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A
Project ReportOn
FINANCIAL ANALYSIS
OF HMT MTL AJMER
Submitted in Partial Fulfillment for the Degree ofMASTER OF BUSINESS ADMINISTRATION
(M.B.A.)
acme
institute of technology of management
Under the Supervision of: Submitted by:
Bharat Bhooshan KHEM KARAN
General Training Manager M.B.A. 2nd Semester
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HMT Machine Tools Ltd.AJMER
AjMER
FINANCIAL ANALYSIS OF HMT- MTL
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Certificate
I here by that the training repot which is submitted by khemkaran student of
MBA semester III has been supervised by me as per my best knowledge the report
fulfill all the norms and guidelines prescribed by the RTU
Date signature
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PERFACE
The industrial revolution in the 18-century brought about the enlistment of
science & technology. The revival of learning showed a new way of life he world in
various spheres. Since then the industries have made a lot of progress. The
industries have made a history in the world and since then they are progressing with
leaps and bounds. in India, industries during that time were small ones. The British
were afraid that in case the India come to know The Know How of variousindustries then the British economy, would have lessened there by bringing about the
decline of the British Empire in India.
After independence India has made such a remarkable progress in industries
that it becomes necessary to mention that the India intelligence has proved its worth
and the labors has also contributed a lot towards the progress. The Indian Industries
can now compete in the world. The industries have helped India to have good trade
with the other countries and have earned a good amount of foreign exchange there
by raising the economic standards and making way of India to become self sufficient
and self reliant.
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ACKNOWLEDGENT
I express my sincere thanks to my project guide, Mr.P.C VERMA (G.M.,
H.M.T.,MTL Aimer) Designation _ Mr. R.C. Maheshwari (A.G.M.Finance) for guiding
me right form the inception till the successful completion of the project. I sincerely
acknowledge him/her/them for extending their valuable guidance, support forliterature, critical reviews of project and the report and above all the moral support
he/she/they had provided to me with all stages of this project.
I would also like to thank the supporting staff _ Mr. Vijay Kumar Inani &
Department, for their help and cooperation throughout our project.
(Signature of Student)
KHEM KARAN
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Table of Content
1) Company Profile
2) Introduction
3) Corporate vision & Mission
4) Objective & goals
5) Human resource development
6) Strength of HMT
7) Different business of HMT
8) Business groups
9) Aimer unit profile
10) Product basket
11) Background history of aimer unit
12) Awards Won
13) Organization structure and personnel classification
14) Different department of HMT Aimer
15) Quality concept
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16) Project Profile
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HMT Machine Tools Limited
CHAIRMAN Shri A. V. Kamat
MANAGING DIRECTOR Shri V. Hemachandra Babu
BIRTH OF HMT Pt. Jawahar Lal Nehru
Inaugurated HMTs
First manufacturing unit
(MT, Bangalore on June 10, 1955)
.
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ABOUT THE ORGANISATION
INTRODUCTION OF HMT LIMITED
When India achieved independence in 1947, there was hardly any industrial
base in the country. Right form the prior H.M.T. has played an important role in
providing the much needed industrial base as well as a launching pad for the growth
& development of the country.
HMT was conceived by the Government of India in 1949, and was
incorporated in 1953, with the objective of producing a limited range of machine tools,
required for building an industrial edifice for the country.
HMT Limited was established in 1953 in technical collaboration with M/s
Orleikon of Switzerland. Over the years, new products have been added to its
manufacturing range. It has technical collaboration with over 30 leading International
Engineering Companies for manufacture of various products HMTs diversified
product range includes Machine Tools, Watches, Tractors, Printing Machine Press,
Di-Casting and Plastic Injection,
Today, HMT is a Multi-Product, Multi Technology Engineering Complex with
strengths comprising of:
16 Manufacturing Units / 22 Product Division
Assets Worth over US$ 250 Million
ISO-9000 accreditation
The widest range of machine tools, ranging from General- purpose lathes
to CNC turning machine centers.
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Source of qualified and experienced Manpower.
HMT Corporate Vision
HMT Corporate Mission:
To establish ourselves as one of the Worlds companies in the engineering field
having strong international competitiveness.
To achieve market leadership in India through ensuring customer satisfaction
by supplying internationally competitive products and services.
To achieve sustained growth in the earnings of the group on behalf of
shareholders.
HMT CORPORATE OBJECTIVES AND GOALS:
To achieve market leadership by ensuring customer satisfaction through
products and services of world class excellence.
To achieve sustainable competitive advantage through value edge and
technological leadership in product and services of the company.
To achieve sustained business growth through generation of adequate internal
resources.
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To globalize the companies operations developing a mix of International
markets and businesses to enable the company to be a net. foreign exchange
earner.
To develop and retain human skills and talents necessary for corporate growth
and performance excellence in all functions.
To improve the quality of work life of the employees of the company.
GROWTH:
To maintain a minimum annual growth of 155 in sales turnover
To achieve an average growth of 5% in market share
To maintain an annual growth in earnings before interest and tax subject to an
average return of 20% on capital employed over plan
To achieve 30% of increment return of incremental investments within thethree years after achieving commercial production in case of verification of
expansion of the existing unit.
To generate sufficient cash surpluses to pay a dividend of at least 65 to the
shareholders and also to enable capital expenditure financing
OUR CORNERSTONES
QUALITY
CUSTOMER
SERVICES
TECHNOLOGY
and R & D
INFRASTRUCTURE
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http://www.hmtindia.com/html/cornerstones.htm#qualityhttp://www.hmtindia.com/html/cornerstones.htm#customerserviceshttp://www.hmtindia.com/html/cornerstones.htm#customerserviceshttp://www.hmtindia.com/html/cornerstones.htm#technologyhttp://www.hmtindia.com/html/cornerstones.htm#technologyhttp://www.hmtindia.com/html/cornerstones.htm#infrastructurehttp://www.hmtindia.com/html/cornerstones.htm#qualityhttp://www.hmtindia.com/html/cornerstones.htm#customerserviceshttp://www.hmtindia.com/html/cornerstones.htm#customerserviceshttp://www.hmtindia.com/html/cornerstones.htm#technologyhttp://www.hmtindia.com/html/cornerstones.htm#technologyhttp://www.hmtindia.com/html/cornerstones.htm#infrastructure7/29/2019 khemkaran on mba for 4th sem
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R&D TECHNOLOGY :
HMT has imbibed a wide range of technologies as a result of its diversification
strategies, to be a truly multi-technology company. The list includes, though not
limited to, the following technologies:
High Speed Machining
Precision Machining
Computer Numeric Controls
Computer Integrated Manufacture
Flexible Manufacturing Systems/ Modules/ Cells
Metal Forming including Die casting & Plastic processing
Horology Farm Mechanization ( Tractors & Implements)
R&D efforts: in the above technology areas are a continuous and ongoing
process at the Design & Development Centers of all HMTs manufacturing units. In
each area of HMTs business domain, well-established research & testing facilities
with experienced engineers to man them are in position. Extensive use is made of in-
house CAD facilities for designing products.The R & D efforts include the design and development of
Over a 100 new types / variants of machine tools
Over a 1000 new watch models
Several variants of tractors to suit farmers needs
HMTs R&D is committed to provide the best to the customer in terms of
contemporary technology and contemporary designs at competitive prices.
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To promote technology development and R&D both in product and processes
by setting aside 3% of sales turnover
To achieve a growth of 5% per annum in the Novelty Ratio
To achieve a growth of 10% per annum in CNC/Quartz Ratio To achieve a growth of 10% per annum in the development Ratio
INFRASTRUCTURE: In the Manufacture of Machine Tools
CNC Machines for Metal Cutting & Metal Forming
CNC Coordinate Measuring Machines
Heat Treatment Facilities
Precision Measuring & Inspection Facilities
Facilities for calibration of Measuring & Testing equipments
MODERNIZATION :
To invest the extent of minimum 5% of turnover per annum on replacement
and modernization of production facilities
To achieve a 10% increase per annum in lant health ratio.
To achieve production of 10% in terms of costs to turnover during the plan
period. To achieve growth in performance index per capital output by 5% per
annum
EXPORTS:
To achieve exports of 10% of turnover on an average during the plan period.
