Financial Statement Analysis and Interpretations at Alfa Laval India Ltd by Noname

7/22/2019 Financial Statement Analysis and Interpretations at Alfa Laval India Ltd by Noname

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Index

Page No.

1.Executive Summary 1

2. Introduction To Topic 23.Objectives Of Project 4

4.Research Methodology 5

5. Company Profile 7Corporate Milestones 8

Product and Services 9

Industrial Application 11

Organization Chart 12Finance & Legal Organization 13

Financial Highlights 14

Operational & Financial Result 15

Graphical presentation of operational and financial

Results

17

6. Information Of Ratio AnalysisFinancial Statement Analysis 18

History Of Financial Analysis 22

Conceptual Framework Of Ratio Analysis 23

Users of Accounting Information 24

What Did The Users Of Accounts Need To Know? 25

Which ratios will each of these groups be interested

in?

27

Information and Analysis 28

Ratio Analysis 29

Classification of Ratios 32


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Executive Summary

Project Title: Financial Statement Analysis and Interpretations.

Company Name: Alfa Laval (India) Limited.

Introduction:

Company changing name from Vulcan Laval Ltd, to Alfa Laval Ltd, in 1987, comes a

long way since it started as a fabrication factory. Now a day, executing projects in all

over the world in countries like South Africa, Middle East, China and so on, the company

has diversified its core product lines with changing technological environment. Coreproduct lines of the company are thermal, separation, chemical technologies.

Critical Analysis of Financial Statement and Interpretations on basis of Ratio Analysis is

an important tool in the hands of management for analyzing the financial performance of

the company. This involves calculation of various ratios based on the information

presented in the financial statements of the company. Based on the requirement of the

management financial ratios are calculated.

For this study five year s comparisons taken for calculating ratio analysis. Main objective

in undertaking this project is to supplement academic knowledge with absolute practical

exposure to day to day functions of the organization.

The training at Alfa Laval (India) Limited involved the day to day working at corporate

accounts departments with the senior managers in the company. This project helped us to

get the deeper understanding of the process of portfolio management in Alfa Laval

(India) Limited and how decisions are taken to strengthen the financial position.


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Introduction to Topic

Every financial manager is involved in financial decision making and financial planning

in order to take right decision at right time, he should be equipped with sufficient past

and present information about the firm and its operations and how it is changing

overtime. Much of this information that is used by financial manager to take various

decisions and to plan for the future is derived from the financial statements.

The project, Financial Statement Analysis and Interpretations of Alfa Laval (India)

Limited focuses to analyze the financial statements and to study different ratios over the

period of 5 years to determine the financial position of Alfa Laval (India) Limited, Pune.

Financial analysis involves the use of various financial statements. These statements do

several things. First, the balance sheet summarizes the assets, liabilities and owners

equity of a business at moment in time, usually the end of a year or a quarter. Next the

income statement summarizes the revenues and expenses of the firm over a period of

time while balance sheet represents a snapshot of the firm s financial position at a

moment in time.

Financial management is planning and controlling of financial resources of a firm with a

specific objective. Since, financial management as a separate discipline is of recent

origin, it is still in a developing stage. It is very crucial for an organization to manage its

funds effectively and efficiently.

Financial management has assumed greater importance today as the financial strategies

required to survive in the competitive environment have become very important. In the

financial markets also new instruments and concepts are coming and one must say that a

finance manager of today is operating in a more complex environment. A study of

theories and concepts of financial management has therefore become a part of paramount

importance for academics as well as for practitioners but there are many concepts and

theories about which controversies exist as no unanimous opinion is reached as yet.


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The project, Financial Statement Analysis and Interpretations of Alfa Laval (India)

Limited, Pune further aims at discussing and understanding the concepts of financial

management of Alfa Laval (India) Limited; the functions expect to be performed by the

financial management as well as the objectives of financial managements.


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Objectives of the Project

1. The main objective is to study Financial Statements like income and expenses and

balance sheet of Alfa Laval (India) Limited.

2. To study various ratios to determine the relationship of different factors which have

impact on the financial position of the company.

3. Analyze financial position of Alfa Laval (India) Limited over 5 years and relationship

between deposits accepted and loans disbursed over the period of 10 years.

4. To assess the present the present profitability, operating efficiency and liquidity

position of the company.


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Research Methodology

The focus of this chapter is on the methodology used for the collection of data for

research. Data constitutes the subject matter of the analyst. The primary sources of the

collection of sources of the collection of data are observations, Interviews and the

questionnaire technique. The secondary sources are collections of data are from the

printed and annually published materials. A questionnaire form is prepared to secure

responses to certain questions. It is device for securing answers to questions by using a

form.

The questionnaire technique is economical and time saving and is an important tool of

collecting information.

Primary Data:

Data that is collected for the specific purpose at hand is called as primary Data.

Following methods are used to do this project:

1. Questionnaire Method:

To study the project, Critical Analysis of Financial Statements of Alfa Laval (India)

Limited questionnaire was used as I asked few questions to the Head of Department,

Mr. S. L. Shewalkar and project guide Mr. Sachin Zinjarde Finance Executive and

other staff for the relevant information.

a. The history of the Alfa Laval (India) Limited.

b. Numbers of staff working for the company.

c. Other company related information.d. Areas of operations.

Secondary Data:

Secondary data highlights the contextual familiarities for primary data collection. It

provides rich insights into the research process.


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Secondary data is collected through following sources:

1. Published Sources:

Annual report of Alfa Laval (India) limited from the year from 2001 to 2005.

a. Profit and Loss accounts statements.

b. Balance sheet (assetsand liabilities).


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COMPANY PROFILE

Alfa Laval India Limited is a leading global provider of specialized products and

engineering solutions. Alfa Laval has business links with leading engineering

multinational, Alfa Laval AB Sweden. The company offers its core technologies in the

areas of Separation, Heat Transfer and Fluid Handling. The company also posses

expertise in project engineering and chemical equipment of fabrication.

With strong manufacturing base at Pune and Satara, It is engaged in the production of

equipment for industries such as breweries, beverages, vegetable oils, food processing,

power generation, chemical, marines, oil and gas production, water treatment plants,

sugar, mining etc.

Alfa Laval s strength lies not only in the supply of individual equipment to these

industries but also in the execution of projects from pre project engineering, to

manufacture, to supply, to installation, commissioning and after sales services. The

company s project management capability has proven in the field of dairies, breweries,

food processing and refrigeration.

