Ratio Analysis at Micro Finish

Evaluation of financial performance appraisal

Industry profile

Global valve market

The valve market, by and large, is shared by various manufacturers based on technology,

manufacturing capacities, and brand name quality and price competitiveness. US, Germany,

Italy & Japan are the leading countries manufacturing valves with 50% of total world

production.

Tyco is the world's largest producer of valves and controls with 80 brands. The company has

pioneered new designs and technologies in this field.

The demand for valves is witnessing growth in almost all areas. All core sectors of industry,

namely power, oil and gas, water and infrastructure projects, metal and mining, chemicals,

drugs and pharmaceuticals, and food and beverages, require various types of valves for

expansion of capacities, de-bottlenecking or routine maintenance and repair of plants.

The valve industry will continue to grow at 7-8 per cent per annum. Exports may grow at

10-12 per cent per annum due to India becoming competitive compared to manufacturers in

Japan, Europe and USA. The global market for industrial valves is forecast to increase 4.4

percent annually through 2011 to $77.6 billion. Gains will be driven by generally healthy

global economic conditions, encouraging investment in key valve markets such as the US,

China and Germany. Growth will instead be much more profound in the rapidly developing

nations of the world such as China, India and Malaysia. Gains in valve demand will be

stimulated by positive economic and fixed investment growth in these areas, while an

expanding market for expensive automated valves and actuators will also aid the overall

valve markets in the US, Japan and Western Europe.

Indian valve industry

Good news is now knocking the doors of the Indian Valve Industry. After a brief slow down

in the activities for past few years, the Indian valve industry has now entered the growth

JSS DVH-IMSR, Dharwad Page 1


phase of the business life cycle. Indian valve industry is now on the threshold of a major

transformation.

Its globalization in the true sense for the Indian valve industry with MNCs rushing to India

to tap the growing valve market in India and to take advantage of the low cost labor, at the

same time make India their export hub for global market. As far as the Indian valve

manufacturers go, they are gearing themselves up to explore the overseas markets and at the

same time working hard to reach the top position in the domestic market. MNCs today are

approaching India as a major outsourcing destination for valve manufacturing the reason

being a large pool of technically qualified personnel, low manufacturing costs and a large

English speaking population.

India is already a manufacturing hub for many internationally renowned valve and pumps

manufacturers such as Crane, Audco, Flowserve, Durco, AK, KSB, Spirex Sarco and

Xomox.

The domestic valves industry has reached the required level of sophistication to enable it to

address export demand and India is competitively placed to cater to the international

demands. The market is large enough to offer opportunities to all manufacturers irrespective

of the size of their operations.

The Indian companies are looking at Middle East as a lucrative market as a number of

multibillion petrochemicals complexes are coming up in the region. The growth of valve

industry depends totally on the growth of other industries like infrastructure, refinery,

chemical industry, petroleum etc. All these sectors including power, oil & gas ,

pharmaceutical & petrochemicals is expected to grow at a rapid pace and Steel are further

going to boost the growth of valve industry

Indian valve market

The world's best brands are also produced locally in the country through fully owned

subsidiaries or joint ventures. India today produces world-class products and the country is

emerging as a large exporter of valves. Like other countries India too has small

manufacturers and almost all manufacturers have their own niche markets. The market is



large enough to offer opportunities to all manufacturers irrespective of the size of their

operations. The quality of Indian valves is, by and large, acceptable to domestic users

depending on the service and application. However, large organizations in key sectors have

strict buying criteria where the best brands are purchased after a complete techno-

commercial scrutiny of offers depending on the criticality of the application. In fact, India is

fast becoming a large exporter of valves now that free imports do not really pose a problem

for market growth.

The organized sector of the India valve industry is estimated to be Rs 900 crore, while the

unorganized sector contributes additionally over to Rs 500 crore. Close to 50% of the market

is shared by two companies (L&T and BHEL), while the rest have individual market shares

of 4% or less.

There are over 100 companies mostly in the unorganized or the small scale sector and the

industry as is evident is highly fragmented. The growth rate of this industry is estimated at

10 to 15%.

Hubli market

Hubli is one of the fastest developing industrial hubs in Karnataka after Bangalore, with

more than 1000 allied small and medium industries already established basically located in

Gokul Road & Tarihal regions of Hubli. There are machine tools industries, electrical, steel

furnitures, food products, rubber and leather industries and tanning industries. With the

establishment of K.E.C, Bhoruka textile Mill, Universal Group of Industries, Microfinish

Group, N.G.E.F, K.M.F, BDK Group of Industries and Murudeshwar Ceramics. It has

gathered momentum in industrial development.

To promote the overall economic development of varied industries, institutions and business

houses "Karnataka Chamber of Commerce & Industry" was formed, it's one of the premier

association, which has been gaining momentum in achieving potential growth and prosperity

in Hubli region .And one more key aspect of industrialization for Hubli-Dharwad was

foundation of Agricultural Produce Market Committee, which aimed at providing hassle free

market conditions for farmers, to establish regulated & stimulated production of various

agricultural related commodities & goods.



Background of the company

Microfinish group of companies

Microfinish was set up in the year 1971. The Microfinish is manufacturing industrial pumps

and valves. Microfinish is known for its quality product and as got certificate of ISO 9001.

Microfinish Valves Pvt. Ltd. manufactured Ball Valves, Bellows sealed globe valves, Globe

valves for chlorine service & Knife edged gate valves. In the 1980’s Microfinish started the

manufacture & sales of chemical process & slurry pumps.

Microfinish is group of seven companies. The companies are as follows:

1. Microfinish Valves Pvt. Ltd.

2. Microfinish Pumps Pvt. Ltd.

3. Flowserve-Microfinish Valves Pvt. Ltd.

4. Flowserve-Microfinish Pumps Pvt. Ltd.

5. Manjira Engineers Pvt. Ltd.

6. Prab Engineers Pvt. Ltd.

7. Specialty Engineers.

Flowserve Pvt. Ltd. USA

Flowserve Pvt. Ltd is a U.S.A company which was set up in early 1920. Flowserve Pvt. Ltd.

Produces engineered and process pumps, precision mechanical seals, automated and manual

quarter-turn valves, control valves and valve actuators, and provide a range of related flow

management services, primarily for the process industries. Flowserve Pvt. Ltd is having its

business more than 30 countries o name few are Canada, Belgium, Australia, India,

Argentina, Mexico, Germany, etc. Flowserve Pvt. Ltd. of USA.

In 1997 Flowserve Pvt. Ltd. of USA came to India by entering into a joint venture with a

Microfinish of Hubli. As Microfinish is known for its quality products worldwide, the

Flowserve Corporation made of a Technical collaboration with the Microfinish Valves.

Flowserve Pvt. Ltd. came to India and gave technical and management training to the

employees of the Microfinish in the year 1996. Flowserve Pvt. Ltd. inspected the spare parts



which that came out to be more than there expectation. Later Microfinish started of its

separate 100% exporting unit and came to be known as Flowserve Microfinish Pvt. Ltd.,

Hubli.

Flowserve Microfinish Valves Pvt. Ltd.

Flowserve Microfinish is one of the 100% EOU (Export Oriented Unit) in the city of Hubli.

From this year they have to pay the tax. The Flowserve Microfinish group of companies

consist of two units namely Flowserve Microfinish Valves Pvt. Ltd. (FMVPL) and

Flowserve Microfinish Pumps Pvt. Ltd. (FMPPL).

FLOWSERVE MICROFINISH VALVES Pvt. LIMITED is one of the pioneer firms in the

manufacture of Ball and Plug valves. It was established in November 1997 to cater to the needs

of Ball and Plug valves. The organization’s manufacturing facilities are housed in an

independent and well laid-out building with ample scope for future expansion, located at

Industrial Estate-Hubli, which is one of biggest and developing industrial center in the state of

Karnataka. The city is well connected by Road & Rail and situated between Pune & Bangalore

of National Highway No-4. The units have 15000sqfts and 10000sqfts of built up area to house

the facilities respectively and both divisions have an open space of 10000sqfts and 15000sqfts

respectively for further expansion. Around 70+ workers are working in a single shift.150+ cores

yearly turnover is done by these companies.

Flowserve Microfinish Valves Pvt. Ltd and Flowserve Microfinish pumps Pvt. Ltd., have a

documented quality system to meet the requirements to ensure that its orders are processed,

products and manufactured to meet the requirements of the customers. Flowserve

Microfinish Valves Pvt. Ltd. in addition meets requirements of PED 97/23/EC.

The Company is catering the major needs of industries in the field of petrochemicals,

refineries, fertilizers, fine-chemicals, pharmaceuticals, food & beverages and other general

chemical industries.



Now the Flowserve Microfinish Pvt. Ltd. exports to more than 15 countries to name a few:

USA

South Africa

Australia

U.K

Taiwan

Hong Kong

Germany

Belgium

Korea

Brazil

Mexico

Singapore



Company ProfileTable: 2.1

Name of the organization Flowserve Microfinish Valves Pvt. Ltd.

Type of organization Private limited company

Registered office CTS no 568/1, industrial area,Hubli -30.