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To set apart a minimum 0.5% of annual export turnover towards development
of export markets of HMTs product
HUMAN RESOURCE DEVELOPMENT :
To ensure a minimum of two potential executives as replacement for each
osition at levels PS VII and above.
To achieve a manning level 120% of the need in key areas like R&D time
available per year is spent in training & development exposing each person at
least for two years in such programmess.
To ensure an average of 2% of supervisory and managerial executives CNC,
Quartz and exports in frontier technologies giving due consideration to the lead
time needed for training and development such personnel.
To train, retrain and develop other category of employees continually tune with
the changing environment and organizational requirement.
The expenditure for the training, retaining and development programmes and
modernization of training centers is to be around 0.5% of the turnover.
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STRENGTH OF HMT
STRONG
BRAND
EQUITY
TECHNOLOGI
CAL BASE
WELL
ESTABLISHED
ANUFATURIN
G BASE
HIGHLY
SKILLD WORK
FORCE
EXTENSIVEMARKETINGN
ETWORK
UNITS
ACCREDITED
WITH ISO 9000
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DIFFERENT BUSINESS OF H MT
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HMT AJMER UNIT PROFILE
MTA AT A GLANCE:
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Date of Registration 11-01-1967
Commencement of Production 1970-71
Merger with HMT 1-04-1975
Capital Employed (as on 1.4.2007) 201 Lacks.
Land Area Total 178 Acres
Plant Foundry 62 Acres
Township 116 Acres
Covered Area (Plant) 31848 Sq. M.
No. of Quarters 136
Power Required 4.00 Lacs Units/Month
No. of Employees (as on 31.7.2008) 429
No. of Machines 250
ISO-9001 Certified 1994
NOTE: These Data Provided by Sales Department of HMT Ajmer.
PRODUCT BASKET:
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CNC Train Master Machinery Centre
Roll Camber Grinder
Knife Edge Grinding Machine
CNC Crank Shafts
Journal Grinder
CNC Centreless Grinder
CNC Turning Centre
CNC Train Master Lathe
CNC Precision Surface Grinder
CNC Universal Cylindrical Grinder
CNC Double Disk Grinder Machine
(ISO Certified)
Vertical Surface Grinders
Pin Grinding Machine
Key Stone Grinders
Tools & Cutters
CNC Internal Grinder
CNC External Cylindrical Grinder
Super Finishing Machine
Special Purpose Machine
Lens Grinding Polishing Machine
CNC Single Axis Centreless Grinder
CNC Trainee LatheT 70 PC
CNC Crank Shaft grinding machine
(ISO Certified)
CNC Grinding Cente (ISO Certified)
unique complete Grinding in one
BACKGROUND HISTORY OF HMT AJMER
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This Unit was established as Machine Tool Corporation of India limited in
January 1964 keeping in view the Government Policy of differing new industries in
under developed areas of the country and achieving self reliance in production of
Grinding Machine Tools which were imported.
This Unit was started 1970-71 with a production of Rs. 8.64 Lack faces with
difficulty in procurement of quality Machine Tool Casings a captive Foundry Plant was
installed in 193 with a capital of about Rs. 2 Crore.
This Unit was subsequently merged with HMT Ltd. On 1 st April 1975 as sixth
Machine Tool Plant with this merger; the Unit got backup support of HMT. The basic
plant was established with the collaboration of the Czechoslovakian firms, M/s Skoda
Export, Praha and German firm WMW, then in East Germany.
FACTORY LAY-OUT
Unit has two workshop Buildings-Building 1-1 Houses assembly, Painting,
heavy Parts, High technology centre and test floor.
Building1-2 houses small parts, medium parts, tool room and special
accessories, tool crib, tractor hydraulics, heat treatment shop and plant
maintenance departments.
Annexi houses civil maintenance, vendor development and sub- contracts,
electrical generation or distribution and conservation.
Stores building houses central stores, material planning and training centre.
Pattern shop Building houses pattern shop and machine shop of training
centre.
Foundry shed houses moulding, machining, sand-plant, core making, knock
out, short lasting areas.
Store foundry block houses personnel, engineering, designing, IT centre,
industrial engineering, servicing and G.M.s office.
Administrative building houses purchase, sales and finance department
AWARDS WON
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YEAR AWARD INSTITUTED BY
1960-61 Outstanding Performance President of India
1970-71Excellence Performance in
ExportsGovt. of Mysore
1975-76National Award for Outstanding
Export PerformanceMinistry of Commerce
1978-79 Best Product at IMTEX 79 PMT & FIE
1981-82 Best Export Performance EEPC
1982-83Meritorious Performance in the
field of ExportMinistry of Commerce
1983-84 Export Excellence EEPC
1984-85 Best Productivity National Productivity Council
1985-86 Best Product at IMTEX 86 FIE Foundation
1986-87 Excellence in Productivity CEI
1987-88 Export Excellence EEPC
1988-89 Best Product at IMTEX 89 CMTI - PMT Trust
1991-92 Best Productivity National Productivity Council
1992 National Safety National Safety Council
1995 Best Products at IMTEX 95 CMTI - PMT Trust Award
1998 Best Product at IMTEX 98 FIE Foundation
1998 Best Products at IMTEX 98 CMTI - PMT Trust Award
2001 Best Product at IMTEX 2001 FIE Foundation
2001 Best Products at IMTEX 2001 CMTI - PMT Trust Award
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ORGANISATION STRUCTURE AND PERSONNEL CLASSIFICATION
Organization
HMT Limited (Subsidiaries)
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1. The Organization Structure: The organization structure of HMT Machine
Tools Ltd., Aimer is based on functions performed by various employees. General
Technical Manager is on the top of the organization structure, assisted by Joint
General Manager. Department of prime importance is a department of production.
DGM production activities control not only the production but also planning,
maintenance and inspection department.23
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The organizational structure consists of following management leaves in all (in
descending order)
2. Personnel Classification:
(i) HMT Machine Tools Ltd., Ajmer has 457 Employees including personnel
employed at Foundry, these includes Officers as well as Workers.
(ii) These have been broadly classified into two categories- Officers & Workmen,
further Officers include Supervisory Staff and Managerial Staff. Workmen includeIndirect Workmen, Technicians, Administration Staff & Direct Workmen.
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GENERAL TECHNICAL MANAGER
JOINT GENERAL MANAGER
DEPUTTY GENERAL MANAGER
ASST.GENERAL MANAGER
MANAGER
DY. MANAGER
FOREMAN
CHIEF CONSULTANT TECHNOLOGY
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DIFFERENT DEPARTMENTS OF HMT, AJMER
A. Brief resume of different departments: -
1. Human Resource Department: Headed by Joint General Manager (HRM)
this department is setup with an aim of conservation and proper utilization of human
resources and is also responsible for maintaining the cordial relations between
employees and management. The other important functions of this department are
performance appraisal and different welfare activities for the employee.
2. Manufacturing and Assembly Department: Headed by JGM
(manufacturing). HMT Ajmers manufacturing environment is highly advanced; this
department also looks after utilizing only the latest production techniques in all
phases of manufacturing maintenance. This assembly of machine is done stages,
much as sub assembly. Group assembly and final assembly of individual
components. There subassemblies after inspection pass on group assembly, which
consists of head stock assembly, saddle, gearbox, tail stock assemblies etc. this
group then reaches to the final assembly to be fitted on the bed. Electrical are also
inter faced and the machine is ready for final testing and printing of plant and
equipment.
3. Service & Inspection Department: Headed by DGM. This department is
responsible for inspection & Servicing of the M/Cs. This department is concerned
with the inspection of various components and machines being manufactured. The
inspection is carried out in various stages, beginning from the inspection of individual
components at different stages of manufacturing followed by the inspection of the
whole machine while included final runs etc. Inspection of incoming material is also
handled.
4. Materials Department: Headed by JGM. It is responsible for all kinds of
purchases made by unit. This department also maintains a Central store and looks
after appropriate levels.
5. Planning Department: Headed by Chief Engineer Planning. The main
functions of the planning department are as under: -
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Technology or process sheet of each component, group assembly and
assembly.
Time calculations for each operation. Job card booking of workers in shifts.
To prepare monthly progress reports for the production activities carried out inshop.
To calculate manpower and machines available, accordingly new machines
are ordered and component.
Counting of products and components.
Prepare machines and sectional layouts
6. Design Department: Headed by JGM. Its functions are: - Design & development of products.
Vendor development for new items.