Today Alfa Laval India Ltd is multi location engineering company with strong

manufacturing bases at Pune, Satara, and Sarole. It does its business through a nation

wide sales and service through a dedicated customer service center located at Thane.


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COMPANY S MILESTONES

Alfa Laval India Ltd traces its origin in the year 1937, when it was incorporated as

Vulcan Trading Company Pvt. Ltd., a wholly owned subsidiary of the Swedish match

company mainly engaged in trading activities.

The company set up its manufacturing unit at Pune in 1961, for the production of plants

and equipment for food, chemical and pharmaceutical industries.

In 1965, Vulcan Trading Company acquired the assets and liabilities of Alfa Laval Ltd.

By the way of amalgamation and was re christened Vulcan Laval Ltd. Alfa Laval Sweden

became a shareholder of the merged company.

In 1983, a manufacturing unit was set up at Satara for the production of Plate Heat

Exchangers and subsequently, Spiral Heat Exchangers.

The company s business was by and large based on Alfa Laval technology. Hence thecompany s name was changed to Alfa Laval (India) Ltd; in 1987.

In 1991, Alfa Laval Sweden merged with Tetra Pak, an international organization that

develops manufacturers and, markets complete packaging systems.

It has been awarded as a GMU (Group Manufacturing Unit) status by Alfa Laval,

Sweden, to manufacture Centrifugal Separators and Decanter Centrifuges for exports to

Alfa Laval Sweden, Japan, Spain and Denmark.

Lloyds Registered Quality Assurance LRQA (UK) for Thermal and Separation business

groups, has conferred it with the ISO 9001 certification.


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Products and Services

Alfa Laval India Ltd develops products that help to make industry more efficient and

contribute to the optimum utilization of energy. The company offers key technologies

like Separators, Heat Transfers and Flow Technology that are of vital importance to

industry.

Separators:

Alfa Laval is the world s largest supplier of separation equipment such as high speed

Separators, Decanters and Separation Systems. These are widely used in chemical,

pharmaceutical and process industries, onboard ships, power plants, water and waste

management and engineering industries.

Heat Exchangers:

Alfa Laval India Ltd supplies an extensive range of compact heat exchangers plate and

spiral heat exchangers in a variety of materials for a large range of applications. With its

unique manufacturing facilities, experiences and expertise gained over a years, Alfa

Laval India Ltd is the undisputed market leader for the supply of Plate and Heat

Exchangers.

Fabrication:

Alfa Laval India Ltd has come a long since the start of its fabrication factory in 1961.

From catering the stainless steel fabrication requirements in dairy industries in its early

days Alfa Laval India Ltd has built an enviable infrastructure to fabricate exotic metals

like Titanium, Hastelloy etc. and also Austenitic Stainless Steel.


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Alcohol Plants/Distillery:

A well-known name in the distillery market, Alfa Laval India Ltd was a pioneer in

bringing Single Fermenter continuous fermentation technology to India in the late

eighties. Almost all distilleries in India are associated with Alfa Laval. Besides, the

company has executed more than 51 complete distillery projects in India as well as in

Turkey, Vietnam, Indonesia, Thailand and Australia.

Customer Care:

For Alfa Laval, service is one of the most important competitive tools. It is the most

important competitive tools. It is making sure its customer stay in production. It is

enabling them to be different, productive and innovative. It is giving them reliable and

relevant information that genuinely relates to their business and getting them started on

time at all full capacity and on specification. It is permitting their customers to be

spectacularly successful.


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Industrial Applications

Alfa Laval India Limited has delivered more than:

100 Vegetable oil refining plants.

14 Brewery plants accounting for a sizeable Production of Beer in India.

200 Dairy Plants.

31 Distillery Plants.

300 Spray Drying and Evaporation Plants for applications in Dairy and Food,

Dyestuff, Chemicals, Ceramic and Paper.

Alfa Laval India is also executing Plants in South Africa, China, Oman, Nigeria, Nepal,

Bangladesh and Sri Lanka.


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ORGANIZATION CHART:


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Finance & Legal Organization

The Finance & Legal group has the responsibility for:

Accounting standards

Statutory and operational

consolidation

Taxes

Legal structures

Systems for financial reporting

Business analysis connected to our

financial reporting

Forecast process

Sales statistics reporting

Production of management accounts

Development and implementation of

direction for Information

Technology and Information SystemSingle source supplier in the Group

for IT and IS

Overall funding matters for the

Group

Funding for all group companies

Commercial guarantees

Financial derivatives

Standard terms of sales, mergers and

acquisitions

Legal matters incl. trademarks

Monitoring & evaluation of risks

within the company

Insurance covers for the Group

Investment and disposal of real estate

Maintenance and leasing of premises

Internal auditing (daily mgmt.)


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Financial Highlights of Alfa Laval (India) Limited over 5 Years

2001 2002 2003 2004 2005

Sales & Other Income 3027.4 3055.9 3919.6 5279.6 5878.4

Profit before Interest,

Depreciation & Tax627.4 725.7 915.9 1253.2 1065.4

Net Profit after Tax 379.9 453.5 650.4 785.1 648.6

Share Capital 181.6 181.6 181.6 181.6 181.6

Reserves & Surplus 1346.9 1455.3 1570.3 1850.1 1980.9

Shareholders Funds 1528.5 1636.9 1751.9 2031.7 2162.5

Dividend 336.0 345.0 454.0 454.0 454.0

Book Value of Share 84.10 90.10 96.40 111.80 119.0

Earnings per Share 20.90 24.90 35.80 43.20 35.70

Return on Shareholders

Fund24% 27% 37% 38% 30%


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Operations and Financial Results of Alfa Laval (India) Ltd over 5

years:

2001:

Sales turnover and other income for the year under review was at Rs.3027.46 M. the

profit before interest, depreciation, amortization and tax improved to Rs.698.71 M. The

company registered a net profit for the year under review at Rs.379.90 M as against a net

profit of Rs. 389.38 M which included extraordinary income of Rs.146.01 M for the

previous financial year. The net profit in real terms grew by about 56% as compared to

previous financial year.