Promoters Flowserve Corporation, USA &Microfinish valves ltd, Hubli

Year of establishment 1997

Product Manufacturing & exporting of industrial valve

Accounting year 1st April to 31st march

No of directors 5

Factory area 3.5 Acres, Built Up area:15000 Sq

Production Capacity 5562 Valves &125564 Valves Components

Production Marketing Marketed By Flowserve Corporation USA

Quality Certification ISO 9001:2000, Got CE marking certification

OSHAS 18000 [British Standard]

List of directors Mr. Tilak K. Vikamshi (Managing Director)Mr. Deepak K. Vikamshi (Director)Mr. William D. Brown (Director)Mr. S. Gopinath (Director) Mr. Mc Geehin Thomas (Director)



VISION

Vision is to manufacture quality valve products for the process industry worldwide. We

embrace the concept of total quality and people involvement to enhance “TOTAL

QUALITY SATISFACTION” and commit to maintain this standard of excellent through

continual improve and use of quality management systems.

MISSION

Mission is to manufacture quality valve products for the process industry worldwide. We

embrace the concept of total quality and people involvement to enhance “TOTAL

CUSTOMER SATISFACTION” and commit to maintain this standard of excellent

through continual improve and use of quality management systems.

QUALITY SYSTEM & POLICY

The organization has received the ISO 9001 certificate as per 2000 edition for being the

highest sold standards and gaining a brand quality with the family products. The

organization produces quality ball valves, plug valves.

“The organization mission is to be the world class leader in manufacturing quality valve

products for the process industry worldwide, they embrace the concept of the total quality

and people involvement to achieve ‘total customer satisfaction’ and commit to maintain this

standard of excellence through continues improvements.

QUALITY OBJECTIVES

To maintain the total system

To implement quality policy through people training and involvement at all levels in

organization.

To achieve and excel in leadership for Quality in worldwide market for its product

range and set the standard for industry.

To strive to reduce the cost without compromise on quality.

Always maintain good relationship with its clients for continuous business without

any conflict between them.


MANAGINGDIRECTOR

ADMINISTRATIO

N ANDACCOUNTS IN-

CHARGE

PLANNING AND

PURCHASE IN-CHARGE

PRODUCTION AND

ASSEMBLY IN-CHARGE

QUALITYASSURANCE IN-CHARGE

PERSONNEL OFFICER

ASSISTANT ACCOUNTANT

SALES ANDSHIPPING OFFICER

PLANNINGAND

PURCHASE ASST.

STOREOFFICER I

.SHIFT IIN-CHARGE

RECEIVINGQUALITY

ENGINEER

SHIFT II INCHARGE

INPROCESSQUALITY

ENGINEER

MAINTAINANCE IN-CHARGE

FINALPRODUCTENGINEER

STOREOFFICER II

ASSEMBLYSUPERVISOR

LOCAL PURCHASER

BOARD OF DIRECTOR


Organization chart



Product profile

Introduction of Valves

A valve is a device that regulates the flow of a fluid (gases, liquids, fluidized solids, or

slurries) by opening, closing, or partially obstructing various passageways. Valves are

technically pipe fittings, but are usually discussed as a separate category.

Valves come in a wide variety of styles, sizes and pressure classes and in design, function

and application. Today’s continuum of availability of valves extends from simple water

faucets to control of the process.

Types of valves:

Gate valves

Plug valves

Ball valves

Butterfly valves

Cryogenic ball valves

Diaphragm valves

Globe valves

Piston valves

Fire safe valves

Among these valves Flow Serve Microfinish Valves Private Limited., manufactures only

Ball Valves and Plug valves.

Table: 2.2

SLNo

Products Size RangeMaximumPR Rating

Material ofconstruction

1 Ball Valve15-20015-50

#300#800

CS/SSCS/SS

2 Plug Valve15-30015-300

#150#300

CS/SSCS/SS



Ball valves:

Ball valves find application mainly as stop valves. As stop valves it has following attributes.

Figure 1: Ball valve 1

Figure 2: Ball valve 2

Plug Valves:

The plug valves are known for its durability and easy replacement of plug which is main

component for plug valves.

Figure 3: Plug valve 1

Figure 4: Plug valve 2


Administration &

Accounts

Personnel officer

Account Assistant


DEPARTMENTAL STUDY

ADMINISTRATIVE AND ACCOUNTS DEPARTMENT

Administration Department

Objective: Is to recruit the personnel, providing suitable training to employees, welfare, time

office functions, stationary, obligations and other administrative functions. The personnel

officer is responsible for preparation of returns. He is responsible for housekeeping of office

and factory premises, maintaining personnel files and record, canteen administration.

Functions of Administration Department (H.R):

1. Training

2. Recruitment

3. Safety

4. House Keeping



1. Training

Objective: Is to provide adequate training to the personnel of all departments performing

activities affecting quality.

Responsibility: Administration and Accounts (A & A) In-charge through personnel officer is

overall responsible to ensure that the training needs of personnel of all the departments are

fulfilled, to identifying the appropriate trainer in consultation with the top management for

arranging the training.

In charge of respective departments are responsible to appraise and to forward the training

requirements of their department personnel to personnel officer. Training is given for

employees one’s or twice in a month depending on the need.

In training the following aspects are covered: Product Application, Basic Computer

Knowledge, Instrument Knowledge, Industrial Safety and First Aid, Statistical Quality

Control, ISO Awareness (9001:2000), Leadership Quality, Manpower Handling,

Commercial Acumen, Communication Skills, Identification and Traceability, Material

Handling

2. Recruitment

Personnel Officer is responsible for recruiting the right person for the right job. He takes

into consideration the knowledge, skill and work experience of the person.

3. Safety

Objective: To ensure safe and healthy environment for personnel.

Responsibility: Administration and Accounts in charge through personnel officer is

responsible for safety related activities.



Procedure: Safety c committee meeting is conducted every quarter. Safety related training

for staff and workers is conducted once in two months such as Fire Extinguisher, Chemical

Hazardous, Personal Hygiene etc and first-aid facility is also provided for workers.

4. House keeping

Objective: To ensure good, healthy, clean, neat and safe work environment.

Responsibility: While the activities are co-ordinate by the personnel officer, each and every

individual in the organization is responsible for the implementation.

Procedure: For effective implementation of the system, the entire premises of the company

are divided into sub-zones as Production and Assembly division, Quality Assurance

division, Administration and Accounts division etc. Each sub-zone is headed by a team

leader and supported by co-ordinates, supervisory staff and workers.

Accounts Department

Objectives: This department is playing a vital role by providing and maintaining the entire

details of each and every financial activities of the company. This department takes care of

both the accounts handling and functions of the personal and administration.

To provide accurate and complete systematic information of financial activities.

To maintain all the books of the accounts and other financial documents.

To prepare periodic financial statements of the company like Profit and Loss

Account and Balance Sheet.


Planning&Purchase

Department

Sales&ShippingOfficer

Planning StoreOfficer I

StoreOfficer II

LocalPurchaser


Books of Accounts maintained by the Accounts Department:

It maintains its complete accounts in the TALLY software package and takes print copies of

following registers every year:

General Ledger Register

Purchase Register

Sundry Debtors Register

Sales Register

Sundry Creditors Register

Debit and Credit Note Register

Journal Register

Bills Discounting and Collected Register

Asset Register

Cash Book with Bank column Register

Stock Register

PLANNING AND PURCHASING DEPARTMENT



Planning

Objective: The main activity of this department is to ensure that all processed or purchased

products and service meet the specified requirements. It also ensures smooth flow of

production activity by planning the purchase of raw materials, castings, forging, fasteners

and even capital goods.

Monthly Manufacturing plan: It is applicable to all work orders and relative activity of

department with respect to manufacturing plan. Planning is done for handling of resources

and to meet the delivery assurance.

Types of plan:

Tentative plan: It is a plan for a particular which is drawn five weeks prior to a

month.

Final plan: It is a plan which is issued one week earlier to the particular month. It can

be modified, if required on the basis of information from other departments.

Important highlights

Planning & Purchase in charge is responsible for drawing tentative and final

“Monthly manufacturing plan” through planning assistant.

Production & Assembly in charge is responsible for modifying to meet urgent

customer requirements.

Plan is drawn to approximate 90% of capacity and 10% of capacity is reserved to

meet urgent amendments.

Tentative plan is modified or amended if required on the basis o feedback

information from other departments.

Final plan is issued one month earlier to the particular month.

Final plan is amended, if required on the basis of feedback from Production &

Assembly department.

Valves which are planned to be manufactured in a particular month but could not be

manufactured are re-planned in consultation with P&A Department.

Cause of not meeting the plan is discussed with P&A Department.



Purchase Department

Objectives: To ensure that all the purchase/processed items and services to meet the

specified requirements.

Scope: Applicable to all raw materials but bought out items, sub contracted items, capital

goods, consumable and services to be produced.

Steps involved in purchasing are:

Purchase activity starts from work order given by sales department.

To prepare bill of materials

To arrive at the total requirement of materials

To check in stock at stores

To select the approved vendor from the list of approved vendor and place the order

for required material.

To prepare the GRIR and inform inspection department after receipt of material.

To store the accepted material and return the rejected material to vendor and issue

the accepted material to production and assembly department.