Drawing of component, group assembly, special assembly etc. along with
master part list (BOM) for machines.
Deciding the type of material required for each component grade such as
casting alloy etc.
Testing & trials of machines.
Marketing of special purpose machine.
7. Foundry Department: Headed by JGM Foundry. This department is
administratively under HMT Aimer, but functionally under executive director.
8. Finance Department: Headed by AGM Finance. The functions of this
department include maintenance of all accounts of the Company. The balance sheetis finally prepared which is sent to the head office for the preparation of combined
balance sheet.
The costing section of this dept. is responsible for the computing of each product of
that the selling price may be determined accordingly.
9. Sales Department: is headed by DGM. This dept. is divided into 3 sections
viz. Sales, Spares and Reconditioning. These functions of sales sections are theexecution of sales order and to bid for contracts through tenders. The function of
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service section is to provide after sales & also looks after customers complaints and
supply of spares.
10. Security Department: This is headed by Asst. Security office. Main function of
this dept. is preventions of theft, sabotage and maintenance of industrial security
within the HMT compound including Township.
11. Quality Assurance Department: Dy. General Manager heads this department.
This department also looks after the feedback received from marketing division so as
to make improvement accordingly.
Concept of Quality:
To maintain quality leadership in all our products and services.
Total Customer satisfaction through quality goods and services.
Commitment of management to quality
To create a culture amongst all employees towards total quality concept.
Total quality through performance leadership
HMT has adopted 5 S for Good House Keeping, which are :
Seiri
Seition
Seiso
Seiketsu
Shitsuke
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FINANCIAL ANALYSIS OF HMT AJMER
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Like lines in the plams or horoschope financial statement can be studied,
puzzles overand scrutinieds. The analysis of such statement can provided valuables
information for managerial decision .analysis of fincial statement is the other to
measure the profitibility, opreation effciency and the growth potenionof the business.
Thus the analysis of finciaal statement is basically a study of the relationship
among varios financial facts and figures as given in a set of these statements.
The basic fincialcial statement i.e. Balance sheet and income statement,
contain a whole lot of historical data . The complex figure , as given in these financial
statement , areb broken into simple and valuble element and significant relationship
are estibished between the elements of the same statement or different fincial
statements.
In the words of metcaff and titard:- analyzing financial statement is a process
of evaluating the relationship between component parts of financial statement to
obtain a better understanding of a firms position and performance.
During the process of analysis, the following steps are reqired by a financial
analyst;
1.selection or information :
The first is to select the information relevant to the decision under
consideration from the total information contained in the financial statements.IT is
because a specific aspect of financial position or operation may be more significant
for one group than other. for example , short term creditors are interested in the
liquidity of current assets while perspective investors are interested in the future
income of the firm.
2.Establishment or Relationship:
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The second step involved is the classification or grouping of the information in
such a way that significant between relationship is establish , for example , to know
the relationship between current assets and current liabilities, both should be
arranged in such a way that firm capacity to pay its short term obligation is known.
3.Evaluation :
The Third and final step is interpretation and drawing of inferences and
conclusion by study in these relationships. Thus in brief , financial analysis is the
process of selection , relation and evaluation.
OBJECTIVES OF ANALYSIS AND INTERPRETATION
A NUMBER OF GROUP (SHAREHOLDERS,CREDITERS, Debenture
holders, management , government etc.) have interest in the financial statement of a
business firm . This interest differs with the objective among various groups .
For instance, the shareholders are interested in the earnings per share and
divided payout ratio that have an important bearing on the market price of the shares.
The short term creditors are mainly interested in the firms ability to repay current
liabilities, which involve the analysis of composition of current assets and current
liabilities . The debenture holders on the other hand , are mainly concerned with the
composition of capital structure and the firms projected earnings.
The management of the firm requires the financial statement for the purpose of
evaluation and decision making .
But there are certain common objectives as Dr. Suryakant Das have said; lithe
main objective of the analysis of financial statement is to ascertain the solvency of a
business concern through its balance sheet , determination of profitability or
operational efficiency from income statement and evaluation of financial statement in
comparision to the firm of the same status A few most specific common objective s
of financial statement analysis are discussed below:
1.MEASURING FINANCIAL SOUNDNESS:
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The business must known its financial soundness ,which can be measured by
calculating different ratio s like proprietary and fixed assets ratios. If it is found
adverse, then corrective steps can be taken.
2.judging solvency:
creditors are always interested in knowing the solwency i.e. capacity of the
business top repay their loans . This can be ascertained by looking into facts
such as:
whether current assets sre sufficient to meet current liabilities;
proportion of current asssets to liquid assets;
future prospectus of the business ; whether debenture or other loans are sercured or not;and
managerial efficiency of the firm.
3.Measuring profitability :
Financial statement show the gross profit, net profit and other expenses . The
relationships of theses items can be established with sales. To ascertain portability
,gross profit ,net profit expenses and operating ratio may be calcite. In case ofperformance can be evaluated.
4.Judging Operation efficiency :
It is vary significant to know the operation efficiency of the management . the
operational efficiency of the , business can be assessed by matching the amount of
manufacturing , selling, distribution and financial expenses of the current year with
the corresponding profitability ratios.
5.Indicating trends of achievements:
Financial statement of the previeous years can be compared and the trends
regarding various expenses .purchase ,sales, gross profit and net profit can be
ascertained .the values of asseta and liabilities can be compared and the future
prospectes of the business can also be indicated.
6.Assending the growth portential :
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The trend or dynamic analysis of the business provides sufficient informatioinn
indicating the growth potential of the business . If the treand predicat gloomy picture ,
effective measures can be taken to correct it . If the cost of product ion is rising
without selling prtices increase.
7. Inter firm and intra firm comparison:
Analysis of the financial statement can be made with previous years
performance of the same firm and with the predominance of the other firms in the
industry
8. Deciding future line of action:
Analysis of financial statement indicates growth potencial of the business.
Comparison of actual performance with the standard shows.
9. SYSTEMENT PRESENTATION OF DATA:
Analysis of financial statement is aneffective tool for simplification
systematizing and summarizing the monotonous data .an average person ,
As Helfert Erich has observed the main purpose of financial analysis s to
provide reasonable clues and answers to specific questions
According to spicer and pengler , the opbjective of analysis is to know and
draw inferances about
1. .PRotibility
2. Solvency
3. Ownership
4. 4.Financial strength
5. 5.Trend
6. 6.gearing and cover
TYPES OF FINANCIAL ANALYSIS
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Financial Analysis can be classified into different categories on the basis of
modus operandi as follows:
1. HORIZONTAL OR DYNAMIC ANALYSIS
2.VERTICLE OR STATIC ANALYSIS
1.HORIZONTAL OR DYNAMIC ANALYSIS:-
When financial statement for a certain number of years or different firms are
examined analytically , the analysis is called horizontal or dynamic analysis. In such
analysis, fluctuations in the various items of the balance sheet and profit loss account
of different years or firms are studied.
It is called dynamic analysis as it measures the challenge in various items of
one years as compared to previous years or years .This method is useful in
measuring the progress of the business from year to year. In such types of analysis
the changes are expressed in the following ways.
EXPRESSIING INCREASE OR DECRESACE IN ABSOULUTE AMOUNTS:
The amount of change in items of the statement of two years is expressed by
the sign of plus (+1or -1) . Plus amount indicates increase while minus amount
indicates increase while minus amount indicates decrease.
EXPRESSING INCREASE OR DECREASE IN PERCANTAGE:
In this method percentage increase or decrease is calculated in comparison to
the previous years by dividing the amount of increase or decrease obtained in
(1above , by the absolute figures of the previous year and multiplied by 100)
EXPRESSIMG THE CHANGES BY INDEX NUMBERS:
When the financial; statement are available for more than two years, the
changes are expressed in the form of index numbers. In this method a normal years ,
generally the earliest past year is chosen as the base year and this base year is taken
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as 100. Then, index number for the current years amount and multiplied by 10. When
index numbers of different years are presented simultaneously, these are called trend
%.
EXPESSING THE CHANGES BY RATIOS:
In this method , ratios are calculated to compare the items of current year
With the items of the previous years .
Example :- 4,000 then 16,000 ratio 1:4
Comparative balance sheet and profit and loss account or income statement .
Trend analysis.