2002:

Sales turnover and other income for the year under review was at Rs.3055.91 M. the

profit before interest, depreciation and tax improved to Rs. 725.70 M. After providing

Rs.0.46 M for interest, Rs.70.81 M for depreciation and Rs.200.90 M for taxation, the

company registered a net profit for the year under review of Rs.453.53 M as against a net

profit of Rs.379.91 M for the previous financial year. The profit available for

appropriation is Rs.697.34 M out of which the amount set aside for dividend is Rs.345.04

M.

2003:

Sales turnover and other income for the year under review at Rs.3919.60 M recorded an

increase of 28%. The profit before interest, depreciation and tax IMPROVED TO

Rs.915.90 M. After providing Rs. 0.94 M for interest, Rs.72.17 M for depreciation and

Rs.192.39 M for taxation, the company registered a net profit for the year under review of

Rs. 650.40 M as against a net profit of Rs.453.53 M for the previous financial year.

The profit available for appropriation is Rs.956.70 M out of which the amount set aside

for dividend including tax thereon is Rs.535.45 M.


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2004:

Sales turnover for the year under review crossed the five billion rupee while the total

income stood at Rs.5279.63 M. In line with the spurt in the sales turnover, the profit

before interest, depreciation and tax cruised past the billion rupee mark reaching

Rs.1253.16 M. After providing Rs.5.37 M for interest, Rs.68.57 M for depreciation and

Rs.394.09 M for taxation, the company registered a net profit for the year under review of

Rs.785.13 M as against a net profit of Rs.650.40 M for the previous financial year. The

net profit after tax for the year under review without considering the profit of SKANSEN

Engineering and Consultancy Company Ltd was Rs.774.45 M, an increase of about 19%

as compared to the net profit after tax of Rs.650.40 M for the previous financial year.

2005:

Sales turnover for the year under review at Rs.5775.73 M registering an increase of about

14% over the previous financial year. The other income was lower at Rs. 102.64 M as

compared to Rs.222.68 M earned in the previous year which included some non recurring

income in the form of profit on sale of long term investments and sale of office premises.

While the total income grew by about 11% to Rs.5878.37 M, the profit before interest,

depreciation and tax at Rs.1065.45 M was lowered by about 15% over the previous year

largely on account of cost overrun in a few long term projects. After providing Rs.6.72 M

for interest, Rs.67.59 M for depreciation and Rs.342.57 M for taxation, the net profit for

the year under viewed at Rs.648.57 M was correspondingly lower by about 18% as

compared to the net profit of Rs.785.13 M for the previous financial year.


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Graphical presentation of operational and financial Results of Alfa Laval

(India) Ltd, over ten years:

0

1000

2000

3000

4000

5000

6000

7000

2001 2002 2003 2004 2005

Sales Turnover


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Financial Statement Analysis

Introduction:

A Financial Statement is a compilation of data, which is logically and consistently

organized according to accounting principles. Its purpose is to convey an understanding

of some financial aspects of a business firm. It shows a position at a movement in time,

as in the case of balance sheet, or reveals a series of activities over a given period of time,

as in the case of an income statement. Financial statements are the major means through

which firms present their financial situation to stock holders, creditors and general public.

The majority of firms which include extensive financial statements in their annual

reports, which receive wide distribution.

Nature of financial statement Analysis:

Financial Statement Analysis consist of the application of analytical tools and techniques

to the data in financial statements in order to derive from them measurements and

relationships that are significant and useful for decision making.

The process of financial analysis can be described in various ways, depending on the

objectives to be obtained. Financial analysis can be used as a preliminary screening tool

in the selection of stocks in the secondary market. It can be used as a forecasting tool for

future financial conditions and results. It may be used as a process of evaluation and

diagnosis of managerial, operating or other problem areas. Above all, financial analysis

reduces reliance on intuition, guesses and thus narrows the areas of uncertainty that is

present in all decision making processes. Financial analysis does not lesson the need for

judgment but rather establishes a sound and systematic basis for its rational application.

Sources of Financial Information:

The financial data needed in financial analysis come from many sources. The primary

source is the data provided by the firm itself in its annual report and required disclosures.

The annual report comprises the income statement, the balance sheet, and the statement

of cash flows, as well as footnote to these statements. Besides this information such as

the market price of securities publicly traded corporations can be found in the financial


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press and the electronic media daily. The financial press also provides information to

stock price indices for industries and for market as a whole.

The Principal Tools of Analysis:

In the analysis of financial statements, the analyst can have a variety of tools available

from which he can choose the best suited to his specific purpose. The following are the

important tools of analysis.

The Principles Tools/Techniques of Financial Analysis:

Tools of FinancialAnalysis

Trend

Analysis

Ratio

Analysis

Funds Flow

Analysis

Cash Flow

Analysis


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Ratio Analysis:

This is the important tool available to financial analyst for their work. An accounting

ratio shows the relationship in mathematical terms between two interrelated accounting

figures. The figures have to be interrelated, because no useful purpose will be served ifratios are calculated between two figures, which are not all related to each other.

Funds Flow analysis:

Funds flow analysis has become an important tool in the analytical kit of financial

analysis, credit granting institutions and financial managers. This is because the balance

sheet of the business reveals its financial status at a particular point of time. It reveals the

changes in working capital position. It tells about the sources from which the working

capital was obtained and the purpose for which it was used. It brings out the changes,

which have taken place behind the balance sheet.

The information it contains in the selection, reclassification and summarization of the

data contained in profit and loss account and balance sheet, it is no way replacement of

either these statements. To provide a comparative view of movement of funds by the

statement of changes in financial position is prepared for the period covered by the profit

and lossaccount as well as the corresponding previous period.

Cash Flow Analysis:

Cash flow analysis is a statement, which measures inflows and outflows of cash on

account of any type of business activity. The cash flow statement also explains reasons

for such inflows and outflows of cash. Cash flow statement maybe prepared on the basis

of actual or estimated data. A projected cash are the where came part of the statement.

Sources of cash can be both internal as well as external. A proper planning of cash

resources will enable the management to have cash available when ever resources will

enable the management to have cash available whenever needed and put it to some

profitable or productive use in case there is surplus cash available.


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Trend Analysis

Analysts make a trend analysis of performance over the past five to ten years to get an

overall picture. Trend analysis is made in respect of sales, cost of sales, gross profit, net

profit (before tax), net profit (after tax), net worth, debt, dividend policy, bonus and

Rights issues, return on net worth, earnings per share, etc.