Selection and evaluation of the vendor:

The potential vendor are selected based on experience, reputation, capability etc. and this is

done by the head of PPD. The capability of vendor is assessed based on the items supplied

and evaluation of the items is done on site by purchase officer and quality department

personnel. If the supplier is acceptable, the purchase officer is instructed to get the samples

for inspection. QA department carries out a sample piece inspection and the report is

submitted to PPD head for review. The purchase order should clearly specify the material

grade, type, class related to Indian /International standards etc.

As per the requirement, the QAD verifies the product at vendor’s premises and asks for

release of the products after successful verification. Based on the performance of vendor in

first supply it will be enlisted in “list of approved vendors”. Purchase officer maintains

record of all these vendors and also approved vendors.



Product identification and Traceability:

All raw materials and products received will be identified by any one or combination of the

following means:

Color code

Heat No.

Reference No.

Batch/Lot No.

Tag

Drawings

Castings: On receipt of castings for material identification, the appropriate color

coded with applicable color codes, preferably in rectangular form around the heat

No. for components. Castings are alphanumerical manner for example “8YRH”- ‘8’

indicates the year of manufacturing, ‘Y’ month (November), ‘R’ date and ‘H’ shift

head. Identification of the vendor to whom the castings belongs will be traced by

reference number or heat number.

Bars: The bar Consisting of four parts first part is of material symbol and diameter

of bar, second part alpha numeric No. which refers year of purchase refers to

particular size, third part consists the number of bars received in the corresponding

lot and Fourth part consists of the cut length in the corresponding bar. The Store

personnel identify the bars as per company engineering standard and color code will

be applied on both ends of the bars. Also bar is affixed with a reference number at its

ends.

Fasteners: Fasteners other than B7 and 2H will be coded with applicable

color/punched for material identification. Batches of fasteners are identified for the

size and material by providing tag suitably. Identification of the vendor from whom

he supply is received will be traced by batch No. given by concerned receiving

quality personnel and batch No. are recorded in the “History register for fasteners”.

Other items: Teflon, Grafoil, spiral etc., are identified by their OD, ID, Thickness,

or diameter in Goods Received, Inspection Non-Conformity Review and Disposition



Report Number. Trace ability of components are also maintained with identification

throughout the process from receipt and during all stage of production and assembly.

Stores: It is very important section of the organization. It provides general guidelines for

monitoring stock levels from material receipt stage through finished components/finished

valves. Store officers are responsible for proper accounting, handling and storage of raw

material/ components and products. Store officers of respective stores are responsible for

planning the storage space in stores section and assigning the material to identified location

and maintain records of receipt and issue of material. The stores are identified as under:

Store 1- Sand castings, Investment castings, Levers, Stems, End caps, Adapters etc.

Store 2- Fasteners, Teflon, Gland, Seat springs, spring disc, Accessories etc.

PRODUCTION AND ASSEMBLY DEPARTMENT


Production &Assembly

Shift I Maintenance Assembly Shift II

MachineOperation

MaintenanceAssistance

Fitters MachineOperation

Helpers Helpers


Production Department

The production department ensures that production process is identified planned and carried

out under controlled conditions in accordance with monthly manufacturing plan.

Objective: The objective of the production department is to improve the productivity, to

reduce the cost of production without any compromise on quality and to manufacture ‘non-

defective quality products’ training the people.

The production Process is carried out in the following 3 steps:

Design development review

Process control

Production planning and process

Design development review: The assistance in development activity by FMVPL commence

after receipt of component drawings. The control and issue of drawings is done as per work

instructions. Patterns/dies whenever required are developed by FMVPL through suppliers.

PAD develops process, tooling, jigs, and fixtures and manufactures components, sub

assemblies and assemblies as detailed in PAD work instruction. Castings/machined

component are sent for their review/approval. Components after final review are released for

bulk production. The PAD head, through the shift in-charge will review the general

assembly drawing and/or components of new design or modifications.

Process control: The production department ensures that the manufacturing process is

carried out in accordance with monthly manufacturing plan, which is as per procedure for

production planning. The production department head plans the production operations. The

department head will ensure the suitable maintenance of equipment for process capability.

Equipments are verified as capable of producing in accordance with product specification.

The product and process characteristics are monitored in consultation with quality assurance

department and non-conformity components are duly identified and disposed off. Any

special/extra services to the product are complied with as against the customer’s demand.

Shift in-charge responsibility is to ensure that tools and instruments are kept in appropriate

places and record of issue and receipt is maintained and submit instrument is due for



calibration. He is also responsible to place indents to the planning and purchase department

upon exhaustion of material.

Different Operations of PAD are Turning, Milling, Drilling and Tapping, Grinding and

Buffing & polishing.

Production planning and process: After receiving the work order the production and

assembly in-charge will instruct the production personnel to check whether required material

available or not. If material is not available the report will made to planning and purchase

department. Return note will be provided if excess material issued by store department.

Material issue slip has to provide by the production personnel while collecting the material

to processing from stores. Non-conformity Review and disposition report has to be made

when components are finished and returned to store through finished components

inspection. Material requisition note has to be prepared for collecting the components for

assembly.

The shift in-charge will collect the drawing from the draftsman for the processing. The

production and assembly in-charge prepares the daily production schedule through which he

schedules the production and machine loading the shift in charge will load the machines and

provide instruction to the machine operators by means of job cards along with relevant

drawing.

The production and assembly in-charge will allocate material for sub contracting for

machining through the store officer. The production and assembly in-charge schedules the

assembly and prepares the daily assembly schedule and ensures that the same is carried out

through the shift in-charges who prepare the assembly job card and give instructions to the

operators/ fitters.

After assembly the products are handed over to the final inspection and testing section along

with valve assembly and testing status format and assembly job card. After clearance from

quality assurance department the shift in-charge will send the assembled products to

dispatch section and finish valve completion note is given to the stores.



Assembly Department

Assembly preparation: P&A personnel collect duly machined and accepted components as

per work order and assembly job card. Debar all sharp corners if any. Clean all components

using de-greasing solution and water by brushes or other appropriate method. Dry the

components by blowing the air.

Assembly method: Here the products are assembled with light coat, screw stud bolts into the

tapped holes in the body, apply light coat of silicon lubricant on the chamfered surface of the

stem washer and Slide the stem washer on to the stem with the chamfered ID side. Apply

light coat of silicon lubricant on packing rings of ID. Be careful not to scratch the ID of the

packing rings on the threaded section of the stem. Apply light coat of silicon lubricant on

one side of the gland surface place the packing gland, ground spring washer and check nut

and gland nut on the stem and then tighten the check nut according to stem nut torque chart.

Post assembly: If fire safe valve, write F/S on valves. Write work order No. on the valve.

Provide end caps on both sides and hand over valves for testing to the QAD.

Corrective action: Corrective actions are taken to eliminate the cause of actual non-

conformities in order to prevent re-occurrence. All the non-conformities at receiving, In-

process and final stage are recorded in “Non-conformity Review Report”. Corrective action

is initiated by the functional in-charge based on criticality of problem, repetitiveness of non-

conformities, and impact of non-conformity on final product. For taking corrective action

respective section head takes the nonconformance details and identify the root causes of

non-conformity by analyzing the data, by using techniques & tools of quality, brain storming

as appropriate. Based upon the root cause analysis necessary corrective action is planned

correctively and preventive action report is prepared. The verification of the effectiveness of

the corrective action taken will be done by department in-charges over a period. If corrective

action found effective then non-conformity is closed.



QUALITY ASSURANCE DEPARTMENT

Objective: The main objective of this department is to ensure that quality is maintained

throughout the production process till the product is dispatched. This department is to ensure

that the documented procedure is prepared to meet the requirements of ISO 9001 and the

quality policy. It is responsibility of quality assurance department head to ensure that the

requirements of ISO 9001 as concerned to the quality assurance department are met.

This is the department where the pre-quality checking & Final quality checking is done.

Earlier days this department was known as the Inspection department where they used to

just inspect the production without bothering about the customer’s satisfaction. After some

years this department is named as the Quality Control department where more important was

given to the customer’s satisfaction & now days this department is known as the Quality

Assurance where the manufacturers assure about their products.


QualityAssurance In

charge

ReceivingQuality

In-processQuality

Final Product

Component TestingWorkers


The quality assurance department is the one where the job is checked after each & every

step & in quality checking the only finished jobs are checked. Quality Assurance procedures

comply with the highest industry standards. We can supply products with Chemical-

Mechanical Test Reports (CMTR's), Non Destructive Testing (NDT: Mag Particle, X-ray,

Dye Penetrant tests), NACE certification, CE markings, SAA/Atex approval and AGA

approved product & assemblies.

Department sections:

1. Receiving Items Quality Inspection: The raw material received by PPD with challen

which consists of serial number, date, quantity, weight, identification etc. All

materials are coming from outside such as castings, bars, and bought items-nuts,

bolts and subcontractor items are inspected as per the drawings or according to the

applicable work instructions, purchase order, work order, standard codes and

company engineering standards. Receiving Quality Engineer is responsible to ensure

that the quality of incoming components/ raw materials/products in accordance with

the established methods and the quality of all accepted items are confirming to the

specified requirements. The various methods of inspecting the components are

visual, dimensional and special tests. There are three main inspections:

Receiving raw material quality inspection (Castings)

Quality inspection of sub contracted items

Quality inspection of bought out items

2. In process quality inspection: Components taken for further process are also

inspected. Machines that are used in the manufacturing process are also inspected

periodically. Here the products are inspected visually & dimensionally if ok then it is

sent to final inspection. In process Quality Engineer is responsible to ensure that the

in process components /raw material/products are in accordance with the established

methods and quality of all accepted items are confirming to the specified

requirements.



