficiency of production and pricing. A high gross profit
ratio means high margin for covering others expenses like administrative,
selling and distribution expenses, i.e. other than the cost of good sold.
Therefore, higher the ratio, the better it is. It is also important for a business to
maintain the ratio on higher side; otherwise it will be very difficult to cover
other expenses. A firm can also compare its own ratio of past with current
year’s ratio to find out its performance its called intra-firm comparison.
The Gross Profit Ratio of TRG from 2004-05 to 2007-08
Year 2004-05 2005-06 2006-07 2007-08
G.P
Ratio
1.2/54.4
=2.36%
.84/44.04
=1.91%
(5.74)/47.62
= (12.07%)
(4.9)/67.11
= (7.31%)
56
Interpretation:
The gross profit ratio of TRG’S was 2.36% in 2004-2005, which has come
down to 1.91% in 2005-2006. But in 2006-2007 it was decreased and show a
negative Gross profit of (12.07) %. Further it had fallen to (7.31)% in 2007-
2008.
57
II Net Profit Ratio:
This ratio shows the earning left for shareholders [equity and preference] as a
percentage of net sales. It measures overall efficiency of all the functions of a
business firm like production, administration, selling, financing, pricing, tax
management etc. This ratio is very useful for prospective investors because it
reveals the overall profitability of the firm. Higher the ratio, the better it is
because it gives an idea of overall efficiency of the firm.
The NP ratio indicates the proportion of sales revenue available to the owners
of the firm & the extent to which the sales revenue can decrease or the cost
can increase, without inflicting a loss on the owners. So the NP ratio shows
the firm's capacity to face the adverse economic conditions.
An increase in the ratio over the previous ratio indicates improvement in
operational efficiency of the business, provided the gross profit ratio is
constant. The ratio is thus an effective measure to check the profitability of
the business. One can check the adequacy of the ratio by taking into
account the cost of capital, return in the industry as a whole & market
condition such as boom or a depression.
This ratio is calculated as follows:
Net Profit Ratio: Net profit / Net sales X 100
Net Profit Ratio of TRG’S from 2004-2005 to 2007-2008
Year 2004-05 2005-06 2006-07 2007-08
Net Profit
Ratio
10.51/54.45
= 19.31%
10.92/44.04
= 24.79%
4.90/47.62
= 10.29%
1.01/67.11
= 1.51%
58
Interpretation:
The net profit ratio of TRG’S was 19.31% in 2004-2005 it had gone up by
5.48%, in 2005-2006. But in 2006-2007 it had fallen down to 10.29 %. Further
it had fallen to 1.51 in 2007-2008. The manufacturing and other expenses had
been gradually increased; it is an alarming sign for the organization to reduce
their manufacturing expenses so that Net profit will increase.
59
5 Turnover Ratios:
These ratios are also known as activity ratio or assets management ratio.
These ratios are very important for business concern to find out how well the
facilities at the disposal of concern are being used. The ratios are being
usually calculated on the bases of sales or cost of good sold. High turnover
ratios indicate better utilization of resources. The important turnover ratios
are:
1. Working capital turnover ratio
2. Debtor turnover ratio
3. Stock turnover ratio
60
1 Working Capital Turnover Ratio:
Significance:
This ratio compares the net sales with net working capital of the business firm.
The indication give by the ratio is the number of times working capital is
turned around in a particular period. The ratio is calculated with the help of
following formula:
Working Capital Turnover Ratio: Net Sale/ Net Working Capital*
*working capital = current assets – current liabilities
The higher this ratio, the better is the utilization of the working capital and also
indication of lower working capital. However, a very high working capital
turnover ratio is a sign of over trading and a firm may face shortage of working
capital. A firm should compare this ratio with the ratio of other firms in the
same industry and also with industry average to find out its position as
compared to other firms. Similarly, an intra-firm comparison will also help to
Find out the comparative performance of the firm.
61
Working Capital Turnover Ratio of TRG’s from 2004-2005 to 2007-2008
Year 2004-05 2005-06 2006-07 2007-08
Working
Capital
Turnover
Ratio
54.45/20.83
= 2.61
44.04/25.59
= 1.72
47.62/24.03
= 1.98
67.11/23.09
= 2.90
Interpretation:
In 2004-2005 the working capital turnover of the company was 2.61 but it
decreased to 1.72 in 2005-2006. Since then the working capital turnover ratio
of the company is increasing every year. In 2006-07 it further marginally
increased to 1.98 but in 2007-08 working capital ratio is 2.90 which is very
low this shows that the working capital of the organization is low compare to
62
net sales company has to increase its working capital for the sound working of
the organization.
2. Debtor Turnover Ratio:
Significance:
One of the important decisions regarding financial management is about
credit to be granted to the customer. There should be a well-defined credit
policy, which should be followed carefully by a firm. The credit policy followed
by the firm is indicated by this ratio. This ratio is calculated with the help of
following formula:
Debtor Turnover Ratio = Credit Sales/Average Account Receivables*
*Average Account Receivables = Opening balance of debtors + closing
balance of debtors / 2
The higher this ratio, lower is the collection period. On the other hand, a lower
ratio indicate higher collection period. The average collection period as shown
by the ratio can be compared the credit rate plan of the firm. If it is more than
the credit period plan by the firm, it should be analyzed carefully. It may mean
efficient credit management or excessive conservatism in credit granting,
which may result in some loss of sale. On other hand if average collection
period as indicated by the ratio is less than the credit planned by the firm, it
indicates that the credit policy by the firm is not that efficient and hence, the
firm may face liquidity crunch and therefore it needs to be tightened.
63
3. Stock/Inventory Turnover Ratios:
This ratio established a relationship between cost of good sold during a given
period and the average amount of inventory held during that period. The
indication given by this ratio is the number of times the finished stock is turned
over during a given accounting period. This ratio is calculated with the help of
given formula:
Inventory/Stock turnover ratio: Cost of Good Sold
/Average Inventory during that period*
*Average Inventory = Opening Inventory + Closing Inventory / 2
Higher this ratio, the better it is because it shows rapid turnover of stock and
consequently shorter holding period. On the other hand, if ratio is lower, it will
indicate that stock is slow moving and there is a longer holding period.
64
BIBLIOGRAPHY
Annual Report Of TRG
INTRANET
65