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History of financial Analysis

Analysis of financial statements has had its greatest growth since 1990 s. A major

impetus came from increasing need from increasing need on the part of grantors of

commercial credit such as bankers, financial institutions etc, to understand the condition

of their customer. At the same time businessman need to understand their own conditions

of their own enterprise in order to assure its survival in stress of competition. Satisfaction

of these needs has been assisted by the continuous development of accounting as a

science and passing of income tax law in1993. This required preparation of balance

sheets and income statements, as they are the basic statements required for the income tax

purpose. Thus a reasonably reliable data from which typical financial ratios could becalculated has become increasingly available.

Between 1919 and 1929 four men pioneered in development of financial ratios. These

where James bliss who published a book on this subject in 1923. Alexander wall, head of

Robert Morris associates and Raymond W Dunning, published a work on this subject in

1928 and Roy Foulke, who made some of the first detailed compilations and studies

between 1925 and 1928.


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Conceptual Framework of Ratio Analysis

Financial ratios are always fascinating because they convey the impression of precision in

analyzing the financial position of the company. Financial ratios are only tools of

analysis. However their effectiveness depends upon the know how of using them for

specific purpose. The ratio is relationship between two variables. Any number of

relationships that is ratio can construct provided we first identify the variables to be

studied. Therefore there is nothing like standard set of ratios which can be used at any

time for any purpose. New ratio can be developed specifically for the purpose or the

mechanics of constructing the given ratio can be suitably adjusted to suit the purpose.

Intact a resourceful financial analyst can develop novel and fascinating ratios which canserve his purpose better than the pedestrian stock.

Having established the point that ratios should be constructed and used keeping in view

the purpose, we shall examine generally the purpose for which the ratio analysis could be

employed. Ratios are used as tools of appraising financial performance of the company.

There two distinct viewpoints in such analysis; the managements viewpoint and the

investors viewpoint. The interests of both these groups are not mutually exclusive; they

are complimentary to each other. Both these groups are interested in key areas that

compromise the financial performance of the company.


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Users of Accounting Information

The list of categories of readers and users of accounts includes the following people and

groups of people:

Investors

Lenders

Managers of the organization

Employees

Suppliers and other trade creditors

Customers

Governments and their agencies

Public

Financial analysts

Environmental groups

Researchers: both academic and professional


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What do the Users of Accounts Need to Know?

The users of accounts that we have listed will want to know the sorts of things we can see

in the table below: this is not necessarily everything they will ever need to know, but it is

a starting point for us to think about the different needs and questions of different users.

Investors To help them determine whether they should buy shares in the

business, hold on to the shares they already own or sell the shares

they already own. They also want to assess the ability of the

business to pay dividends.

Lenders To determine whether their loans and interest will be paid when

due

Managers Might need segmental and total information to see how they fit

into the overallpicture

Employees Information about the stability and profitability of their employers

to assess the ability of the business to provide remuneration,

retirement benefits and employment opportunities

Suppliers and other

trade creditors

Businesses supplying goods and materials to other businesses will

read their accounts to see that they don't have problems: after all,

any supplier wants to know if his customers are going to pay their

bills!

Customers The continuance of a business, especially when they have a long

term involvement with, or are dependent on, the business

Governments and

their agencies

The allocation of resources and, therefore, the activities of

business. To regulate the activities of business, determine taxation

policies and as the basis for national income and similar statistics

Local community Financial statements may assist the public by providing


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information about the trends and recent developments in the

prosperity of the business and the range of its activities as they

affect theirarea

Financial analystsThey need to know, for example, the accounting concepts

employed for inventories, depreciation, bad debts and so on

Environmental

groups

Many organizations now publish reports specifically aimed at

informing us about how they are working to keep their

environment clean.

Researchers

Researchers demands cover a very wide range of lines of enquiry

ranging from detailed statistical analysis of the income statement

and balance sheet data extending over many years to the

qualitative analysis of the wording of the statements


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Which ratios will each of these groups be interested in?

On this page you should complete the table below (you can do this by printing it out). In

the left hand column there is a list of interest groups one by one .our job is to complete

the right hand column by giving two or three examples of ratios When you've filled in the

gaps you will appreciate that it gives us some ideas about the ratios that each of the users

we have identified would be interested in looking at.

Investors Return on Capital Employed

Lenders Gearing ratios

Managers Profitability ratios

Employees Return on Capital Employed

Suppliers and other trade creditors Liquidity

Customers Profitability

Governments and their agencies Profitability

Local Community This could be a long and interesting list

Financial analysts Possibly all ratios

Environmental groups Expenditure on anti-pollution measures

Researchers Depends on the nature of their study


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Information and Analysis

Financial analysis is the process of identifying the financial strength and weaknesses of

the firm by properly establishing relationships between the items of the balance sheet and

the profit and loss account.

Analysis and Interpretation of Financial Statements:

Financial statement comprises the following:

Trading and Profit and Loss Account which give the results of a year s working.

Profit and loss appropriation account, which gives details about the disposal of the

retained income.

Balance sheet which gives the financial position of the undertaking as on the

accounting date.

The meaning of Analysis and Interpretation:

The financial statements are of much interest to a number of groups of persons. Apart

from management, there are other interested parties like shareholders, debenture holders,

potential investors, large and small bankers, trade creditors, journalists etc. who are

increasingly getting interested in the analysis and interpretation of financial statements.

According to F Wood business accounting to interpret means, to put the meaning of a

statement into simple terms for the benefit of person . This is essentially done through

the tools of analysis such as comparative statements, common size statements and ratio

analysis. The tools of analysis only help in establishing relationship between one

accounting figure and another in the financial statements and go no far. It is the expert

who has to grasp the significance of related figures and from an opinion as to whether the

ratio calculated indicates the favorable or adverse state of affairs. Therefore, while

analysis comprises resolving the statement by breaking them in to simpler statements by

a process of understanding the terms of such statement and forming opinions or

inferences about the financial health, profitability, efficiency and such other aspects of

the under taking.


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Ratio Analysis

Introduction:

Ratio analysis is a powerful tool of financial analysis. A ratio analysis is defined as the

indicated quotient of two mathematical expressions and as the relationship between two

or more things . In financial analysis, a ratio is used as an index or yardstick for figures

reported in the financial statements do not provide a meaningful understanding of the

performance and financial position of the firm. An accounting figure conveys meaning

when it is a related to some other relevant information. The relationship between two

accounting figures expressed mathematically is known as a financial data and to make a

qualitative judgment about the firm s financial performance.

