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A Project report on
Study of Inventory Control System and Trend Analysis in Mangalam Cement
Conducted At
(A unit of B.K. Birla group of companies)
Submitted in partial fulfillment for the degree of
Master Of Business Administration (2004-2006)
Guided by: Submitted by: Mr.Sumit Sharma Shabbar Hussain (Dy. Manager) (M.B.A Part-II)
Submitted To
VISHWAKARMA INSTITUTE OF MANAGEMENT, PUNE (Affiliated to Pune University, Approved by AICTE)
TABLE OF CONTENT
S.NO PERTICULARS
1. Introduction to cement industry
2. Introduction to Mangalam Cement ltd
a. Company Profile
b. Objective and Quality Policy
c. Corporate philosophy
d. TPM Policy
3. Introduction to finance department
a. Structure of finance department
4. Research Methodology
5. Project Work
6. Evaluating financial position by using ratio analysis
a. Ratio analysis a tool kit
b. Type of ratios
c. Application of ratio analysis technique
7. Conclusion
8. Suggestion
9. Bibliography
PREFERACE
Summer training has been accepted as a integral part of the Master Of Business
Administration (M.B.A) as its objective is to let the students themselves familiar with the
working environment in an organization, deal with at least some of the problem or aspects
practically and tackle them or at least understand and analyze them. This of course paves a
road for the where they have to lead later.
Summer training also enables the student to train themselves in applied knowledge
over the theoretical learning. I feel privileged for having undergone my summer training at
MANGALAM CEMENT LTD. The training in this particular organization has enriched
my knowledge regarding cement industry.
The project assigned to me was Inventory Planning and Control and
Trend Analysis .
ACKNOWLEDGEMENT
It is a great pleasure and privilege for me to present this report of summer training at
Mangalam Cement Ltd , in partial fulfillment for the award of MBA, degree by PUNE
UNIVERSITY,
I would like to express my gratitude to Mr. Sumit Sharma (Dy. Manager) and Mr.
N.K. Maheshwari (Personnel head), Mangalam Cement Ltd. For their valuable guidance
and encouragement given me to undertake this project.
I am also committed to thanks to staff members of Mangalam Cement ltd. whose
valuable and appropriate direction, in all respect was very helpful in preparing the report.
I specially thank Mr.S.K Vaze, Professor VIM Pune for his valuable and
appropriate guidance and direction
(SHABBAR HUSSAIN)
Introduction to Cement Industry
Cement industry is not of recent origin. It is one of the major and oldest manufacturing
industries in the Indian economy. Cement industry showed its presence from early 1900 s
Jam agar Gujarat) got the credit for setting up first cement plant in 1914. It is an indigenous
industry, with the country well endowed with the raw material, manpower, machinery,
equipment and technology.
It is a vital Industry assumes crucial role in economic growth and development of the
country. It is a basic as well as consumer industry. It is an infrastructure development of a
country.
Cement is a product of mass consumption. It can define as a substance which can join
or unite two pieces two together to from a unit mass. India stood cement producing country
in the world. The installed capacity is 104 million tones and production is nearly 79 million
tones. This is the significant achievement as in 1980 it was just 26 million tones. More ever
the pr capital consumption in 1997 was 85 kg. As compared to that of 80 kg. In 1990. It is
expected that in the first decade of 21st century, the should 140 million tones.
Of cement per annum, with per capital consumption to the tones of 120 kgs. To satisfy
the requirement of cement, we are having adequate coal lime reserve. Apart from the lime
reserve, we are also having world class managerial experts and technical staff for efficient
and economical operation of cement factory and offices. We are now in a position to play a
dominant role in global production. We had already registered our presence in world maker
by occupying the 4th position. We are just behind China, Japan and USA in terms of
production.