3. Final product quality inspection: This inspection is mainly to check if any of the

lapses that may have occurred in the above stages. Final Product Engineer is

responsible to ensure that the products are in accordance with the established

methods and the quality of all the accepted items is confirming to the specified

requirements.

4. Calibration: All inspections, measuring and testing equipments including machines

are subjected to calibration in order to ensure positive control of inspection,

measuring and test equipments to demonstrate the conformances of products to

specified requirements. There is master list that includes all inspection, measuring

and test equipments.

The following are the some tests done on the raw material & the finished products:

Visual inspection: Here the Brand name, size & class, Material code, drawing

number, cracks, defects, identification and testability is being checked just by

looking at the raw material.

For Ex. 8YRH

Where

8-Year code, R-Date of working, Y-Month, H-Shift Head.

Dimensional checking: Dimensions are measured here using gauges & instruments.

Functional checking:

Visual & Dimensional Inspection

Dye Penetrate examination

Magnetic Particles examination

Radiography examinations and reports (X-ray)

Hardness testing

Hydro leak shell & Seat testing



Pneumatic test & Torque testing

high pressure nitrogen / Helium test

Fire safe testing

Cryogenic testing

High temperature Steam testing

Cyclic testing

Fugitive Emission testing

High Pressure testing

Status identification report has following color codes

Green: Conforming

Yellow: Rework

Black: Accepted on deviation

Red: Rejected

Blue: Hold



FINANCIAL ANALYSIS

Financial analysis is the selection, evaluation and interpretation of financial data, along with

other pertinent information, to assist in investment and financial decision- making. Financial

analysis may be used internally to evaluate issues such as employee performance, the

efficiency of operations, and credit policies, and externally to evaluate potential investments

and the credit-worthiness of borrowers, among other things.

The analyst draws the financial data needed in financial analysis 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 statements, the balance sheet, and the

statement of cash flows. Certain businesses are required by securities law to disclose

additional information.

The financial statements provide a summarized view of the financial position and operations

of the firm. Therefore much can be learnt about a firm from a careful examination of its

financial statements as performance reports. The analysis of the financial statement is thus

an important aid to financial analysis. Financial analysis is the important point for making

plans, before using any sophisticated forecasting and planning procedures. Understanding

the past is a prerequisite for anticipating the future.

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

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

profit and loss account. Financial analysis can be under taken by management of the firm, or

by parties outside the firm, viz. owners, creditors, investors and others. The nature of

analysis will differ depending on the purpose of the analyst.



FINANCIAL STATEMENTS

The Financial statements are the end product of the financial accounting process. The

financial statements are nothing but the financial information presented in concise and

capsule form, and the financial information is the information relating to the financial

position of any firm. Therefore the financial statements are the depiction of the financial

position of firm.

The basic source which provides the financial information is the annual report of the

company, which is presented by the company to its shareholders at the annual general

meeting.

This annual report contains the chairman’s report, the balance sheet, the income Statement,

the auditor’s report together with number of schedules, annexure etc. The presentation of

annual report is a statutory requirement under the companies Act of 1956.

STEPS IN FINANCIAL ANALYSIS

1. Select the information relevant to the decision under consideration from total

information contained in the financial statement.

2. Arrange the information is a way to highlight significant relationship.

3. Interpretation and drawing of inferences and conclusions.

TECHNIQUES/TOOLS OF THE FINANCIAL ANALYSIS

The methodology adopted for the AFS may be varying from one situation to another.

However, the following are some of the common techniques of the AFS:

Comparative financial statements

Common-size financial statements

Trend percentage analysis

The ratio analysis is the most common, comprehensive and powerful tool of the AFS.



IMPORTANCE OF RATIO ANALYSIS

As a tool of financial management ratio are of crucial significance. The importance of ratio

analysis lies in the fact that it presents facts on a comparative basis and enables the drawing

inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the

performance of a firm in respect of the following aspects:

Liquidity position

Long term solvency

Operating efficiency

Overall profitability

Inter firm comparison

Trend analysis.

Yet another factor which influences the usefulness of ratios is that there is difference of

opinion regarding the various concepts used to compute the ratios. There is always room for

diversity of opinion as to what constitutes shareholders equity, debt, assets, and profit and so

on. Different firms may use these terms in different senses or the same firm may use them to

mean different things at different times.

Reliance on a single ratio, for a particular purpose may not be a conclusive indicator. For

instance, the current ratio alone is not an adequate measure of short term financial strength;

it should be supplemented by the acid test ratio, debtors turnover ratio and inventory

turnover ratio to have real insight into the liquidity aspect.

In brief, ratio analysis suffers from some serious limitations. The analyst should not be

carried away by its oversimplified nature, easy computation with a high degree of precision.

The reliability and significance attached to ratios will largely depend upon the quality of

data on which they are based. They are as good as the data itself. Nevertheless, they are an

important tool of financial analysis.



Title of the project

“Evaluation of financial performance appraisal”

Name of the organization

‘Flowserve Microfinish Valves Pvt. Ltd.’

Statement of problem

Evaluation of financial performance is an integral part of overall corporate management. It

is one of the significant tools for performance evaluation. It is effective only through ratio

analysis. As ratios provide a benchmark for companies against their own performance in

industry. This study of financial performance appraisal helps to know the financial position

of the company, its future growth and ensures its existence. Thus ratios provide all timely

and relevant information for inter-firm and intra-firm comparisons.

In this project I have selected only intra-firm comparison.

Objectives of the study

To get practical exposure of the company and its environment.

To study organization in brief.

To study departments of the organization.

To ascertain financial performance of the company using ratio analysis.

Scope of the study

The study is conducted to ascertain

Organization structure and its departments within a limited period of time.

The financial performance of the company using last five years financial statements.

The years are 2005, 2006, 2007, 2008 and 2009.



Methodology

This project is an analytical research where in the researcher has to use the available facts as

information and analyze these to make a critical evaluation of materials.

Types of data:

Primary data: This data is required mainly for organization study and departmental

study.

Secondary data: This data is required for both organization study (History of the

company) and for calculation of various ratios to find financial performance.

Sources of data:

Primary data: This data can be collected through personal interaction with external

guide and managers of respective departments. The personal interaction includes the

lecture of particular department followed by question-answer session.

Secondary data: This data is collected from annual reports of last five years and old

project reports done in the past by other student in company.

Tools/Techniques and materials used for the study:

Accounting Ratios.

Annual Reports ( Financial statements)

Old project reports

Limitations of the study

The study was restricted only to the analysis of financial performance of last five

years, at FMVPT.

The major study based on secondary data only on the annual report of the Company.

It doesn’t cover an entire spectrum of financial management.

As project is prepared for academic purpose only it suffers from the limitations of

the time.

The employees couldn’t spare sufficient time due to busy schedule



Ratio Analysis

Introduction

Ratio analysis is a powerful tool of financial analysis. Financial analysis is the process of

identifying the financial strengths and weaknesses of the firm by properly establishing

relationships between the items of balance sheets and the profit and loss account.

Accounting ratios are relationships in mathematical terms between figures which are

connected with each other in some manner. In financial analysis ratio is used as a

benchmark for evaluating the financial position and performance of a firm. The absolute

accounting figures reported in financial statements do not provide a meaningful

understanding of performance and financial position of the firm. An accounting figure

conveys meaning when it is related to some other relevant information. The relationship

between two accounting figures, expressed mathematically, is known as a financial ratio.

Ratios help to summarize large quantities of financial data and to make qualitative judgment

about the firm’s financial performance.

Definition

Ratio analysis is defined as, “The systematic use of ratio to interpret the financial statement

so that the strength and weakness of the firm as well as its historical performance and

current financial condition can be determined. In the financial statements we can find many

items are co-related with each other For example current assets and current liabilities, capital

and long term debt, gross profit and net profit, purchase and sales etc.

Users of Financial Analysis Trade creditors

Suppliers of long-term debt

Investors

Management



Standards of comparison

PAST RATIOS: ratios are calculated from past financial statements of some of

company.

COMPETITORS RATIOS: ratios of some selected companies especially most

successful and progressive competitors.

INDUSTRY RATIOS: ratios of the industry to which the firm / Company belongs.

PROJECTED RATIOS: ratios developed using the projected financial statements of

the same Company.

Limitations of ratio analysis

Ratio analysis is a widely used tool of financial analysis. Yet it suffers from various

limitations. The operational implication of this is that while using ratios the conclusions

should not be taken on their face value. Some of the limitations which characterize ratio

analysis are:

Difficulty in comparison: One serious limitation of ratio analysis arises out of the

difficulty associated with their comparisons are vitiated by different procedures

adopted by various firms. The differences may relate to:

Differences in the basis of inventory valuation (e.g. last in first out, first in

first out, average cost and cost).