Standard of Comparison:

The ratio analysis involves comparison for a useful interpretation of the financial

statements. A single ratio in itself does not indicate favorable or unfavorable condition. It

should be compared with some standard. Standard of comparison may consist of:

1. Ratios calculated from the past financial statements of the same firm.

2. Ratios developed using the projected or pro forma, financial statements of the samefirm.

3. Ratios of some selected banks, especially the most progressive and successful at the

same point in time.

4. Ratios of the industry to which firms belongs.

To evaluate the performance of a firm, compare its current ratios with the past ratios.

When financial ratios over a period of time are compared, it is known as time series or

trend analysis. It gives an indication of the direction of change and reflects whether the

firm s financial performance has improved or deteriorated or remained same over time.

The analyst should not simply determine the change, but more importantly he should

understand why ratios have changed. The change may be affected by changes in the

accounting polices without material change in the firm s performance.


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Sometimes future ratios are used as the standard of comparison. Future ratios can be

developed from the projected or Performa financial statements. The comparison of past

ratios with future shows the firms relative strength and weaknesses in the past corrective

actions should be initiated. Another way of comparison is to compare ratios of one firm

with some selected firm in the same industry at the same point in time. This kind of

comparison is known as the cross sectional analysis. In most cases it is more useful to

compare the firm s ratios of carefully selected competitor, which have similar operations.

This kind of comparison indicates the relative financial position and performance of the

firm. A firm can easily resort to such a comparison, as it is not difficult to get the

published financial statements of similar firms.

To determine the financial condition and performance of a firm, its ratios may be

compared with average ratios of industry to which the firm belongs. This sort of analysis,

known as the industry analysis helps to ascertain the financial standing and capability of

the firm in the industry to which it belongs. Industry ratios are important standards in

view of the fact that each industry has its characteristics, which influence the financial

and operating relationships. But there are certain practical difficulties in using the

industry ratios. First it is difficult to get average ratios for the industries. Second, even if

industry ratios are available, they are the averages of the strong and weak firms.

Sometimes spread may be so wide that the average may belittle utility. Third, the average

may be meaningless and the comparison futile if the firms with in the same industry

widely differ in their accounting polices and practices. If it is possible to standardize the

accounting data for companies in the industry and eliminate extremely strong and

extremely weak firms. The industry ratios will prove to be very useful in evaluating the

relative financial condition and performance of the firm.

Ratios are generally expressed in various forms. They are:

a) Pure ratios which are arrived at by the simple division of one number by other e.g.

Current assets to current Liabilities ratio are 2:1.

b) Rate, which is the ratio between two numerical facts usually over a period of time e.g.

stock turnover, is three times a year.


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c) Percentage, which is special type of rate expressing the relation in hundredth e.g.

gross profit, is 25% on sales.

d) Ratio analysis when rightly used offers the following advantages:

i. It facilitates the compression of financial statements and evaluation of several

aspects such as financial health, profitability and operational efficiency of the

undertaking.

ii. It provides inter firm comparison to measure the efficiency and help the

management to take remedial measures.

iii. It is also helpful in forecasting corporate sickness and help the management to

take corrective actions.

iv. Trend analysis with the help of ratios help in planning and forecasting. It helps

in investment decision in the case of investors and lending decisions in the

case of bankers and financial institutions.

We can simply make a list of the ratios we can use here but it's much better to put them

into different categories. If we look at the questions in the previous section, we can see

that we talked about profits, having enough cash, efficiently using assets -we can put our

ratios into categories that are designed exactly to help us to answer these questions. The

categories we want to use, section by section, are:

1. Profitability: has the business made a good profit compared to its turnover?

2. Return Ratios: compared to its assets and capital employed, has the business made

a good profit?

3. Liquidity: does the business have enough money to pay its bills?

4. Asset Usage or Activity: how has the business used its fixed and current assets?

5. Gearing: does the company have a lot of debt or is it financed mainly by shares?


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Classification of Ratios

Several ratios calculated from the accounting data can be grouped in to various classes

according to financial activities or functions to be evaluated. The parties, which generally

undertake financial analysis, are short term and long term creditors, owners and

management. Short term creditor s main interest is in the liquidity position or the short

term solvency and profitability of the firm. Similarly owners concentrate on firm s

profitability and analysis of the firm s financial positions. Management is interested in

evaluating every aspect of the firm s performance. They have to protect the interest of the

parties and see that the firm grows profitably.

One of the ways of classification according to the following basis is more effective for

analyzing and interpreting the financial statements:

Profitability Ratio

Turnover Ratio

Financial Ratio

Leverage Ratio

Financial Ratios

Leverage

Ratio

Financial

Ratio

Turnover

Ratio

Profitability

Ratio


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TABLE SHOWING SUMMARY OF FINANCIAL RATIOS OVER LAST5 YEARS:

2001 2002 2003 2004 2005

Gross profit ratio (%) 37.18 39.47 37.00 35.63 32.41

Net profit ratio (%) 13.20 15.61 17.27 15.53 11.23

Return on shareholders

Fund (%)

40.56 42.60 54.61 56.61 55.70

Current ratio 1.70 1.58 1.80 1.65 1.55

Inventory turnover ratio 4.11 3.85 4.24 4.28 4.05

Debtors turnover ratio 5.6 4.55 4.65 4.22 3.66

Creditors turnover ratio 2.21 2.16 2.48 2.49 2.18

Earning per share 2.09 2.50 3.58 4.32 3.57

Working capital ratio 5.00 5.00 4.40 5.00 5.00

Turnover to capital employed 1.81 1.71 2.07 2.41 2.59


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Profitability Ratios:

Profitability is an indication of the efficiency with which the operations of the business

are carried on. The primary objective of a business undertaking is to earn profits. Profit

earning is considered essential for the survival of the business.

Profit is the engine that drives the business enterprise . A business needs profits not

only for its existence but also for its expansion and diversification. The investors want an

adequate return on their investments, workers want higher wages, creditors want higher

security for interest and loan and so on.