2. VERTCAL OR STATIC ANALYSIS
Vertical or stick analysis is the study of mutual relationship between different
components or their total of the financial statements for a definite period of time. For
instance, to know the share of each asset in the total assets of the business at a
specific date , the total assets would be assumed equal to 100 and for each asset %
shall be calculated . This types of analysis expresses relationship at a specific date
and not the fluctuations. Knows as static analysis .
Common size balance sheet and profit and loss account or income statement
Stuctural rastio established realaonships betwwen variuos iteams of balance
sheet and profit and loss account.
Both these techniques, horizontal& vertical , of financial analysis are
complemental=ry to each other as john n. Myer has said.
On the basis of material ussed finaqncial analysis may be two types , as
follows :
1. EXTERNAL ANALYSIS
2. INTERNAL ANALYSIS
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1. EXTERNAL ANALYSIS
An analysis made by person not internally Related to the enterprise and meant
for external users of the financial statement is called external analysis . The analysis
has no to all the documents of the concern . So, he has to depend on the printed and
published statement only .
Such types of analysiss made by blanks, investing agencies, creditors ,
research scholar and the Government.
2. INTERNAL ANASLYSIS
When analysis of financial statement is made by somebody internally, related
to the enterprise such as executives, employees etc. it is said to be Internal analysis .
such persons have access to all the documrent and record of the concern . hence, it
is done on the basis of information n ,obtained from the internal and unpublished
record and books.
SIGNIFICANNCE OF FINANCIAL STATEMENT ANALYSIS
Every person who has interest in the business entity liked to take decision
based on analysis and interpreted financial statements.
1.DISCLOSURE OF FACTS :
With the help of analysis , all fact reating to liquidity position , financing of fixed
assets , credit policy , quantum of working capital , solvency , valuation of assets are
made available . Thusas s result of analysis , all undisclosed facts come to light for
the benefit of all concerned parties.
2. Effective decision making ;
Decision based on intuition are of personal natures and carry either no
meaning or of negligible value to other persons , such decision are not effective and
impartial , nut are defective and baseless. On the other hand , analysis and
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interpretation is based , some logical and scientific of the decision taken on the basis
of intuition , analysis and interpretation is essential.
3. EFFECTIVE PLANNING ANDF CONTROL:
The analysis and interpretation of fincisal statement provides adequate
information for planning and controlling the of the business. Future forecasting casn
easily be made by ananlyzing the pat data help of this information .The management
can take corractinve action by drawing inference about routine activities.
4. MEASUERE OPRATIONAL EFFICIENCY :
The management and the owner are interested inknowing about the opretion
efffiency different activity of the concern the=is can bvbe judged by calculating
different activity of the concern . this can be judged by calculating different activitity
and profitability ratios.
5. comparative study :
With the help of financial analysis , business information and fact can de
presented caopraratively. Such presentation is made either In the form of last few
years position of the business or comparision of operating activities with other
business units engaged in the same industry . Thus, financial analysis is helpful in
the comparative study of business efficiency.
6. SERVING the need of interested arties:
As explained in the previeus chapter, different parties (management, Creditors
,investors etc.) have varied interest in the performance of the business . They search
for information relating to their interest in the financial statements.
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LIMITATION OF FINANCIAL STATEMENTS ANALYSIS
Despite the significance of analysis and interpretation of financial statement as
discussed above. It has certain limitations, which an analyst and the user should keepin view. These limitations are indentified as
follows:
1. 1.suffer from limitation of financial statements:
2. Absence of universally accepted standard terminology :
3. Ignores qualitative aspect:
4. Ingnore price level changes :
5. It steps the symptoms but not diagnose:
Techniques of financial statement analysis
COMPARATIVE FINANCIAL STATEMENTS
COMMON SIZE FINANCIAL STATEMENT
TREND ANALYSIS
RATIO ANALYSIS
FUNDS FLOW ANALYSIS
CASHFLOW ANALYSIS
BREAK-EVEN ANALYSIS
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COMPARATIVE FINANCIAL STATEMEENT ANALYSIS
Comparative fincial statement are those statement which summaries and
present realed accounting data for a number of years incorrasting therein the
changes (Absolute or relative or doth) In Individual iteams. In these statement , The
Finanacial Data for two or more years are placed and presented inorder to facilitate
periodic comparison. The preparation of comparative financial statement is based on
this logic that a statement covering a period of a number of years is more meaningful
and significant than for a single year only , because financial data for one year
represent only one phase of the long and continuos history of the firm . The
comparative financial statement are designed to disclose the following:
Absolute figures ( In rupees amount)
Increase or decrease i.e. changes in absolute fingers .
Absolute data in terms of percentages.
Increase or dec. in terms of %
The objective of comparative financial statement is to ascertain the changes
occurring years by years in yeas in each items of assets , liabilities and net worth
shown in the financial statement of a business firm and whether such changes are
favorable or adverse
.
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ADVANTAGES:
1.EASY EVALUTION:
Comparative fincial statement disclose trends in sales , production casts and
profits through which the financial position , efficiency and performance of a
firm can be eveluted .
2.COMNPARATIVE EVALUTION:
In these statement , Figures of two or more period are placed side by side ;
Hence inter period comparison of various items becomes easy. With these
statement ,Financial position of the firm can be compared with average of the
specific industry or other firm comparison is possible
3.IDENTIFIES WEAKNESSES:
WITh the help of comparative statement , weakness in the oprating cycle
financial health etc.can easily be indentified and suitale remedial steps may be
taken.
COMPARATIVE BALANCE SHEET
Normally any increase or decrease in thevalue of vsrious assets , liabilities as
weel a in owners equity or capital resulting from the operational activities of the
business can be easily
Advantages of comparative balance sheet :
1. EMPHASIS ON CHANGES :
Comparative balance sheet nopt onl;y disclose balance of account at different
dates but also discloses changes in such balance between the two different
dates.
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1. EFFECT OF ACTIVITIES:
Balance sheet serves as a links between the balance sheet and profit and loss
account . profit and loss account discloses the oprating result of the firm.
2. Future forecasts :
The comparative balancea sheet not only reflects the changes in the book
value the assets and liabilities ,but indicates treands visibale in them over a
period of time.
INTRODUCTIONTO THE BALANCESHEET
The balance sheet is one of the fincial statement that limited companies and
PLCs produce every year for their shareholders. It is like a financial snapshot of the
companys financial situation at the moment in time.
ANALYSIS OF BALANMCE SHEET
SHAREHOLDER FUND
This is the initial soures to the business i.e. share capital provided by
shareholders. The capital has been provided by head office, BANGLORE. The
share capital may be made up of both ordinary and preference shares , Though
preference shares are much less popular thes days for tax reasons .
RESERVE &SURPULS
Another term for erned equity ; repensents the profits of a company which
have been reinvested within the business. The reservewill incude retained profit from
the past .
This situation can occur particularly with property companies such as hotel
operators where the value of the properties rises with a booming property market.
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HMT MTL DONT HAVE ANY RESERVE AND SURPLUDE THEY CAPITALIZED
THEIR PROFIT &LOSS TO HEAD OFFICE , BENGLORE.
MACHIONE TOOLS DIRECTORATE HMT MTB, BANGALORE
DIE CASTIINGS, BANGALORE
HMT MTP, PINJORE
HMT MTK, KALAMASSERY
HMT MTH,HYDERABAD
HMT PRESS,HYDERABAD
HMT M/C TOOLS MKTG.
HMT CNC DIV, BANGALORE
HMT CRB DIV, BANGALORE
HMT PRECISION M/C DIVISION
HMT MACHINE TOOLS DIRECTORATE
PROFIT OR LOSS FOR THE YEAR
LOAN FUND SECURE LOANS
A LIABILITY IS SOMETHINF which a firm owes t a person or another firm. It
may be in the form of creditors people or firms who have sold you goods which you
have not yet paid for, or it may be money borrowed form a financial institution loans.
As the title of the variable suggests, we are looking in this case for liabilities
that are owed in the long term. This is generally taken line accounting terms to be
more than a year. This therefore tends to mean that most trade creditors ( except in
exceptional circumstances ) are not long term but current liabilities. Long term
liabilities thus tend to be bank loans.