Different depreciation methods (i.e. straight line vs. written down basis).

Estimated working life of assets, particularly of plant and equipment.

Amortization of intangible assets like good will, patents and so on.

Amortization of deferred revenue expenditure such as preliminary

expenditure and discount on issue of shares.

Capitalization of lease.

Impact of inflation: The second major limitation of the ratio analysis as a tool of

financial analysis is associated with price level changes. This, in fact, is a weakness

of the traditional financial statements which are based on historical costs. An

implication of this feature of the financial statements as regards ratio analysis is that



assets acquired at different periods are, in effect, shown at different prices in the

balance sheet, as they are not adjusted for changes in the price level. As a result, ratio

analysis will not yield strictly comparable and, therefore, dependable results. To

illustrate, there are two firms which have identical rates of returns on investments,

say 15%. But one of these had acquired its fixed assets when prices were relatively

low, while the other one had purchased them when prices were high. As a result, the

book value of the fixed assets of the former type of firm would be lower, while that

of the latter higher.

Conceptual Diversity: Yet another factor which influences the usefulness of ratios

is that there is difference of opinion regarding the various concepts used to compute

the ratios. There is always room for diversity of opinion as to what constitutes

shareholders equity, debt, assets, and profit and so on. Different firms may use these

terms in different senses or the same firm may use them to mean different things at

different times. Reliance on a single ratio, for a particular purpose may not be a

conclusive indicator. For instance, the current ratio alone is not an adequate measure

of short term financial strength; it should be supplemented by the acid test ratio,

debtors turnover ratio and inventory turnover ratio to have real insight into the

liquidity aspect.

Classification of ratios

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

according to financial activity or function to be evaluated. The parties interested in financial

analysis are short and long term creditors, owners and management. In view of the various

uses of ratio can be classified in to following into categories namely:

a. Liquidity Ratios

b. Leverage Ratios

c. Activity Ratios

d. Profitability Ratios


Current Ratio= Current assetsCurrent liabilities


a. LIQUIDITY RATIOS:

Liquidity refers to the ability of firms to meet its obligations in the short run, usually one

year. Liquidity ratios measure the ability of the firm to meet its current obligation. Liquidity

ratios, by establishing a relationship between cash and other current asset to current

obligations, provide a quick measure of liquidity. A firm should ensure that it does not suffer

from lack of liquidity, and also that it does not have excess liquidity, it is necessary to strike

a proper balance between high liquidity and lack of liquidity. Following are liquidity ratios,

which are explained in detail.

1. Current ratioThe current ratio is a measure of the firm’s short-term solvency. It indicates the availability

of current asset in rupees for every rupee of current liability. A ratio greater than one means

that, the firm has more current assets than current claims against them. As a conventional

rule, a current ratio of 2:1 is considered satisfactory. The current ratio represents a margin of

safety for creditors. The current ratio is a test of quantity, not quality i.e. it does not measure

quality of current assets. Liabilities are not subject to any fall in value, they have to be paid

but current assets can decline in value.

Current ratio is calculated by dividing current assets by current liabilities:



Table: 4.1 Rs in lakhs

particulars 2004-05 2005-06 2006-07 2007-08 2008-09

current assets 1457.6 1465.31 1552.9 2209.66 2333.34

current liabilities 482.2 396.2 234.02 750.97 387.99

current ratio 3.02 3.69 6.64 2.94 6.01

Graph: 4.1

2004-05 2005-06 2006-07 2007-08 2008-090

1

2

3

4

5

6

7

3.02

3.69

6.64

2.94

6.01

current ratio

current ratio

Years

Ratio

Interpretation:

From the above graph it is evident that current ratio of the firm is more than the standard or

acceptable norms i.e. 2:1. Above graph shows that current ratio of the firm has been

increased compared to previous year (2007-2008) which implies that there is increase in the

current assets of the firm as compared to current liabilities.


Quick Ratio= Current assets - Inventories Current liabilities


2. Quick Ratio

The ratio is referred as quick ratio because it is a measurement of firm’s ability to convert

current assets quickly into cash in order to meet its current liabilities. It is also called acid-

test ratio. Quick ratio establishes a relationship between quick or liquid assets and current

liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon

without a loss of value. Current assets included in this are cash and bank balances, short

term marketable securities, debtors / receivables, thus current assets which are excluded in

this are prepaid expenses and inventory. Quick ratio of 1:1 is considered as satisfactory as

firm can easily meet all current claims. Ratio is calculated as follows:




Year Current assets Inventories Quick assets Current liabilities Quick ratio

2004-05 1457.6 558.58 899.02 482.2 1.862005-06 1465.3 602.7 862.6 396.2 2.18

2006-07 1552.9 688.36 864.54 234.02 3.69

2007-08 2209.66 749.84 1459.82 750.97 1.94

2008-09 2333.34 735.47 1597.87 387.99 4.12

Graph: 4.2

2004-05 2005-06 2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1.862.18

3.69

1.94000000000001

4.12

Quick ratio

Quick ratio

Years

Ratio

Interpretation:

It is evident from the graph which shows that quick ratio has been increased compared to the

previous year (2007-2008) and also with the base year (2004-2005), which indicates that

liquidity position of the firm is more than standard or acceptable norm i.e. 1:1, which in turn

indicates that liquidity position of the firm is good.


Cash Ratio= Cash + Short-term InvestmentsCurrent liabilities


3. Cash Ratio

Since cash is the most liquid asset, it is useful to examine the cash ratio as it indicates

liquidity position of company and firms commitment to meet its short -term liabilities. Trade

investments or marketable securities are equivalent of cash and hence can be included in

cash ratio. The ratio is calculated as follows:


Years Cash and Bank

Short-term Invs.

Total cash Current liabilities

Cash ratio

2004-05 211.18 0.11 211.29 482.2 0.442005-06 372.48 0.21 372.69 396.2 0.942006-07 207.3 0.21 207.51 234.02 0.892007-08 470.74 0.2 470.94 750.97 0.632008-09 749.83 0.2 750.03 387.99 1.93

Graph: 4.3

2004-05 2005-06 2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

0.44

0.940000000000001 0.89

0.630000000000005

1.93000000000001

Cash ratio

Cash ratio

Years

Ratio

Interpretation:It is evident from the graph which shows that cash/absolute liquid ratio has been increased

as compared to the previous year (2008-2009) and also to the base year (2004-2005) which

indicates that cash ratio of the firm is sufficient or more than the required on standard norm

i.e. 0.5:1 which in turn indicates that the firm has sufficient amount of liquid assets to meet

the short term liabilities.


Interval measure= Current assets - InventoriesAvg. daily operating expenses


4. Interval Measure

Interval measure relates liquid assets to average daily operating cash outflows. The daily

operating expenses will be equal to cost of goods sold plus selling, administrative and

general expenses less depreciation (other non-cash expenditure) divided by number of days

in the year (360).


YearsQuick assets

Operating exps.

Depreciation

Avg. daily Op. exps.

Interval measure

(days)2004-

05899.02 207.47 48.23 0.44233333 2032

2005-06

862.6 177.69 43.7 0.37219444 2318

2006-07

864.54 218.62 43.93 0.48525 1782

2007-08

1459.82 313.54 43.47 0.75019444 1946

2008-09

1597.87 299.2 36.86 0.72872222 2193

Graph: 4.4

2004-05 2005-06 2006-07 2007-08 2008-090

500

1000

1500

2000

2500

2032

2318

17821946

2193

Interval measure (Days)

Interval measure (Days)

Years

Ratio

Interpretation:

It is evident from the graph which shows that interval measure (Days) has been increased as

compared to the previous year (2007-2008) and also to the base year (2004-2005) which


NWC Ratio= Net working capitalNet assets


shows that a firm has sufficient liquid assets to meet the operations for the days indicated by

the interval measure, which implies that the firm has enough liquidity to meet the operating

expenses.

5. Net working capital Ratio

The difference between current assets and current liabilities excluding short-term bank

borrowing is called Net working capital (NWC) or net current assets (NCA). NWC is used

as a measure of a firm’s liquidity. Between the firms, the one having larger NWC has the

greater ability to meet its current obligations. NWC measures the firm’s reservoir of funds.

It can be related to net assets. NWC ratio is calculated as follows:


Years Current assets Current liabilities NWC Net assets NWC ratio2004-05 1457.6 482.2 975.4 1188.67 0.822005-06 1465.3 396.2 1069.1 1266.67 0.842006-07 1552.9 234.02 1318.88 1489.81 0.892007-08 2209.66 750.97 1458.69 1647.44 0.892008-09 2333.34 387.99 1945.35 2127.05 0.91

Graph: 4.5

2004-05 2005-06 2006-07 2007-08 2008-090.76

0.78

0.8

0.82

0.84

0.86

0.88

0.9

0.92

0.94

0.82

0.84

0.89 0.89

0.91

NWC ratio

NWC ratio

Years

Ratio

Interpretation:



It is evident from the graph which shows that NWC ratio has been increasing YoY,

compared to the previous year (2007-2008) and the base year (2004-2005) which indicates

the firm has enough liquidity to meet the immediate obligation of the firm. Higher the NWC

ratio better for the firm to meet the current obligation.

b. LEVERAGE RATIOS

The short-term creditors, like bakers and suppliers of raw material, are more concerned with

the firm’s current debt paying ability. On the hand, long –term creditors, like debenture

holders, financial institutions etc. are more concerned with the firm’s long-term financial

strength. In fact, a firm should have a strong short as well as long-term financial position. To

judge the long-term financial position of the firm, financial leverage ratios are calculated.