The following ratios are included in this category:

Gross Profit Ratio:

This ratio expresses relationship between gross profit and net sales. The formula is:

Year 2001 2002 2003 2004 2005

Gross Profit 1075.65 1146.99 1390.26 1794.77 1871.88

Net Sales 2879.94 2905.69 3764.64 5056.95 5775.73

Gross Profit Ratio (%) 37.34 39.47 37.00 35.49 32.41

Gross Profit

Gross Profit Ratio = X 100

Net Sales


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0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005

Gross Profit Ratio (%)

Significance:

This ratio indicates the degree to which the selling price of goods per unit may decline

without resulting in losses from operations to the firm. It also helps in ascertaining

whether the average percentage mark up on the goods is maintained.

In this case increase in the percentage of gross profit as compared to previous year, it is

indicator of following factors:

1. Selling price of goods has gone up without corresponding increase in cost of goods

sold.

2. The cost of goods sold has gone down without corresponding decrease in the selling

price of goods.

Interpretations:

A lower gross profit ratio, generally indicates high cost of goods sold due to the

unfavorable purchasing polices, lesser sales, lower selling prices, excessive competition,

over investment in plant and machinery.

Gross profit ratio is decreasing, which means the profitability of the company is

decreasing. Gross profit ratio is decreasing due to more increase in sales as compared to

gross profit for the year 2003-2005. but for the year 2002 gross profit is increasing which

shows that profitability of the company is good and healthy for this year. This ratio is

increasing due to more increase in gross profit as compared to increase in sales.


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Net Profit Ratio:

This ratio indicates net margin earned on a sale. It is calculated as follows:

0

5

10

15

20

2001 2002 2003 2004 2005

Net Profit Margin

Significance:

This ratio helps in determining the efficiency with which the affairs of the business are

being managed. As increase in the ratio over the previous period indicates improvement

in the operational efficiency of the business provided the gross profit is constant.

2001 2002 2003 2004 2005

Net Profit 379.91 453.53 650.40 785.13 648.57

Net Sales 2879.94 2905.69 3764.64 5056.95 5775.73

Net Profit Margin (%) 13.20 15.61 17.27 15.53 11.23

Net Profit

Net Profit Ratio = X 100

Net Sales


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Interpretations:

This ratio indicates the firm s capacity to face adverse economic conditions such as price

competition, low demand etc. obviously, higher the ratio, the better is the profitability.

Net profit ratio is increasing for the year 2001-2003. This exhibit that the profitability of

the company is good. The shareholders of the company are happy as their earnings are

getting better day by day.

But for the year 2003-2004 the net profit ratio is decreasing, which indicates that

profitability of the company is decreasing. Net profit ratio is decreasing as increase in

sales is much more than the increase in net profit. For the year 2004-2005 also the net

profit ratio is decreasing. Here net profit ratio is decreasing as sales are increasing but net

profit is decreasing. Thus we can say the company s overall strength is better for the first

three years and for the last two years company s position is going down.


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Overall Profitability Ratios:

Profits are the measures of overall efficiency of a business. Overall profitability or

efficiency of a business can be measured in terms of profits related to investments made

in the business. Higher the profits, the more efficient is the business considered.

Return on Share-holders Fund:

This ratio indicates the percentage of return on the total capital employed. It is calculated

on the basis of following formula:

*Net profit after interest, tax.

#Equity Capital + Reserves and Surplus.

0 5 10 15 20 25 30 35 40 45

2001

2002

2003

2004

2005

Return on Share Holders Fund

2001 2002 2003 2004 2005

Profit available for equity shareholders 379.91 453.53 650.4 785.13 648.57

Equity shareholders fund 1528.5 1636.9 1751.9 2031.7 2162.5

Return on shareholders fund (%) 24.85 27.70 37.12 38.64 30

*Profit available for Equity Shareholders

Return on shareholders fund = X100

#Equity Shareholders fund


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Significance:

This ratio indicates percentage of net profit available for equity share holders to equity

shareholder s fund. It indicates the productivity of the ownership capital employed in thefirm.

Interpretations:

This ratio is one of the most important ratios used in overall efficiency of the firm. This

ratio is of great importance to the present and prospective shareholders as well as the

management of the company. As this ratio reveals how well the resources of the firm are

being used, higher the ratio, better are the results. The inter-firm comparison of this ratio

determines whether investments in the firm are attractive or not as the investors would

like to invest where the returns are higher. The return on shareholders fund in Alfa Laval

is relatively increasing since five years.

This shows that company is utilizing its resources better year by year, which indicates

that overall efficiency of the company is increasing. As the returns are higher, the

investments in the company are attractive.

Earnings Per share:

This ratio indicates the amount of net profit available per equity share of a business firm.

The formula for calculation of this ratio is as follows:

2001 2002 2003 2004 2005

Profit available for Equity

Shareholders 379.91 453.53 650.4 785.13 648.57

No. of Equity shareholders 181.6 181.6 181.6 181.6 181.6

Net Profit available for Equity shareholders

E P S =

Number of Equity Shareholders


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Earnings Per Share (in Rs.) 20.90 24.90 35.80 43.20 35.70

0

10

20

30

40

50

2001 2002 2003 2004 2005

Earning Per Share

Significance:

The earning per share helps in determining the market price of the equity shares of the

company. A comparison of earning per share of the company with another will also help

in deciding whether the equity share capital is being effectively used or not. It also helps

in estimating the company s capacity to pay dividend to its shareholders. If earning per

share increases, the possibility of the higher dividend paid by company increases.

Interpretations:

The earning per share is a good measure of the profitability and when compared with

E.P.S of previous 5 years, it gives a view of the comparative earnings power of a firm.

Calculated for 4 years indicates the earning power of the company is increasing. The

earning per share of the company for five years for 2001 is 20.90% which increased up to

35.70% in the year 2005.

Earning per share is increasing for the year 2001-2004. EPS is increasing as profit

available for appropriation is increasing and Number of equity shares is constant for the

five years. This indicates that earning power of the firm is increasing for the year 2001-

2004. But in 2004-2005 EPS is decreasing, due to decrease in profit available for

appropriation. However number of equity shares remains constant. This indicates the

earning power of the company is decreasing for year 2004-2005.


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Liquid Ratios:

Liquidity refers to the ability of a concern to meet its current obligations as and when

they become due. The short term obligations are met by realizing amounts from current,

floating or circulating assets. The current assets should either be liquid or near liquidity.