They are usually shown on the top half of the balance sheet , and are
subtracted from the fixed assets and the net current assets to show net assets,
Cash is an assest to the business and is usually considered to be one of the
current assets. Under the heading cash on the balance sheet may be included anumber of items of varying liquidity.
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HMT MTL AJMER HAS CREDIT FROM-
UCO BANK, PURANI MANDI BRANCH, AJMER by hypothecathion of
inventories, sundry debtors and other receivables.
PNB RAMGANJ, AJMER
UNSECURED LOANS
Other long term loans may, unlike the mortgages, be unsecured loans. This
mean that the bank or financial institution that lent the money does not have any title
over any of the firms assets, janddd they would have to go through the courts to get
any money back. This can prove to be a lengthy and expensive process. An
unsecured loan will therefore ten to attract a higher rate of interest then a secured
one where the lender is more certain of recovering their money in the event of a
problem.
They have unsecured loan from HMT-MTL, HOLDING COMPANY, In this
quarter they paid of f unsecured loan worth ,60,40,10 ,378.00.This is the good sings
for the company .
DEFERRED CREDIT
Amount due to supplied who have provided inventory to the company they
cant have any deferred credit.
FIXED ASSETS
1. used singly or in combination with other assets in the production of goods or ser
vices to be sold by the enterprise.
2. Exchange other assets
3. used to settle a liability
4. Owner of the enterprise These represent fixed assets 1,79,25,605.48
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DEPRECIATION
In accounting process of allocating in a systematic and rational manner the
cost of a capital asset the period of its useful life The company act 1956 pro data with
reference to the data of addition or deletion except assets coasting less than Rs 5,00
per asset which is written off to rs 1\- in the year of purchases
NET BLOCK =GROSS BLOCK DEPRECIATION
CAPITAL WORK IN PROGRESS MACHINARY &EQUIPMENT UNDER ERECTION
Till last year there was no w.i.p in this year they have Rs 3,20,108 in this particular
head.
INVESTMENT
Investment is the portfolio investment, product ,direct investment investment have
been considered by head office BANGLORE.
INVENTORIES
Stock are oftan known as inventories. They are anything which a firm has
which is not currently.Bening used for one of the firms functions.
Most department in the company will have stock of something The factory may
have stock of raw mareials ready to produce, the office may have stock of stationery
and the warehouse may have stock of finished goods.
Stock are vital toa company to help function smoothly . IF production had be
stopped every time ran out ofraw materials, the time wasted would soon derests
them . the same is treu of most areas the firm opretes in I am sure you can
appreciate the importance of planning ahead and having suitable of stocks.
The other current are assets debtors and cash.
HMT-MTL has
1. Raw material and component s2. Stores an spare parts
3. Tools and instruments
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4. Work-in-progress
5. Finished stock
6. Stock of scrap , in inventory category
In the year 2007-08 they reduced their inventory cost by Rs2,86,700 it
is better indication towards profit making policy.
SUNDRY DEBTORS
Debtors are people or other firms who owe money to the firm .This will uasally
happen where the firm has sold allows the purchaser a period of credit the firm sells
the good or service but allows the purchaser a period of credit to pay usually a
month . During this month the purchaser ows the firm the money and is therefore a
debtor
In HMT MTL sundry debtors include both secured and unsecured debtors .
They are considered as good& doubtful Debtors .In the year 2007-08 They reduced
debtors by 3,67,61,140.16
CASH & BANK
IN much the same way it is important to a business . However , in a business
the term cash may have a broader meaning than it does to ypou as an individual.
Cash is an asset to the business and is usually considered to be one of the current
assets.
As with the debtors , the amount of cash required will vary accourding to the
line of business the firm is in . Retail firms may have higher levels of liquid cash
thamn business that business that oprate mostly on a credit basis and therefore
rarely handle notes and coins
Current assets
The current assets asre therefore ones that can be quickly realized and change
frequently . The main current assets are stock , debtors and cash.
CERRENT ASSETS =STOCK + DEBTORS +CASH
LOAN & ADVANCES
Secured considered good
Unsecured considered good
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CURRENT LIABILITIES
A liability is something which a firm owes to a person or another firm.It may be in the
form of creditors people or firms who have sold you goods which you have not yet paid for,
or it may be money borrowed form a financial institution-loans or overdrafts.
NET CURRENT ASSTES
NET ASSETS = TOTAL ASSETS TOTAL LIABILITIES
HMT-MTL RS 18,50,197,36.00
DEFERRED REVENUE EXPENDITURE
Technical assistance fees including fees technical documentation
And exchange fluctuation difference.
GRATUITY
Expenses inclured in respect ofbond issued for raising to meet payament
Under the VRS.
Profit and loss account or income statement The balance sheet,as discussed
above, indicates firms financial position at a specific date. Hence, it is considered as
a very significant statement by bankers and lenders. But, it fails to indicate whether a
firm is making or losing money. Therefore, creditors and financial analysts have
recently started paying more attention to the earning capacity of the firm as a
measure of financial strength.
According to guthman H.G.,the statement of profit and loss is the considered
and classified record of the gains and losses causing change in the owners interest
for a period of time.
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FUNCTIONS OF INCOME STATEMENT
Profit and loss account or income statement reveals the flow revenues and expenses
during a period of time. It also reveals the changes occurred in the balance sheet
form the end of one period of time. It also reveals the changes occurred in the
balance sheet form the end of one period to the end of another period.the important
functions of the profit and loss account are as follows;
MEASUREMENT OF NET INCOME COMMUNICATION
Form and contents of profit and loss account The profit and loss account is
prepared in defferent forms due to diversity in the nature of industry and business
interests. In case of porprientary and partnership firms, there is no prescribed form of
profit and loss account. Even for companies, the Indian companies act, 1956 has not
prescribed any legal proforma for profit and loss account as it has prescribed for
balance sheet. Generally, profit and loss account is prepared in account lform, which
is divided into two parts
1 profit and loss account, and profit and losss appropriation account
Such a profit and loss account is not useful from analysis point of view.
Therefore, the profit and loss account should be prepared in such proforma where the
items of revenues and expenses of the firm could be shown classified under
appropriate heads. This will prove 100% useful to the management in analyzing the
results. Such profit and losss account should incorporate the following items sources
of income from business oerationsl
Sales after deducting sales returns and trade discount.
Cost of goods sold. Operation expenses of the business, administration ( sellin
and distribution expenses,) depreciation etc.
All other incomes and expenses ( optating and non-operation ) such as
interest, income form investments, profit or loss on sale of fixed assets etx.
Recorded facts
The term recorded facts means that data used for preparing financial
statemen6s are taken out form the accounting records. For example, figures relating
to cash in hand, cash at bank, debtors, bills receivables, xost of fixed assets, bills
payable, creditor sales , purchases, wages, salaries, rent etc. are recorded facts. Thefinancial statements do not disclose such facts which are not recorded in the
accounting books whether such facts are significance or not .
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Accounting conventions and postulates
The financial statements are affected to a very grant extent by accounting principles,
concepts and conventions. On the going concern concept assets are shown at cost
after deducting depreciation instead of their market value, on the assumption that
these assets will not be sold. On money measurement concept, non- monetary
factors such as managerial efficiency and interity that affect firms profit to a great
extent are not shown in the financial statements.
Personal judgments
Although accounting concepts an conventions provide good guidelines to the
accountant, yet the application of these concepts and conventions depends upon the
personal judgments of the accountant.
For example, depreciation on fixed assets is charged on cost, but which method
(fixed installment, written down value or unit of service ) and rate of depreciation arte
to be used, depend upon the personal judgments of the accountant.
ESSSENTIAL QUALITIES OF FINANCIAL STATEMENTS
As stated earlier, the basic objective of financial statements is to provide information
useful to the users of these satatements. Different users like shareholders, investors,
financial institutions, workers etc,are interested in financial statements with varying
objectives.
Relevance
Only that information should be disclosed in financial statements which are relevant to
the objectives of the firm. The information is said to be relevant only when it
influences decisions of the users while evaluating any levent jor correcting past
evaluation. The conclusions drawn on the basis of irrrelevnt information would be
misleading and of no use.
Understandability
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The main objective of financial statements is to provide necessary information about
the firms resources and performance. to fulfill this objective, the information
contained in these statement should be clear, simple so that a person who is not well
versed with the accounting terminology shall be able to understand without much
sifficulty. Therefore, as far as possible, the form of financial statements should not be
complex and the terms used in these statements should should be simple, in common
language and non technical.