The table will show the production and market share of few countries
S no Country Cement Production % share
1 CHINA 389.2 28.00
2 JAPAN 94.4 7.00
3 USA 69.5 4.60
4 INDIA 33.2 3.50
5 RUSSIA 48.5 3.50
6 ITALY 21.2 2.40
7 OTHER 686.5 49.50
It was after independence that the need for self reliance is felt. At that time, cement was in a
short supply. The government was forced to import huge quantity of cement to satisfy the
domestic demand. Realizing the fact that import is against the national interest, Govt took
steps to decontrol the production. The first initiative in this direction was taken in 1982 and
it was shown the good growth rate when the industry was deli censed with effect from 1991.
Presently cement industry was facing hard time of following reasons.
a. Supply in excess of demand
b.Presence of large number of competitors
c. Competition result in price war between companies
However the company is expecting a boom time in future. Reason behind such an
expectation.
a. It is hoped that the per capital, consumption, which is 85 kg. As compared to outside
work of 200 kg, will increase.
b.The economy of the country is growing steadily. To support the economic growth,
infrastructure development is needed .besides; population increase will put
enormous strain on the rail and road network, power sectors housing constructions.
Post facilities and other areas. These factors will increases demand for cement. With
the GDP growth rates of 7% in the country during the ninth plan. Cement industry is
likely to grow at above 9 % to 10% annually.
COMPANY PROFILE
Mangalam cement was promoted in the year 1978 by famed house of shri B.K. Birla the
most eminent and illustrious industrialist of the country. It is a professionally managed
and well established cement manufacturing company enjoying the confidence of the
consumer because of its superior product and excellent customer service.
Mangalam cement plant was situated in Morak 65km from Kota. Its commercial
production was started in 1982, with total capacity of 1200 MT/day.
The company has commissioned in 1924 its state art new cement plant with German
technology for producing 7 lacks tones per annum at its exiting site at Morak, dist. Kota
in Rajasthan under the name of Neer Shree Cement.
Rupp Polysins, Germany and their counterpart Krupp industries India ltd. Have joined
hands with Mangalam Cement Ltd. To produce BIRLA UTTAM Premium 43 and 53
grade Portland cement and PPC using ultra modern technology.
Its Unique Feature Are As Follows:-
Vibrating screen:
Commencing with a 500 TPH crusher with latest vibrated screen to ensure that only very
clean limestone goes in the process of manufacturing cement.
Stacker reclaimer:-
To perfectly homogenize the main raw materials i.e. Limestone
X-Ray Analyzer:
For quick and accurate analysis of all the raw material, clincker and cement
Computerized Central: for stable and efficient operation.
Roller Mills: Latest roller mills for coal/ Raw material grinding and roller press for clincker
grinds to ensure uniform particle size of cement for greater strength.
Electronic Packaging: for consistent result and prompt delivery. The company is obtaining
the from its own mines located near the plant. The mine field is spread over 10 sq km. A
part from this, it is also obtaining the high quality limestone, from Chittorgarh, Nagpur etc.
Brief Information about Mangalam
Location : Morak, Disst. Kota
Register Office : Aditya Nagar, Morak-326517
Disst. Kota (Raj)
Head Office : 9/1 R.N Mukherjee Road,
Kolcutta- 700 001
Year of incorporation : Mangalam 1978
Near Shree 1992
Commercial production : Mangalam 1978
Near Shree 1994
Total project cost : Rs.500 Cr.
Total Capacity : Mangalam 1lac MT/year
Manpower : Directly employed:
300 Staff, 700 Workers
Brand name : Birla Uttam
Product manufactured : OPC 43 grade. OPC 53 grade
PPC MPA 53
OBJECTIVES OF MANGALAM CEMENT LTD
To make continues effort to sustain and improve the quality and productivity levels
and attain consistent result.
To promote the culture for acquiring knowledge and skill to adapt to the new
technology development.
To encourage team work for finding solution to be problem of quality and
productivity. and there implementation leading to enhanced commitment.
Excellence in all spheres of management through census, consultation, system
perfection, delegation, decentralization and human resource development for
knowledge integration and skill development.
QUALITY POLICY
We pledge to produce and deliver
Quality clinker and cement
To the satisfaction of our customers
By following a quality management system
FINANCE DEPARTMENT
Finance department of Mangalam cement is well organized with all the staff well qualified
and experienced to handle day-to day affairs. It is concerned with the preparation of
financial statements. The books of accounts are properly maintained and updated. Enabling
the timely preparation of financial statement. There is the proper coordination between the
staff.