If current assets can pay off current liabilities, then liquidity position will be satisfactory.

On the other hand, if current liabilities may not be easily met out of current assets then

liquidity position will be bad. The bankers, suppliers of goods and short term creditors

are interested in liquidity position of the concern.

Current Ratio:

This ratio indicates the margin of safety available with the company. The formula for

calculating is as follows:

1.4

1.45

1.5

1.551.6

1.65

1.7

1.75

1.8

1.85

2001 2002 2003 2004 2005

Current Ratio

2001 2002 2003 2004 2005

Current Assets

1520.21

1657.25

1958.94

2844.84

3320.74

Current Liabilities 892.62 1048.54 1094.53 1720.82 2147.28

Current Ratio 1.70 1.58 1.80 1.65 1.55

Current AssetsCurrent Ratio =

Current Liabilities


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Significance:

The current ratio indicates the margin of safety available with the company to meet short

term liability. i.e. higher the current ratio, the larger the amount of rupees available per

rupee of current liability, the more is the firms ability to meet current obligations and thegreater is the safety of funds of short term creditors. Thus current ratio, in a way is the

measure of margin of safety to the creditors.

Interpretations:

Current ratio 2:1 shows excellent liquidity position of the firm.

Current ratio between 1:1 to 2:1 shows satisfactory position of the company.

Ratio less than 1:1 shows no liquidity at all.

For SSI it should be at least 1.33:1.

Current ratio of any company may be 2:1. But according to USA accounting standards

any company should maintain ratio of 1.33:1. As the current ratio of Alfa Laval is more

than 1.33:1 for the year 2001-2005.this shows that current ratio is favorable from the

company s as well as shareholders point of view. Thus company is in position to meet its

current liabilities out of its current assets.


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Quick Ratio:

Quick ratio, also known as Acid Test Ratio, is a more rigorous test of liquidity than the

current ratio. The term liquidity refers to ability of the firm to pay its short term

obligations as and when they become due.

The quick ratio can be calculated by dividing the total assets by total current liabilities.

Thus,

2001 2002 2003 2004 2005

Liquid Assets 1118.78 1146.58 1349.5 1931.22 2308.06

Current Liabilities 892.62 1048.54 1094.53 1720.82 2147.28

Quick Ratio 1.25 1.09 1.23 1.12 1.07

0.95

1

1.05

1.1

1.15

1.2

1.25

1.3

2001 2002 2003 2004 2005

Acid Test Ratio

Significance:

Usually, a high acid test ratio is an indication that the firm is liquid and has the ability to

meet its current or liquid liabilities in time and so on the other hand a low quick ratio

represents that the firms liquidity position is not good. Quick ratio may be defined as the

relationship between liquid assets and current or liquid liabilities. As a thumb rule or as a

convention quick ratio 1:1 is considered as satisfactory.

Current Assets - Inventory

Quick Ratio =

Current Liabilities


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Interpretations:

The standard of liquid ratio is 1:1. The company s liquidity ratio for the last five years is

more than 1, which indicates the liquidity position of the company is good. Thus liquid

assets are more than current liabilities. So company is in position to pay its obligations.


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Turnover Ratio:

Funds are invested in various assets in business to make sales and earn profits. The

efficiency with which assets are managed directly affects the volume of sales. The better

the management of assets, the larger is the amount of sales and the profits. Activity ratio

measures the efficiency with which a firm manages the assets. These ratios are called as

turnover ratios because they indicate the speed with which assets are converted or turned

over in to sales.

Inventory Turnover Ratio:

This ratio indicates whether investment in inventory is efficiently used or not. It therefore

explains whether the investment in inventories is with in proper limits or not. The ratio is

calculated as follows:

365

Inventory Conversion Period:

Inventory Turnover

2001 2002 2003 2004 2005

Inventory conversion period (Days) 89 95 86 85 90

2001 2002 2003 2004 2005

Cost of Goods Sold 1804.29 1758.7 2374.38 3262.18 3903.85

Average Inventory 438.54 456.05 560.08 761.56 963.15

Inventory Turnover

Ratio 4.11 3.85 4.24 4.28 4.05

Cost of Goods Sold

Inventory Turnover Ratio =

Average Inventory


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3.6

3.7

3.8

3.94

4.1

4.2

4.3

4.4

2001 2002 2003 2004 2005

Inventory Turnover Ratio

Significance:

Average inventory is calculated by taking stock levels of raw materials work in process,

finished goods at the end of each month, adding them up and dividing by twelve. The

inventory turnover ratio indicates the liquidity of the inventory. A high inventory

turnover ratio indicates the brisk sales. The ratio is therefore, a measure to discover the

possible trouble in the form of over stocking and overvaluation.

It is difficult to establish the standard ratio of inventory because it will differ from

industry to industry.

Interpretations:

Provision for obsolete stock, slow moving items is deducted from the inventory. Faster

the production, fewer product lines, just in time ordering will reduce overall inventory.

The ratio is sticky and not showing improvement during the last 5 years. It is nearly 4.10,

which indicates, for sale of Rs. 100/- the company has to keep inventory of Rs. 25/- in

stores.There is scope of improvement.


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Debtors Turnover Ratio:

Debtors constitute an important constituent of current assets and therefore the quality of

debtors to a great extent determines a firm s liquidity. The formula for calculating is as

follows:

No of Working Days (360)

Average Collection Period:

Debtors Turnover

2001 2002 2003 2004 2005

Average Collection Period (Days) 64 79 77 85 98

0

1

2

3

4

5

6

2001 2002 2003 2004 2005

Debtors Turnover Ratio

2001 2002 2003 2004 2005

Credit Sales 2879.94 2905.69 3764.64 5056.95 5775.73

Average Accounts Receivables 575 638.5 810.35 1197 1578.11

Debtors Turnover Ratio 5.60 4.55 4.65 4.22 3.66

Credit Sales

Debtors Turnover Ratio=

Average Accounts Receivables


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Significance:

Sales to account receivables ratio indicates the efficiency of the staff entrusted with

collection of book debts. The higher the ratio, the better it is, since it would indicate that

debts are being collected more promptly. For measuring the efficiency, it is necessary to

set up a standard figure. A ratio lower than a standard will indicate inefficiency.

The ratio helps in cash budgeting since the flow of cash from customers can be worked

out on the basis of sales.