These ratios indicate mix of funds provided by owners and lenders. As a general rule, there

should be an appropriate mix of debt and owners’ equity in financing the firm’s assets.

The long term lenders / creditors would judge the soundness of a firm on the basis of the

long term financial strength measured in terms of its ability to pay the interest regularly as

well as repay the installment of the principal on due dates or in one lump sum at the time of

maturity. The leverage ratio may be defined as financial ratio which throw light on long

term solvency of a firm as reflected in its ability to assure the long term lenders with regard

to periodic payment of interest during the period of loan and repayment of principal on

maturity or in pre determined installment at due dates.

Leverage ratio may be calculated from the balance sheet items to determine the proportion

of debt in total financing. Leverage ratios are also computed from the profit and loss items

by determining the extent to which operating profits are sufficient to cover the fixed charges.

Note:

At FMVPL (Flowserve Microfinish Valves Pvt. Ltd.), the debt financing or debt part is

absent in capital structure. Therefore, assets are financed from net worth only. Hence it is


CE-to-NW Ratio= Net assetsNet worth


not possible to calculate all the leverage ratios except one ratio i.e. capital employed to net

worth ratio.

Capital employed to net worth ratio

This is an alternative way of expressing the basic relationship between debt and equity. One

may want to know: How much funds are being contributed together by lenders and owners

for each rupee of owners’ contribution. This is calculated as follows:

Net assets= Net fixed assets + Net current assets


Years Net assets Share capital

R&S Net worth Capital employed to NW ratio

2004-05 1188.07 349 839.32 1188.32 0.992005-06 1266.14 349 913.74 1262.74 1.002006-07 1489.44 349 1139.35 1488.35 1.002007-08 1610.98 349 1298.09 1647.09 0.972008-09 2095.93 349 1777.7 2126.7 0.98

Graph: 4.6

2004-05 2005-06 2006-07 2007-08 2008-090.965

0.97

0.975

0.98

0.985

0.99

0.995

1

1.0050.99

1.001.00

0.97

0.98

Capital employed to NW ratio

Capital employed to NW ratio

Years

Ratio


Inventory turnover= Cost of goods soldAvg. inventory


Interpretation:

It is evident from the graph which shows that capital employed to net worth ratio has been

decreased compared to previous year (2007-2008).

c. ACTIVITY RATIOS

Activity ratios are employed to evaluate the efficiency with which the firm manages and

utilizes its assets. The better the management of assets, the larger the amount of sales. An

activity ratio may, therefore, be defined as a test of the relationship between sales and

various asset of a firm. These ratios are also called turnover ratios because they indicate the

speed at which assets are being converted or turned over into sales and also called efficiency

ratios or asset utilization ratios because the efficiency with which the Assets are used would

be respected in the speed and rapidity with which asset are converted into sales. A proper

balance between sales and assets generally reflects that assets are managed well. Several

activity ratios can be calculated to judge the effectiveness of asset utilization.

1. Inventory turnover

Inventory turnover: This ratio indicates the number of times inventory is replaced

the year. It measures the relationship between the cost of goods sold and the

inventory level. Inventory turnover indicates the efficiency of the firm in producing

and selling its product. It is calculated by dividing the cost of goods sold by the

average inventory.

Average Inventory is calculated as follows:

Average Inventory = (Opening stock + Closing stock)/2



In my project, am using the Net sales instead of cost of goods sold.


Years Net sales Op. stock Cl. Stock Avg. Inventory Inventory turnover

2004-05 2007.23 NA 558.58 279.29 7.192005-06 1623.38 558.58 602.71 580.645 2.79

2006-07 2127.91 602.71 688.36 645.535 3.29

2007-08 2685.92 688.36 749.84 719.1 3.74

2008-09 3057.02 749.84 735.48 742.66 4.12

Graph: 4.7

2004-05 2005-06 2006-07 2007-08 2008-090

1

2

3

4

5

6

7

8

7.19

2.793.29

3.744.12

Inventory turnover

Inventory turnover

Years

Ratio

Interpretation:


Raw material inventory turnover= Material consumedAvg. raw material inventory


It is evident from the graph which shows that inventory turnover ratio has been increased

compared to previous year (2007-2008). However, it is much less than standard ratio of 8

times. It indicates high cost of holding and maintaining inventories.

Raw material inventory turnover: It is important to examine the efficiency with

which the firm converts raw materials into work-in-process and work-in-process into

finished goods. That is, it shows the level of raw materials inventory held by the firm

on an average. The raw material inventory should be related to materials consumed.


Years Op. stock(RM)

Purchases (RM)

Cl. Stock (RM)

Materials consumed

Avg. RM inventory

RM inventory turnover

2004-05 0 1217.47 450.74 766.73 225.37 3.402005-06 450.74 959.89 372.38 1038.25 411.56 2.522006-07 372.38 1249.7 420.9 1201.18 396.64 3.032007-08 420.9 1786.61 525.98 1681.53 473.44 3.552008-09 525.98 1640.31 489.88 1676.41 507.93 3.30

Graph: 4.8

2004-05 2005-06 2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

3

3.5

4

3.40

2.52

3.03

3.553.30



Years

Ratio


Debtors turnover= Net credit sales Avg. Debtors


Interpretation:

It is evident from the graph which shows that RM inventory turnover ratio has been

decreased compared to previous year (2007-2008) and also to the base year (2004-2005)

which indicates that RM are not immediately converted into the finished goods, which

implies that the firm is not efficient to handle the inventory.

2. Debtors Turnover

A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of

companies. When the firm extends credits to its customers, debtors are created in the firm’s

accounts. Debtors are convertible into cash over a short period and therefore, are included in

current assets. The liquidity position of the firm depends on the quality of debtors to a great

extent. Financial analysts apply following ratios to judge the quality of debtors:

Debtors turnover: It indicates the number of times debtors turnover each year.

Generally, the higher the value of debtors turnover, the more efficient the

management of credit.

To outside analyst, the information about credit sales and opening and closing

balances of debtors may not be available. Therefore, debtors turnover can be

calculated as follows:




Years Net sales Debtors Drs. Turnover2004-05 2007.23 664.98 3.022005-06 1623.38 464.11 3.492006-07 2127.91 628.89 3.382007-08 2685.92 910.05 2.952008-09 3057.02 819.35 3.73

Graph: 4.9

2004-05 2005-06 2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

3

3.5

4

3.02

3.49 3.38

2.95

3.73

Drs. Turnover

Drs. Turnover

Years

Ratio

Interpretation:

It is evident from the graph which shows that the debtor turnover ratio has substantially

increased compared to previous year (2007-2008) which indicates efficient credit


ACP= 360Debtors turnover


management of the firm where more number of debtors is converted into cash which

improve the current assets of the firm.

Collection period: The average number of days for which debtors remains

outstanding is called the average collection period (ACP) and can be computed as

follows:


Years Drs. Turnover Avg. collection period (Days)2004-05 3.01848176 1192005-06 3.49783457 1032006-07 3.3835965 1062007-08 2.95139827 1222008-09 3.7310307 96

Graph: 4.10

2004-05 2005-06 2006-07 2007-08 2008-090

20

40

60

80

100

120

140

119

103 106

122

96

Avg. collection period (Days)

Avg. collection period (Days)

Years

Ratio

Interpretation:


Net assets turnover=Net salesNet assets


From the graph it shows that average collection period of the firm has been decreased

compared to previous year (2007-2008) and also to the base year (2004-2005) which implies

that time taken for converting receivables into cash has been reduced which shows efficient

credit management of the firm.

3. Assets Turnover Ratios

Assets are used to generate sales. Therefore, a firm should manage its assets efficiently to

maximize sales. The relationship between sales and assets is called assets turnover. Several

assets turnover ratios can be calculated:

Net assets turnover: The net assets turnover should be interpreted cautiously. The

net assets in the denominator of the ratio include fixed assets net of depreciation.

Thus old assets with lower book (depreciation) values may create a misleading

impression of high turnover without any improvements in sales. Since net assets

equal capital employed, hence this ratio is called as capital employed turnover.

Net assets= Net fixed assets + Net current assets.




Years Net sales Net assets Net assets turnover

2004-05 2007.23 1188.67 1.69

2005-06 1623.38 1266.67 1.28

2006-07 2127.91 1489.81 1.43

2007-08 2685.92 1647.44 1.63

2008-09 3057.02 2127.05 1.44

Graph: 4.11

2004-05 2005-06 2006-07 2007-08 2008-090

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.81.69

1.281.43

1.63

1.44

Net assets turnover

Net assets turnover

Years

Ratio

Interpretation:

From the above graph it is evident that net assets turnover ratio has been decreased

compared to previous year (2007-2008) and also in base year (2004-2005) which indicates


Total assets turnover= Net salesTotal assets


net assets are not properly being utilized to improve the sales of the firm. It shows

management is not efficient to maximize its sales.