Financial statement:
Financial statement is generally prepared and presented annually. They are of use to
prospective investors, creditors and even management. Ratio analysis is a powerful tool of
financial analysis to measure accurately the financial health and stability of organization to
make the profits. Financial statement includes profit and loss and balance sheet.
Taxes
In Mangalam Cement there are two type of taxes.
1. Direct taxes
2. Indirect taxes
Direct taxes
Direct tax is beard by Mangalam, which pay direct tax by corporate tax section at its head
office. Direct tax includes-
1. Income tax 2. Corporate tax
Indirect tax:
There are three type of indirect tax:
Royalty-anything below the surface of the earth belong to government and
that is why Mangalam has to pay a tax of royalty o govt. For the mining of
Lime Stone
Sales tax: Sales tax is the last tax charge on the product
Excise duty. It is the charge of manufactured product i.e. cement
Structure Of Finance Department
Joint President finance (Mr.R.C.Gupta)
Deputy Manager, finance (V.G. Haircut)
Assistant Officer Finance
(Mr. Joshi)
Steno Grapher
Senior Assistant (Mr. Suresh Gupta)
Junior Officer Finance (Mr.R.C. Purohit)
INTRODUCTION
What is cement ?
Cement is a mixture of limestone. Clay, silica and gypsum. It is a fine powder which when
mixed with water sets to a hard mass as result of the hydration of the constituent
compounds. It is a most commonly used construction material.
Different Type Of Cement:
There are different varieties of cement based on different composition according to the
specific end uses namely ordinary Portland cement. Portland Pozolona Cement, Portland
Blast Furnaces Slag cement. White cement and specialized cement. The basic difference lies
in the percentage of clinker produces.
Ordinary Portland Cement (OPC)
OPC, popularly known as grey cement. Has 95% of clinker and 5% of gypsum and other
material. It accounts for 70% of the total consumption. White cement is a variation of OPC
and it s used for decorative purpose like rendering of walls, flooring etc
Portland Pozolona Cement (PPC)
PPC has 80% clinker. 15% pozolona and 5% gypsum and accounts for 18% of total
consumption. Pozolona has siliceous and aluminous that do not posses cementing properties
but develop these properties in the presence of water. It is cheaply manufacture because it
uses fly ash/ burnt clay coal waste as the main ingredient. It has a lower heat of hydration
which helps in preventing cracks where large volumes are being cast.
Portland blast furnace slag cement (PBFSC)
PBFSC consist of 45% of Clinker. 50% blast Furnace slag and 5% of gypsum and account
for 10% of total cement consumed. It has a heat of hydration even lower than PPC and is
generally used in the construction of dams and similar massive construction.
White Cement
Basically it is OPC: clinker using fuel oil (instead of coal) and with iron oxide content
below0.4% to ensure witness. Special cooling techniques are used. It is used to enhance
aesthetic value, in tiles and for flooring. White cement is much more expensive than grey
cement.
Specialized cement :
Oil Well Cement: Is made from clinker with special additives to prevent any porosity.
Rapid Hardening Portland cement: It is similar to OPC, except that it is ground much
finer, so that casting. The compressible strength increases rapidly.
Major Cement Industries in Rajasthan
1. ACC Limited Lakheri, Bundi (1924)
2. Ambuja Cement Limited , Beawar
3. Aditya Cement works , Chittorgarh
4. Birla Cement Works, Chittorgarh
5. Binani Cement Limited , Sirohi
6. J.K. Cement , Nimbahera
7. J.K. Udyog Limited , Udaipur
8. J.K. Corp. Limited, Sirohi (Laxmi Cement)
9. Mangalam Cement (Neershree), Morak-Kota
10. Shree Cement , Beawar
11. Shri Ram Cement, Kota.
Our Corporate Vision The 21st Century Atlas
Atlas, the Titan Collective strength of the group:
These symbols as a whole represent the collective strength of the group. The astute and dynamic management that binds the group together and gives it leadership and direction is personified in the figure of Atlas. A pillar of strength, Atlas also stands
for steadfastness, consistency and reliability.