Interpretations:

Since the ratio of debts is declining in comparison to preceding years and the debt

collection period is increasing. This also shows that company s sales are increasing to

preceding year. But to maintain profitability and sales the company has to decrease the

debt collection period. Thus, to decrease the debt collection period the company has to

adopt certain policy s to attract the customers to pay debts. Policies like trade credit, cash

credit.

Creditors Turnover Ratio:

It is similar to Debtors Turnover Ratio. It indicates the speed with which the payments for

credit purchases are made to the creditors. The ratio can be computed as follows:

2001 2002 2003 2004 2005

Creditors Turnover Ratio 2.21 2.16 2.48 2.49 2.18

Credit Purchases

Creditors Turnover Ratio =

Average Accounts Receivables


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No. of days

Average Payment Period=

Creditors Turnover Ratio

2001 2002 2003 2004 2005

Average Payment Period(Days)

1.9

2

2.1

2.2

2.3

2.4

2.5

2.6

2001 2002 2003 2004 2005

Creditors Turnover Ratio

Significance:

The term accounts payable include Trade Creditors and Bills Payable. Both the creditor s

turnover ratio and the debt payment period indicate about the promptness or otherwise in

making the payment of credit purchases. A higher creditors turnover ratio signifies that

creditors are paid promptly, thus enhancing the credit worthiness of the company.

However, a very favorable ratio to this effect also shows that the business is not taking

full advantage of credit facilities which can be allowed by creditors.


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Working Capital Turnover Ratio:

This is also known as working capital leverage. This ratio indicates whether or not

working capital has been effectively utilized in making sales. The formula for calculating

is as follows:

4

4.2

4.4

4.6

4.8

5

5.2

2001 2002 2003 2004 2005

Working Capital Turnover Ratio

Significance:

This ratio indicates whether or not working capital has been effectively utilized inmaking sales. In case a company can achieve higher volume of sales with relatively small

amount of working capital, it is an indication of the operating efficiency of the company.

However it should be kept in mind that EPS of different companies may vary due to the

following of different practices regarding stock in trade, depreciation etc.

2001 2002 2003 2004 2005

Net sales 2879.94 2905.69 3764.64 5056.95 5775.75

Working Capital 627.59 608.33 864.41 1124.02 1173.46

Working Capital Turnover

Ratio 5.00 5.00 4.40 5.00 5.00

Net Sales

Working Capital Turnover Ratio =

Working Capital


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Interpretations:

The working capital turnover ratio of the company indicates that the working capital of

the company has been effectively utilized for the five years. The company is achieving

higher volume of sales with relatively small amount of capital. The company hasachieved sales of RS.3764.64 M in the year 2003 with relative small amount of working

capital. The company has maintained the stability in effective utilization of working

capital for five years.


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OBSERVATIONS AND FINDINGS

Based on the interpretations and calculations of my project, I can conclude that though

the Alfa Laval (India) Ltd is earning the consistent profit.

The financial performance of the company for the 5 years reflected a good growth in

sales and though all the market segments sustained or bettered their performance over

the previous years. Cost overrun in a few long term projects impacted the

profitability. However, the company s track record has always been oriented towards

profitable growth and with the strong fundamentals; the company is well placed to

grow continuously on major fronts.

Sales turnover for the year 2005 under review was at RS. 5775.73 registering an

increase of about 14% over the previous year. The turnover for the year 2004 stood at

Rs. 5279.63 M which crossed five billion rupee mark. The turnover for the year

review at Rs. 3919.60 M recorded an increase of 28%. The other income was lowered

at Rs. 102.64 M (2005) as compared to Rs. 222.68 M earned in the previous year

which included some non recurring income in the form of profit. The total income

grew by 11% to Rs. 5878 M (2004: 5279 M). The PBIDT at Rs. 1065.45 M (2004:

Rs. 1253.16 M) was lower about 15% over the previous year largely on account of

cost overrun in a few long term projects.

The book value of the company s shares for the year 2005 improved to Rs. 119.00,

the Earnings Per Share was lower at Rs. 35.71 as compared to previous year (200 4).

The return on shareholders funds and the return on total capital employed declined to

30% and 44% for the year 2005 respectively.

The margins across all business segments for the 5 years were better. The company

has to absorb the extra costs in a long term projects due to which the profitability was

low impacting the overall performance of the company.

The overall performance of the company is good and there is a continuous flow of

project business. The company is continuing its drive for volume with continued

focus on profitability.


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In the year 2004 sundry debtors are1433.11 and in 2005 it is 1723.10. it shows that

company investment increased in debtors. And company s working capitals major

portion invested in sundry debtors, which in turn requires more working capital?

Excellent cash flow management of the company is the forte of the company.

Purchasing policy and smooth procedure is efficient and smooth.

Importance is given to work in progress and efforts are taken to reduce the working

capital cycle and to maintain minimum cost.

It is found that inventory is low and movement of inventory is slow.

The initial credit period allowed for the company is 90 days, but the company can

stretch it to 120 days due to market conditions.


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CONCLUSIONS AND SUGGESTIONS

The business environment of the company is reasonably good. The company s track

record is always oriented towards profitable growth and with strong fundamentals.

As major portion of working capital is invested in sundry debtors, company has to

adopt factoring services so that cash realization will be faster.

Company should take corrective actions to write off or sell off the inventory, which is

of no use and occupies unnecessary space.

Action on priority basis should be taken against pending jobs for more than three

months. Smooth functioning will release locked up capital and improve the cash flow.

Other factory capital deals with the expenditure that is done on assets of less value,

building and other direct assets. Capital consumption on this head is in company s

own hands hence more importance can be given to this head. The capital should be

used effectively with the improvement in manufacturing activity and minimizing cost.

Acquisition of new assets of heavy costs should be done with proper capital

budgeting supported by pay back period.


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BIBLIOGRAPHY

1. I M Pande FINANCE MANAGEMENT Vikas Publication.

2. DR. S N Maheshwari FUNDAMENTALS OF FINANCIAL MANAGEMENT

Sultan Chand & Publications.

3. N M Vechlekar FINANCIAL MANAGEMENT Vikas Prakashan.

4. www.alfalaval.com

5. www.myiris.com

6. www.google.co.in
http://www.google.co.in/http://www.myiris.com/http://www.alfalaval.com/


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Financial Statement Analysis and Interpretations at Alfa Laval India Ltd by Noname