Total assets turnover: This ratio shows the firm’s ability in generating sales from

all financial resources committed to total assets.

Total assets= Net fixed assets + Current assets.


Years Net sales Total assets Total assets turnover2004-05 2007.23 1447.96 1.392005-06 1623.38 1569.65 1.032006-07 2127.91 1828.5 1.162007-08 2685.92 2014.69 1.332008-09 3057.02 2525.57 1.21

Graph: 4.12

2004-05 2005-06 2006-07 2007-08 2008-090

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.39

1.031.16

1.331.21

Total assets turnover

Total assets turnover

Years

Ratio

Interpretation:


Fixed assets turnover=Net sales

Net fixed assets


It is evident from the graph shows that total assets turnover ratio has been decreased as

compared to previous year (2007-2008) and also to the base year (2004-2005) which

indicates that management is not so effectively utilized total assets of the firm.

Fixed and current assets turnover: The firm may wish to know its efficiency of

utilizing fixed assets and current assets separately.


Years Net sales Net fixed assets Fixed assets turnover2004-05 2007.23 212.66 9.442005-06 1623.38 197.03 8.242006-07 2127.91 170.55 12.482007-08 2685.92 152.3 17.642008-09 3057.02 150.58 20.30

Graph: 4.13

2004-05 2005-06 2006-07 2007-08 2008-090

5

10

15

20

25

9.448.24

12.48

17.64

20.30

Fixed assets turnover

Fixed assets turnover

Years

Ratio

Interpretation:


Current assets turnover=Net sales

Current assets


It is evident from the graph which shows that fixed assets turnover ratio has been increased

YoY which shows that management of the firm has efficiently utilized the fixed assets of the

firm which has resulted in the increase in the net sales of the firm.


Years Net sales Current assets Current assets turnover2004-05 2007.23 1457.6 1.382005-06 1623.38 1465.31 1.112006-07 2127.91 1552.9 1.372007-08 2685.92 2209.66 1.222008-09 3057.02 2333.34 1.31

Graph: 4.14

2004-05 2005-06 2006-07 2007-08 2008-090

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.38

1.11

1.37

1.221.31

Current assets turnover

Current assets turnover

Years

Ratio

Interpretation:

It is evident from the graph which shows that the current asset turnover ratio has been

increased as compared to previous year (2007-2008) which indicates that management is


Net current assets turnover= Net current assetsNet sales


efficiently utilized the current assets of the firm which has resulted in the increase in the net

sales of the firm.

Net current assets turnover: A firm may also like to relate net current assets to

sales. It is calculated as follows:


Years Net sales Net current assets Net current assets turnover2004-05 2007.23 975.41 2.062005-06 1623.38 1069.11 1.522006-07 2127.91 1318.89 1.612007-08 2685.92 1458.68 1.842008-09 3057.02 1945.35 1.57

Graph: 4.15

2004-05 2005-06 2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

2.06

1.521.61

1.84

1.57

Net current assets turnover

Net current assets turnover

Years

Ratio

Interpretation:

It is evident from the graph which shows that net current assets turnover ratio has been

decreased as compared to previous year (2007-08) and also with the base year (2004-05)

which shows that net current assets of the firm not efficiently utilized by the firm.



d. PROFITABILITY RATIOS

A company should earn profits to survive and grow over a long period of time. Profits are

essential, but it would be wrong to assume that every action initiated by management of a

company should be aimed at maximizing profits, irrespective of concerns for customers,

employees, suppliers or social consequences. Except such infrequent cases, it is a fact that

sufficient profits must be earned to sustain the operations of the business to be able to obtain

the funds from investors for expansion and growth and to contribute towards the social

overheads for the welfare of society. Profit is the difference between revenues and expenses

over period of time. Profit is the ultimate output of a company and it will have no future if it

fails to make sufficient profits.

The profitability ratios are calculated to measure the operating efficiency of the company.

Besides the management of the company, creditors and owners are also interested in the

profitability of the company. Creditors want to get interest and repayment of principal

regularly. Owners want to get a required rate of return on their investment. This is possible

only when company earns enough profits.

Generally, two major types of profitability ratios are calculated:

a. Profitability in relation to sales

b. Profitability in relation to investment

a. Profitability in relation to sales

Gross profit margin: The gross profit margin reflects the efficiency with which

management produces each unit of product. This ratio indicates the average spread between

the cost of goods sold and the sales revenue. When we subtract the gross profit margin from

100 per cent, we obtain the ratio of cost of goods sold to sales. Both these ratios show profits

relative to sales after the deduction of production costs and indicate the relation between


Gross profit margin= Gross profitNet sales × 100


production costs and selling price. A high gross profit margin relative to industry average

implies that the firm is able to produce at relatively lower cost. It is calculated as follows:

Gross profit= sales – Cost of goods sold.

COGS= Opening stock + Purchases – Closing stock.


Years Net Sales COGS Gross profitGross profit

margin(in percentage)

2004-05 2007.23 658.89 1348.34 67.172005-06 1623.38 915.76 707.62 43.582006-07 2127.91 1164.05 963.86 45.302007-08 2685.92 1725.13 960.79 35.772008-09 3057.02 1654.67 1402.35 45.87

Graph: 4.16

2004-05 2005-06 2006-07 2007-08 2008-090

10

20

30

40

50

60

70

80

67.17

43.58 45.30

35.77

45.87

Gross profit margin

Gross profit margin

Years

Percentage

Interpretation:

It is evident from the graph which shows that GP margin of the firm has been increased as

compared to previous year (2007-08) which indicates that firm trying to reduce the cost of


Net profit margin= Profit after taxNet sales × 100


production by increasing the net profit margin which shows management effectiveness in

controlling cost by minimizing it.

Net profit margin: Indicates management’s efficiency in manufacturing, administering and

selling the products. This ratio is the overall measure of firm’s ability to turn each rupee

sales into net profit. If the net margin is in adequate, the firm will fail to achieve satisfactory

return on shareholders’ funds. This ratio indicates the firm’s capacity to withstand adverse

economic conditions. A firm with high net margin ratio would be in an advantageous

position to survive in the face of falling selling prices, rising costs of production or declining

demand for the product. It is calculated as follows:


Years Profit after tax Net sales Net profit margin(in percentage)

2004-05 464.63 2007.23 23.152005-06 391.8 1623.38 24.132006-07 544.95 2127.91 25.612007-08 487.36 2685.92 18.142008-09 806.26 3057.02 26.37

Graph: 4.17

2004-05 2005-06 2006-07 2007-08 2008-090

5

10

15

20

25

30

23.15 24.1325.61

18.14

26.37

Net profit margin

Net profit margin

Years

Percentage

Interpretation: It is evident from the graph which shows the net profit margin of the firm has been increased

as compared to previous year (2007-08) and also with the base year (2004-05) which implies


Profit margin= EBITNet sales × 100


that ability of the management to meet the operating expenses and also leads to increase

return to the shareholders and the firm ability to withstand adverse economic conditions.

The profit after tax (PAT) figure excludes interest on borrowing. Interest is tax deductable

and therefore, a firm pays more interest pays less tax. Thus conventional measure of net

profit margin is affected by the firm’s financing policy. For true comparison of the operating

performance of firms, we must ignore the effect of the financial leverage; the measure of

profit must ignore interest and its tax effect. Taxes are not controllable by a firm and also

one may not know the marginal corporate tax rate while analyzing the published data.

Therefore, the margin ratio may be calculated on before tax basis, as follows:

EBIT= Earnings Before Interest and Taxes




Years EBIT Net Sales Profit margin(in percentage)

2004-05 466.58 2007.23 23.242005-06 401.68 1623.38 24.742006-07 550.48 2127.91 25.872007-08 464.45 2685.92 17.292008-09 1255.1 3057.02 41.06

Graph: 4.18

2004-05 2005-06 2006-07 2007-08 2008-090

5

10

15

20

25

30

35

40

45

23.24 24.74 25.87

17.29

41.06

Profit margin

Profit margin

Years

Percentage

Interpretation:

It is evident from the graph which shows that profit margin of the firm has been increased as

compared previous year (2007-08) and also to the base year (2004-05) which shows that

profit of the firm has been increased since it indicates efficient working management.


Operating expense ratio= Operating expensesNet sales × 100


Expenses Ratio:

Operating expense ratio: This ratio explains the changes in the profit margin (EBIT to sales) ratio. A higher operating expenses ratio is unfavorable since it will leave a small amount of operating income to meet interest, dividends, etc.

Operating expenses= COGS + Selling Exps. + General & Adm. Exps.


Years COGS Other Op. Exps.