The sun Enlightenment and growth:
The head of the Atlas also represents the Sun. in this context the sun represents for a luminous and powerful presence that a group should has over the industrial arena on
one hand and resourcefulness in term of finance, technology skill and intellectual leadership on the other.
Earth Segment - Diversified Activities:
Each latitude around the Titan represents the different industries or activities that constitute the group. They individually draw and give the strength to the central
figure of Atlas.
The Globe- Global Vision:
The groups global vision and harmonious blend of all the elements, sum up as well conceptualized conglomerate
Strong Foundation Sustained growth Proven Leadership
SWOT ANALYSIS
STRENGHTS:
It is best quality of cement manufacturer.
Latest technology adopted
Neeer Shree latest technology has given the best output.
It is attributed by healthy work environment and management system
Goodwill of B.K. Birla group is also strength of Mangalam Cement limited
Good and healthy work environment is also maintained
Superior strength of its products
Optimum setting time of the cement
Good reputation among dealer s/ Retailers & end users.
Transportation cost is very less
Electronic packaging system for prompt delivery
It is self for raw material
Sales depots and offices for prompt delivery and immediate attention for customer
grievances
It has its own mines for raw material near the plant
Weakness:-
Worsening power situation facing companies to invest huge amounts in captive power
plants
Inadequacy of finance for the modernization.
Increasing freight prices
Infrastructure bottlenecks like transportation for the raw material. fuel supply and
cement
Continues losses may effects its goodwill and market value of its shares
Not have good marketing network in Rajasthan except Kota division.
Awareness of customer `is not good about Birla Uttam.
Opportunities:-
Its superior qualities attract brand loyal and quality conscious customers.
Expected infrastructure growth will add to the current demand.
Cost can reduce by establishing own power plant.
Company can reduce cost. If they have own transportation.
By increasing investments in promotional activities.
If company may increase its distribution/network of the area it may grow fast.
Threats:-
Large companies are coming up. This may put pressure on realization in central and
north area.
Cement industry is facing price price war. It may compel Mangalam cement limit to
reduce its cement price.
The low growth rate of cement market may affect the company sales.
High cost of transportation may affect the sales.
Excessive losses incurred by company can have bad impression in the mind of
customer.
VISION
We the member of Mangalam Cement Pariwar with persistent pledge to produce excellent
quality cement as per the needs of our customers and to achieve optimum utilization of our
resources by.
Striving for zero accidents. Zero quality complaints and zero down time.
Enhancing individual competencies through continuous human resources
development aids and over all excellence through people
Total motivated involvement through participated management activities with high
degree of professionalism.
Creating clean, conductive, green, healthy and safe environment.
Continues effort for total quality management and quality way of life
Endless effort of total productivity and maintenance by creating the highly
performing work culture and inculcating the feeling that. this is my machine, I
maintain it
Fulfillment of the social responsibility of the organization by continues effort for
rural development and upliftment of the surrounding areas
QUALITY POLICY
We pledge to produce and deliver quality Clinker and Cement to the satisfaction of our
customer by a quality management system.
TOTAL PRODUCTIVE MAINTENANCE
Total productive maintenance or TPM of each and everything and every activity in the
industry, with special care on the profitability with the involvement of all the employees.
MANGALAM TPM POLICY
We at Mangalam Cement ltd. Aims for zero failure , zero defect zero accident and creating
pollution free environment through introduction of TPM with participation of personal at all
level in the unit. This will contribute to the improvement of overall equipment efficiency
and awareness of all workmen and deduction in the cost.
FIVE MAIN BASIC CONCEPT OF TPM
1. Building up a profitable business.
2. Culture preventive policy
3. all workers participation
4. Genba Genbustsu (actual scene, actual thing and reality)
5. Automation and unmanned plant operation
MANGALAM COMITTMENT TO TPM
To double our productivity.