Reliability and accuracy
The information incorporated in financial statements shou,lld be reliable. Information
has the quality of reliability when it is free from material error and bias and can be
depended upon by users. Reliability changes with the nature of information contained
in lthe subject matter.
FINANCIAL STAATEMENTS AND Utility
MANAGEMENT
First of all financial statement are used by those persons who direct and control the
business. These persons are known as management desires such information from
these statement by which the efficiency and earning power of the firm can be
measured and rational decision for its efficient operation can be taken.
Other macro level decisions
Employees and their representative biddies are interested in the financial statement
to ascertain the ability of the enterprises to maintain the existing staff and serve them
through appropriate rumination and retirement benefits . On the basis of these
statements, employees come to known about the profit earning capacity and
productivity of the company
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INTERPRETATION OF INCOME STATEMENT
.
The income statement of Hmt Mtl is not complicates , it is very simple o
understand.
1 ERNINGS:-
SALES
Machine tools
Accessories
Sundry jobs and miscellaneous sales
Packing /forwarding charges Include excise duty
2 .OTHER INCOME
Servicing income recoveries from staff/other
Royalties
Profit on sale of assets
Credit relating to previous provisions withdrawn
Settlement allowance
Earned leave encashment
Warranty
Doubtful debts /advances
Obsolescence
Interest liability-other miscellaneous income
1. OUT GOINGS
MATERIALS
Raw materials and components
Purchases
Consumption of raw materials and componants
Consumptionof stors, spares tools &pkg. materials
Repairs to buildings
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Repairs to machinery
PERSONNEL
Salaries, wages and bonus
HOUSE RENT ALLOWANCE
GRETUITY CONTRIBUTION TO P E & FPS
DEPOSIT LINKED INSURANCE
CONTRIBUTION TO ESI
WELFARE EXPENCSES
WAGWS FORREPIARS TO BUILDINGS
WAGES FOR REPAIS TO MACHINERY
MANAGEMENT REMUNERATION
REMUNERSATION TO MANAGING DIRECTOR
SALARIES
ALLOWANCES
PERQUISIOTES MADICAL REIMBURSEMENT
CONTIBUUTION TO PROVIDENT FUNDTOTALREMUNATION
Other expenses
Power and fuel
Rent
Rates and taxes
Excise duty
Insurance
Water and electricity
Repairs t building
Repairs to machinery
Printing and stationery
Travelling expenses Rebate on sales
Advertisement and publicity
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Training
Auditors remuneration
Other agents commission
Loss/obsolescence of linventory and materials
Bad debts/loans &advances written off
Provision for doubtful debts, loans and advances
Warranty claims
Special tools
VRS bonds issue expenses share of holding company expenses
Loss on exchange variation
Miscellaneous expenses
In respect of taxation matters
In any ljother manner
Reimbursement of expenses
Service tax
Directors
Directors sitting fees
Jobs done for internal use
Capital works
Shop manufactured special tools
Interest
Government loans
Loan from holding company VRS bonds
Term loans form banks /financial institutions
Cash credits from banks
Bonds
others
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prior period adjustments
material
personnel
other expenses
other income
extra ordinary itemsincome from sale of land &building
cash flow
fund is a broad term that means transfer of economic values whether such values
relate to cash or not cash as well as other transactions such as purchase of fixedassets on credit, payment of creditors by issue of debentures or preference shares
etc. which do not affect cash are included. Thus , it do not reveal the sources from
which cash was obtained or in flowed in the business and the specific uses to which
cash was utilized or out flowed. In any jbusiness, it is important to know about the
sources and uses of cash.
Cash flow statement
While discussing funds flow statement, we hve observed that in a narrow
sense. Funds means only cash .it is shown in the balance sheet as cash in hand ,
cash at bank etc. data given date, but it does not disclose how the cash was obtained
and how the same was used in the given accounting period.
The profit and loss account or income statement is also of no help in thisregard. For this purpose, a new statement, called cash flow statement is required. A
statement of cash flow reveals the movements of cash of a business enterprise for
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the given accounting period indication specifically how the cash was generated i.e.
when the cash has come from and how the cash was used i.e. what has been done
with cash during the given accounting period.
Thus, cash flow statement is a statement of inflows (sources) and outflows
(uses0 of cash and equivalents in an enterprise during a specified period of time.
Such a statements disclose the net effect of operating, investing and financing
activities of an enterprise during a period on cash and its equivalents and taken into
account receipts and disbursements of cash.
Cash means not only cash in hand but it also comprises demand deposits with
banks .
Cash equivalents are short term highly liquid investments that are all readily
convertible into known amounts of cash.
Cash flows are inflows and out flows of cash and cash equivalents.
Cash flows exclude movements between items that constitute cash or cash
equivalents because these components are part of the cash management of and
enterprise rather than part its operating, investing an financing activities. Cash
management includes the investment of excess cash in cash equivalents.
Classification of cash flows
As explained earlier, cash flow statement indicates the cash inflows (sources)
and cash outflows (uses or application ) of cash during an accounting period. Hence,
it is essential to know about the various items of source of cash or inflows of cash and
uses of cash or outflows of cash. As per accounting standard-3 (revised) the changes
resulting in cash inflows and cash outflows arise on account of three types of
activities i.e. operating , investing and financing as discussed below
1. Cash flows from operating activities
2. Cash flows from investing activities
3. cash flows from financing activities
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Ratio analysis
Has emerged as the principal of technique of analysis of financial statements.
It is an attempt to present the information of the financial statements in simplified,
systematized and summarized form by establishing the quantitative relationship of the
items or group of items of financial statements.
Financial ratio analysis is a fascinating topic to study because it can teach us
so much about accounts and businesses .ratio analysis can also help us to check
whether a businesses is doing better this year than it was last year; and it can tell us if
our business is doing better or worse than other businesses doing and selling the
same things.
WHAT ARE WE TRYING TO FIND OUT?
1. Is Profitable.
2. Has enough money to pay its bills.
3. Could be paying its employees hire wages.
4. Is paying its share of taxes.
5. Is using its assets efficiently.
6. Has a gearing problem.
7. Is a candidate for being bought by another company or investor.
And more, once we have decided what we want to know then we can decide
which ratios we need to use to answer the question or solve the problem facing
us.
Lets look at the ratios we can use to answer these questions.
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THE RATIOS:-
We can simply make a list of a ratios .we can use here but its much better to put
them into different categories. If we look at the question in the previous section,
we can see that we talked about profits, having enough cash, efficiently using
asset-we can put over ratio into categories that are design exactly to help us to
answer this questions. The categories we want to use, section by section are:
1. Profitability : has the business made a good profit compare to its turnover?
2. Return ratio : compare 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. Assets usage or activity: how is the business used its fixed and current
assets.
5. Gearing: does the company have a lot of depth or is it financed mainly by
shares?
6. Investor or share holder: not every one needs to use all of the ratios we can
put in this categories so the table that we present at the start of each
section is in two column: basic and additional.
The basic ratio are those every one should use in this categories whenever we are
asked a question about them .we can use the additional ratio when we have to
analyzed a business in more detail or when we want to show someone that we
have really though carefully about a problem .
Ratio Analysis is the process of determining and presenting the relationship fitems or group of items in the financial statements. the relationship may be of two
types:
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1. Associate Relationship and
2. Cause/Effect relationship
For example there is an associate relationship between costs of goods sold and
cost of raw material, whereas there is cause/effect relationship between sales and
profits .Both the relationships are expressed in terms of ratios. Ratios may be
expressed in following ways-
Expression of Ratios:-
1. Ratio as Proportion: in this form, the relationship between two figures is
expressed in common denominator. It is obtained by the simple division of
one number by another so that the proportionate relationships become
clear. For example, if current assets are Rs.16000 and current liabilities are
Rs.4000,the ratio between current assets and current liabilities i.e. current
ratio will be 4:1 (16000/4000).
2. Ratio as Turnover: in this form a ratio is calculated between two numerical
facts for which one item is divided by another and the quotient so obtained
is taken as unit of expression. When ratio is expressed in this form, it is
called as turnover and is written in times. For example, sale for the year
are Rs.80000 and fixed assets are Rs.20000; it indicates that sales are
4(80000/20000) times of fixed assets.