Op. Exps. Net Sales

Op. Exps. Ratio

(in percentage)

2004-05 658.89 207.47 866.36 2007.23 43.162005-06 915.76 177.69 1093.45 1623.38 67.362006-07 1164.05 218.62 1382.67 2127.91 64.982007-08 1725.13 313.54 2038.67 2685.92 75.902008-09 1654.67 299.2 1953.87 3057.02 63.91

Graph: 4.19

2004-05 2005-06 2006-07 2007-08 2008-090

10

20

30

40

50

60

70

80

43.16

67.36 64.98

75.90

63.91

Op. Exps. Ratio

Op. Exps. Ratio

Years

Percentage

Interpretation:


COGS ratio= COGSNet sales × 100


It is evident from the graph which shows that operating expense ratio has been decreased as

compared to previous year (2008-09) which indicate ability of the management towards

controlling the cost of production and also firm has managed to increase the return to the

shareholders.

Cost of goods sold ratio: As COGS contributed directly/indirectly profit margin to the

organization. COGS indicates profit earned during the period.


Years COGS Net Sales COGS ratio(in percentage)

2004-05 658.89 2007.23 32.822005-06 915.76 1623.38 56.412006-07 1164.05 2127.91 54.702007-08 1725.13 2685.92 64.222008-09 1654.67 3057.02 54.13

Graph: 4.20

2004-05 2005-06 2006-07 2007-08 2008-090

10

20

30

40

50

60

70

32.82

56.41 54.70

64.22

54.13

COGS ratio

COGS ratio

Years

Percentage

Interpretation:


Return on assets ROA= Net profit after taxTotal assets

Return on capital employed ROCE= EBITTotal capital employed


It is evident from the graph that shows COGS of the firm has been decreased as compared to

the previous year which shows that gross profit margin of the firm has been improved which

indicate management efficiency towards controlling the cost of production.

b. Profitability in relation to investment

Return on Investment (ROI)

The term investment may refer to total assets or net assets. The funds employed in net assets

are known as capital employed.

ROA & ROCE: The conventional approach of calculating ROI is to divide PAT by

investment. Investment represents pool of funds supplied by shareholders and

lenders, while PAT represents residue income of shareholders, therefore it is

conceptually unsound to use PAT in calculation of ROI and also PAT is affected by

capital structure. It is therefore more appropriate to use one of the following

measures of ROI for comparing the operating efficiency of the firm.

Total assets= Net fixed assets + Current assets.

OR




Years PAT NFA Current assets

Total assets ROA

2004-05 464.63 212.66 1457.6 1670.26 0.282005-06 391.8 197.03 1465.31 1662.34 0.242006-07 544.95 170.55 1552.9 1723.45 0.322007-08 487.36 152.3 2209.66 2361.96 0.212008-09 806.26 150.58 2333.34 2483.92 0.32

Graph: 4.21

2004-05 2005-06 2006-07 2007-08 2008-090

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.28

0.24

0.32

0.21

0.32

ROA

ROA

Years

Ratio

Interpretation:

It is evident from the graph which shows that ROA has been increased as compared to the

previous year (2007-08) and also to the base year (2004-05) which indicates that the

operating efficiency of the firm is good.


ROE = Profit after taxNet worth


ROE (Return on equity): Common or ordinary shareholders are entitled to residual

profits. Thus net profits after taxes represent their return. A return on shareholders’

equity is calculated to see the profitability of owners’ investment. ROE indicates

how well the firm has used the resources of owners. It is calculated as follows:

Net worth= Share capital + Reserves & surplus


Years PAT Net worth ROE2004-05 464.63 1188.32 0.392005-06 391.8 1262.74 0.312006-07 544.95 1488.35 0.372007-08 487.36 1647.09 0.292008-09 806.26 2126.7 0.38

Graph: 4.22

2004-05 2005-06 2006-07 2007-08 2008-090

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.450.39

0.31

0.37

0.29

0.38

ROE

ROE

Years

Ratio

Interpretation:


EPS= Profit after taxNumber of shares outstanding


It is evident from the graph which shows that Return on equity has been increased as

compared to the previous year (2007-08) which shows that firm has efficiently utilized the

resources of the owners properly which shows in the graph there is subsequent increase in

the ROE of the firm.

Earnings per share (EPS)

One such measure of measuring the profitability of the shareholders’ investment is to

calculate the earnings per share. EPS calculations made over years indicate whether or not

the firm’s earnings power on per-share basis has changed over that period. The EPS of the

company should be compared with the industry average and EPS of other firms. EPS simply

shows the profitability of the firm on a per-share basis; it does not reflect how much is paid

as dividend and how much is retained in the business. It is calculated as follows:




Years PAT No. of shares o/s EPS2004-05 464.63 34.9 13.312005-06 391.8 34.9 11.222006-07 544.95 34.9 15.612007-08 487.36 34.9 13.962008-09 806.26 34.9 23.10

Graph: 4.23

2004-05 2005-06 2006-07 2007-08 2008-090

5

10

15

20

25

13.3111.22

15.6113.96

23.10

EPS

EPS

Years

Ratio

Interpretation:

It is evident from the graph which shows that EPS of the firm has been increased as

compared to the previous year (2007-08) and also to the base year (2004-05) which indicates

that profitability of the firm on per share basis has been increased.


DPS= Total Dividend (cash dividend) to eq.shareholdersNumber of shares outstanding


Dividend per share (DPS)

The net profits after taxes belong to shareholders. But the income, which they really receive,

is the amount of earnings distributed as cash dividends. Therefore, a large number of present

and potential investors may be interested in DPS, rather than EPS. DPS is calculated as

follows:


Years Proposed Div. Interim Div. Total Div. No. of shares o/s

DPS

2004-05 139.6 69.8 209.4 34.9 62005-06 174.5 104.7 279.2 34.9 82006-07 0 279.2 279.2 34.9 82007-08 139.6 139.6 279.2 34.9 82008-09 139.6 139.6 279.2 34.9 8

Graph: 4.24

2004-05 2005-06 2006-07 2007-08 2008-090123456789

6

8 8 8 8

DPS

DPS

Years

Ratio

Interpretation:


DPSEPSDP ratio =


It is evident from the graph which shows that DPS of the firm has been remain constant from (2005-06) to (2008-09) which indicates that no change in the DPS ratio, shows that decision of dividend earning remains constant for equity shareholders.

Dividend-Payout ratio

It shows inter relationship between DPS to EPS. It indicates the company’s overall

performance and contribution made to shareholders.

This ratio is calculated as follows:


Years DPS EPS DP ratio2004-05 6 13.3131805 0.452005-06 8 11.226361 0.712006-07 8 15.6146132 0.512007-08 8 13.9644699 0.572008-09 8 23.1020057 0.35

Graph: 4.25

2004-05 2005-06 2006-07 2007-08 2008-090

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.45

0.71

0.510.57

0.35

DP ratio

DP ratio

Years

Ratio

Interpretation:

It is evident from the graph which shows that Dividend payout ratio has been decreased as

compared to the previous year (2007-08) and also to the base year (2004-05) which shows



that company wants to retain more amount of funds after paying dividends to shareholders

i.e. out of Rs 1 firm wants to retain 66 paisa for the firm and 34 paisa pay out to the equity

shareholders which will increase the Reserves and Surplus.

Findings

Company’s liquidity position is too high. It indicates over-capitalization and under

trading i.e. current ratio is 6.01 times as against standard 2.00 times and quick ratio is

4.12 times as against standard 1.00 times.

Company’s ability to meet all operating expenses is very strong and it is most

acceptable.

As compared to total net assets, holding working capital is very high i.e. during

2008-09 it is just Re 0.92 working capital for every Re 1.00 net assets.

Inventory turnover ratio is below standard ratio of 8.00 times, i.e. 4.11 times during

2008-2009. It indicates company clear its stock for four times a year. It shows high

cost for holding and maintaining inventories.

Company’s credit collection period is quiet healthy as compared to previous year.

I.e. during 2007-08 it was 122 days, 2008-09 it is 96 days.

Gross profit margin is very strong as cost of goods sold is 54.13% and GP is 45.87%

during 2008-09.

Profit after tax is also very steady and increasing in trend.

EPS of the company is very attractive, as it shows Rs. 23.10 per equity share in

2008-09 as against Rs. 13.94 per Eq. share in 2007-08.



Company should make sincere and continuous efforts to maintain appropriate

liquidity level, so as to make it fair-capitalization.

Company must not maintain/idle cash over actual requirements.

As net WC ratio is very high, hence company must adopt strict procedure to control

this kind of variations.

Inventory turnover ratio must increase at least to 8 times, by decreasing cost of

holding inventory.

Yet company needs to make effective receivables system by revising existing credit

policy and credit discount.

Company must maintain same rate of GP in future also. It needs continuous study

and control over cost, demand and supply.



General Conclusion

Company’s overall financial performance is quite healthy and sound.

Company is having strong ability to meet all kinds of contingencies.

Management of receivable and credit is also made in the light of future changes.

Company runs under “management of objectives” (MBO) theory but not

“Management by Exceptions” (MBE).

Most of the financial results are not static but fluctuating in nature.

Specific Conclusion

Profitability ratio of the company during 2008-09 is quiet high and healthy. (It

includes GP margin, NP margin, ROI etc.)

Turnover ratios are quite lower than standard/idle ratios. Therefore, company must

evaluate causes for low turnover ratios.

Company is working within its limited parameters and in the light of future expected

changes.

Last but not the least, companies financial and non-financial performances are up to

the mark and it is having strong financial support to face any kind of recessions.


Documents

Ratio Analysis at Micro Finish