3. Ratio as percentage: in this form, the relationship between two items is
expressed in percentage for which one item is divided by another and the
quotient is multiplied by 100.for example, if sales i.e. gross profit ratio will
be 25% (20,000/80,000 x 100).
in financial analysis ,these ratios highlights the financial position of the business,
and hence known as Financial ratios .these are also called accounting ratios,because they are based on the data taken from financial accounts. similarly they
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measure the relative importance of the items expressed in financial statements,
hence called structural ratios.
OBJECTIVES OR SIGNIFICANCE OF RATIO ANALYSIS:
Ratios are guides or short-cuts that are useful in evaluating the financial position
and operations of a company and in comparing them to previous years or to other
companies. In accounting and financial management, ratios are regarded as the
real test of earning capacity, financial soundness and operating efficiency of a
business concern. Ratio can also assist management in its basic functions of
forecasting, planning, co-ordination, control and communication..
IMPORTANCE OF RATIO ANALYSIS:
1. Simplifies Accounting Figures: Accounting figures in many cases fail to
provide information in a desired way. Ratio simplify, summaries and
systematic accounting figures which can easily be understood by those
who do not know the language of accounting.
2. Measure s liquidity position: liquidity position of a firm is set to be
satisfactory if it is able to meet its current obligation as and when they
mature .a firm is set to be capable of meeting its current obligations only. If
it has sufficient liquid funds to pay its short-term obligation with interest
within a period. Hence this ratio is used for the purpose of credit analysis by
banks and other short-term lenders.
3. Measure Long term solvency : ratio analysis is equally important in
evaluating the long-term solvency of the firm. it is measured by capital
structure of leverage ratio. This ratio are helpful to long term creditors
,security analyzed and present and prospective investor because the reveal
the financial soundness and weakness of the firm.
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4. Operational Efficiency: ratios are useful tools in the hands of management
to evaluate the firms performance over a periods of a time by comparing
the present ratios with the past ratios. various activity or turnover ratios
measure the operational efficiency of the firm. this ratio are used, in
general, by banker, investor and other supplier of credit.
5. Facilities inter firm and intra firm comparison: ratio analysis is the basis for
comparing the efficiency of various firms in the industry and various division
of a business firm. absolute figures are not suitable for this purpose, but
accounting ratios are the best tools to compare the firms and divisions of a
firm.
6. Trend Analysis: ratio analysis enables a firm to take the time dimension into
account. trend analysis of ratios reveals whether financial of a firm is
improving or deteriorating over years .with the help of such analysis one
can ascertain whether the trend is favorable or adverse.
7. Managerial Usage: ratio analysis is an in valuable aid to management in
this charging its basic functions such as planning, communication, control
and decision making as discussed below:
Aid in Planning and Forecasting: ratios ,derived after analyzing the
past result, help the management to prepare budgets and formulate
future policy and plan of action, what is to be done in immediate
future is decided on the basis of trend analysis.
Aid in Control: trend ratio are compared with standard ratios to
measure the degree of variance with the actual if comparison shows
and adverse variance, it is reported to the management to take
corrective action and exercise effective control.
Aid in Communication: ratio are effective means of communication.
they plan an important role in informing about the progress made by
the firm to the owners and other parties interested there in.
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Aid in Decision Making: ratio analysis highlights on the degree of
efficiency of the management and utilization of assets. this helps
management in decision making.
USERS OF ACCOUNTING INFORMATION:
Now we know the kinds of questions we need to ask and ewe know the ratios
available to us, we need to know who might ask all of these questions. This is an
important issue because the person asking the question will normally need to know
something particular.
Of course, anyone can read and ask questions about the accounts of a business; but
in the same way that we can put the ratios into groups, we should put readers and
users of accounts into convenient groups, too. Lets look at that now.
The List of Categories of Readers and Users of Accounts include the following people
and groups of people:
Investors
Lenders
Managers of the organization
Employees
Suppliers & other Trade Creditors
Customer and Governments and there agencies.
Public.
Financial Analyst
Environmental Groups
Researchers: both academic and professional
LIMITATION OF RATIO ANALYSIS:
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1. Need for comparative analysis: a single ratio would not be able to convey
anything, is the single ratio in itself is meaningless; it can not furnished a
complete picture.
2. False Results : ratios are based upon the financial statements. in case financial
ratio is incorrect or the data upon which ratio are based in is incorrect ratio
calculated will also be false and defective.
3. Ignore Qualitative Factors : ratio analysis is the quantitative measurement of
the performance of the business. it ignores the qualitative aspects of the firm. It
shows that ratios Is only one sided to measure the efficiency of the business.
4. Ignoring Price level changes : the comparability of ratios suffers if the prices of
the commodities in two different years are not the same change in price affects
the cost of production, sales and also the value of assets it means that will not
be meaning full for comparison if the price of the commodities is different.
5. Personal Bias: Ratios are only means of financial analysis and not an end in
itself. Ratios have to be interpreted in different people May interpreter the
same ratio in different ways.
WHICH RATIOS WILL EACH OF THESE GROUPS BE INTERESTED IN?
In the left hand column there is a list of interested one by one. your job is to be
completed the right hand column by giving two or three example of ratios they might
be interested in .
INTEREST GROUPS RATIOS TO WHICH
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INVESTORS RETURN ON CAPITAL EMPLOYED
LENDERS GEARING RATIOS
MANAGERS PROFITABILITY RATIOS
EMPLOYEES RETURN ON CAPITAL EMPLOYED
SUPPLIER AND OTHER LIQIDITY
TRADE CREDITORS
CUSTOMERS PROFITABILITY
GOVERNMENT AND PROFITABILITY
THERE AGENCIES
FINANCIAL ANALYSTS POSSIBLE ALL RATIOS
RESEARCHERS DEPENDS ON THE NATURE OF
THERE STUDY
LOCAL COMMUNITY HIS COULD BE A LONG AND
INTERSTING LISTS
ENVIORMENTAL GROUPS EXPENDITURE OR ANTI-POLLUTION
MEASURES
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RATIO ANALYSIS IN THE CONTEXT OF HMT, MACHINE TOOLS AJMER
As discussed earlier ratios are very useful for very person who has been related to
the organization. HMT-MTL IS AN UNIT OF HOLDING COMPANY WHICH IS
SITUTED AT BANGLORE. In HMT-MTL AJMER, they calculate ratio in order to
find out the efficiency turnover etc
CURRENT RATIO:-
MEANING:-
Current ratio may be defined as the relationship between current assets and
current liabilities. It is also known as working capital ratio or 2:1 ratio. It is
calculated by dividing the current assets by current liabilities. :
FORMULA:-
CURRENT RATIO = CURRENT ASSETS/CURRENT
LIABILITIES
COMPONENTS:-
Current assets of a firm represent those assets, which can be, in the ordinary
course of business, converted into cash within a period not exceeding one year.Assets are anything, which the firm owns or has title to (other words ownership
of). Firms may have fixed assets which are long-term assets-plant, machinery and
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equipment, but they will also have assets which cab be realized (cashed-in) in the
short-term. This is generally taken in accounting terms to be less than a year.
The current assets are therefore ones that can be quickly realized and change
frequently. The main current assets are stock, debtors, cash. And etc.
CURRENT ASSETS= STOCK +DEBTORS+CASH+B/R+PREPAID EXP.
+OTHER CURRENT ASSETS
They are usually shown on the top half of the balance sheet, and the current
liabilities are subtracted from them to show net current assets.
Current liabilities mean those obligations which are to be paid within a period of
one year out of current or by creation of current liabilities.
A liability is something, which a firm owns to a person or another firm. It may be in
the form of creditors people or firms who have sold you goods which you have
not yet paid for, or it may be money borrowed from financial institution-loans or
overdrafts.
As the title of the variable suggests, we are looking in this case for liabilities that
are owed in the short-term. This is generally taken in accounting terms to be a
less than a year. Any money that is owed in more than a years time is considered
to be a long- term liability. Short-term liabilities thus tend to be trade creditors and
short-term borrowing such as overdrafts.
CURRENT LIABILITIES=CREADITOR+B/P+BANK OVERDRAFT+OUT
STANDING EXP.
values related to current ratio for five years are as follows
2004-05 2005-06 2006-07 2007-08 2008-091.03 1.09 1.53 1.69 1.65
This graph depicted these values, given below:-
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0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2004-05 2005-06 2006-07 2007-08 2008-09
CURRENT RATIO
CURRENT RATIO
INTERPRETATION OF CURRENT RATIO:-
The above graph shows the values of current ratio of past 5 years.
2003-04 was very difficult for HMT-MACHINE TOOL due to more liabilities over
their current assets.
But in the next two years they perform their duty over the management of currentassets and current liabilities very well.
If the current ratio is high, the larger amount of rupees available per rupee of
current liabilities, the more firms ability to meet current obligation and the greater
safety of funds to short- term creditors
LIQUIDITY OR QUICK RATIO:-
MEANING:-
Liquidity ratio is the measure of the instant debt paying ability of the business
enterprise,. Hence it is, also called QUICK RATIO OR ACID TEST RATIO. This
ratio establishes the relationship between quick/liquid current assets and current
liabilities. The formula used is:-
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FORMULA:-
LIQUIDITY/QUICK RATIO = LIQUID OR QUICK ASSETS/CURRENT LIABILITIES
OR
= CURRENT ASSETS-(STOCK + PREPAID EXP.)/CURRENT LIABILITIES
COMPONENTS:-
Liquid or quick assets refers to all the current assets except inventory and prepaid
exp. the exclusion of inventory is based on the fact that it cannot be easily and readily
converted into cash.
Prepaid exp. by their very nature do not provide cash, they merely reduce the
demand for cash required in one period because of payment in a prior period.
According to them, Bank overdraft is not included in liquid liabilities i.e. deducted from
the amount of total current liabilities on the plea that firm avails this facility more or
less on a regular basis. But, if the bank overdraft is to be withdrawn on demand, it
should be a part of liquid liabilities. In this book, it has been included in liquid/current
liabilities.
Liquid ratio is considered to be superior to current ratio in evaluating the liquidity
position of the firm.
IN OTHER WORDSQUICK ASSETS ARE HIGHLY LIQUID AND ARE
IMMEDIATELY CONVERTIABLE TO CASH
A liquid ratio of 1:1 is considered satisfactory.
values related to quick ratio for five years as follows:-
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2004-05 2005-06 2006-07 2007-08 2008-09.33 .45 .28 .53 .50
This graph depicted these values given below:-
0
0.1
0.2
0.3
0.4
0.5
0.6
2004-05 2005-06 2006-07 2007-08 2008-09
LIQUID RATIO
LIQUID RATIO
INTERPRETATION OF QUICK RATIO:-
A quick ratio of 1:1 is considered as an ideal ratio. If the liquid ratio is more than
1:1, the financial position of the firm seems to be sound and good. On the other
hand, if the ratio is less than 1:1, the financial position of the firm is unsound.
A high quick ratio compared to current ratio may indicate under-stocking while a
low liquid ratio indicates over stocking.
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STOCK/INVENTORY TURNOVER RATIO:-
MEANING:-
Generally, a firm must have reasonable stock in comparison to sales. The quantity of
stock should be sufficient to meet the demand of the business, but it should not be
too large to indicate unnecessary locking-up of capital in stock, danger of stock-items
becoming obsolete and resulting in waste by passing of time.
The stock turnover ratio is calculated to consider the adequacy of the quantum of
capital and its justification for investing in inventory.
Inventory turnover ratio normally establishes the relationship between cost of sales
and average inventory.
The stock turnover ratio can be calculated by applying the following formula:-
FORMULA:-
INVENTORY TURNOVER RATIO= COST OF GOODS SOLD OR SALES/AVERAGE
INVENTORY
AVERAGE INVENTORY=OPENING STOCK+CLOSING STOCK/ 2
COST OF GOODS SOLD= SALES GROSS PROFIT
OR=OPENING STOCK +PURCHASE-CLOSING STOCK
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Values related to inventory turnover ratio for five years as follows-
2004-05 2005-06 2006-07 2007-08 2008-091.36 1.75 1.52 2 1.88
This graph depicted these values, given below:-
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
INVENTORY TURNOVER RATIO
INVENTORY TURNOVER
RATIO
INTERPRETATION OF INVENTORY TURNOVER RATIO:
This ratio reveals the number of times finish stock is tuned over during a given
accounting period in relation to sales. it also indicates whether investment in
inventory is within proper limit or not.
A high inventory turnover ratio is better than a low ratio. a high ratio reflects
efficient business activities and is an indication of under investment in inventory.
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A low ratio reflects:1(dull business ) 2.(over investment in inventory) 3.(wrong
valuation of stock) 4.(stock of unassailable and obsolete goods.)
The inventory turnover ratio is also an index of profitability as a high ratio indicatesmore profits
DEBTOR TURNOVER RATIO:-
MEANING:-
Receivable normally include debtor and bills receivable and represent the uncollected
portion of credit sale. This ratio establishes the relationship between net credit sales
and average receivable of the years.
The Formula used for its calculation is as follows:
FORMULA:-
DEBTOR TURNOVER RATIO=NET CREDIT SALES /AVERAGE RECEIVABLES
AVERAGE RECEIVABLE=OPENING DEBTOR & B/R+CLOSING DEBTOR &
B/R/2
COMPONENTS:
CREDIT SALES=TOTAL SALES CASH SALES SALES RETURN
If information about credit sales is not available, the figure of total sale may be
assumed to be the credit sale.
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Debtors and B/R which arise out of credit sale should only be considered
.while calculating this ratio, the full amount of bills discounted, which creates
liabilities, should be included of provision for bad and doubtful debts should not
be detected because it may give an impression that some amount ofreceivable has been collected.
if the data relating to opening and closing balances of debtors and receivable
are not available, the receivable at the end of the year may be considered for
computing this ratio.
Values related to debtors ratio for five years are as follows
2004-05 2005-06 2006-07 2007-08 2008-0955 38 32 4.67 4.82
This graph depicted these values given below:
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0
10
20
30
40
50
60
2004-05 2005-06 2006-07 2007-08 2008-09
DEBTORS TURNOVER RATIO
DEBTORS TURNOVER
RATIO
INTERPRETATION OF DEBTORS TURNOVER RATIO:
This ratio indicates the number of times the receivables are turned over in a
year in relation to sales. It shows how quickly debtors are converted into cash.
Ahigher debtors turnover ratio shows the efficiency in collection from debtors
i.e. debtors are being collected more promptly.
A lower ratio indicates efficiency of management in collection of payment
against credit sales in time or payments by debtors are delayed.
FIXED ASSETS TURNOVER RATIO:-
MEANING:-
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This ratio expresses the relationship between fixed assets (less depreciation) and net
sales or cost of goods sold.
It is calculated by using the following formula:-
FORMULA:-
FIXED TURNOVER RATIO = SALES OR COST OF GOODS SOLD/FIXED
ASSETS(less depreciation)
values related to fixed assets turnover ratio for five years are as follows:-
2004-05 2005-06 2006-07 2007-08 2008-0914.35 21.26 15.68 22.43 5.56
This graph depicted these values, given below:-
0
5
10
15
20
25
2004-05 2005-06 2006-07 2007-08 2008-09
FIXED ASSETS TURNOVER RATIO
FIXED ASSETS
TURNOVER RATIO
INTERPRETATIO FIXED TURNOVER RATIO:-
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This ratio measures the efficiency and profit earning capacity of the firm.
Thehigher the ratio, the greater is the intensive utilization of fixed assets.
Lower ratio means under utilization of fixed assets and excessive investment in
these assets.
As volume of sales depends on a variety of factors such as price, quality of good,
salesmanship, marketing etc. it is argued that no direct relationship can be
established between sales and fixed assets.
WORKING CAPITAL TURNOVER RATIO:
MEANING:-
This ratio establishes the relationship between net working capital and net sales or
cost of goods sold. It is calculates by dividing the net sales or cost of goods sold by
net working capital Expressed as a
FORMULA:-
WORKING CAPITALTURNOVER RATIO = COST OF GOOGS SOLD OR
SALES/NET WORKING CAPITAL
NET WORKING CAPITAL=CURRENT ASSETS CURRENT LIABILITIES
Table showing data related to NET WORKINGCAPITAL
2004-05 2005-06 2006-07 2007-08 2008-0929.37 6.98 8.56 3.35 3.54
This graph depicted these values, given below:
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0
5
10
15
20