To reduce the cost of production by 30%
To reduce the cost of complaint by 75%
To reduce inventory by 50%
To involve employees by applying their suggestion and increase in their
morale that is one suggestion per employee per year to be implemented.
ACHIVEMENTS
190214 MT tons cement in Delhi in 1990-91 the
Won prestigious company of the year award for cement industry high-test
among all manufacturer during the year 1988-1989
DSJ corporate excellence award in year 1991-1992
ISO9002 certificate from BIS.
Research Methodology
Management Information system:-
A management information system is a continuing and interacting structure of
people, equipment and procedure to gather, sort, analyze, evaluate, and distribute pertinent
timely and accurate information for use by management decision makers. To improve their
planning execution and control.
The four subsystem of the company s management information system are:-
1. Internal Report System
2. Intelligence System
3. Research System
4. Analysis
Through research an executive can get a synopsis of the current scenario which improves
his information base for making sound decision affecting future operations of the enterprise.
Research has its helpful hand in the area of financial planning and control.
Financial research involves the process of systematic collection, compilation, analyses and
interpretation of relevant data for financial planning and control. Research tools are applied
effectively for studies involving financial position of the enterprise and for studying the
Investment planning and the techniques used for the controlling the activities and major
function of the company.
Research system:-
For undertaking my project, titled, Study of Inventory Control System and Trend Analysis
in Mangalam Cement research has been conducted in four stages.
Stage I:-Defining the Problem and Research Objective
a. What is the Process of inventory planning and control to classify the different type
of inventory to determine the type and degree of control required for each.
b. Trend analysis which involves the comparisons of the Ratios of the firm over the
period of time which indicate the direction of change in the performance,-
improvement, deteriorations and consistency
Research Objective:-
Material control refers to the managerial functions which are directed to ensure that the required quality and quantity of material is required at proper time with the minimum amount of capital.
Inventory control is not the wider term than material control. It seems to be a part of material control.
The first step in inventory planning/control process is the classification of different type of inventory to determine the type and degree of control required for each. The ABC system is a widely used classification technique for the purpose. On the basis of the cost involved, the various items are classified into three categories.
1. A consisting of items with the largest investment
Defining the problem and
research objective
Developing and collecting the information
Analyzing the information
Presenting the findings
2. C with relatively low investment, but fairly large number of items
3. B witch stands mid-way between category A and C
Category A requires more rigorous control, C requires minimum attention, and B deserves less attention than A. but more than C.
Order quantity problem:-
Economic order quantity(EOQ)is the second key inventory problem relates to determination of the size/quantity of the inventory which would be acquired that would minimize the total cost associated with inventory management.EOQ refers to the level of inventory at which the total cost of inventory comprising
1. Order/ setup cost. 2. Carrying cost is the minimum.
Since data related to the Order/ setup cost and Carrying cost is confidential with the Mangalam for that we have not calculated the EOQ.
Order point problem:-
Yet another problem relating to the inventory planning and control is: when should the order to procure to inventory to be placed? It is that inventory level which is equal to the consumption during the lead time/procurement time.
Reorder Level = Safety stock + (daily usages * lead time)
Safety stock:
Safety stocks are the minimum additional inventory which serves as a safety margin to meet an unanticipated increase in usages. This increase may be due to an unusually high demand or because of uncontrollable late receipt of incoming inventory.
RATIO ANALYSIS
Ratio analysis is a widely used tool of financial analysis. It 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 his historical performance and current financial position can be determined.
Three types of comparisons are involved in the ratio analysis which reflects the relationship between the related variables:-
1. Trend analysis.
2. inter-firm comparison
3. Comparison with standards/industry averages.
In this project work the Trend Analysis of the of the Ratios of the financial result of last year with the Ratios of the same previous year is calculated.
This analysis will figure out the performance of the Mangalam Cement in this year in comparison with the last year.
Ratios are broadly classified into four groups
1. liquidity Ratios
2. Capital Structure or Leverage Ratios
3. Profitability Ratios
4. Activity/Turnover/Efficiency Ratios
Stage II: - Developing and Collecting the Information:-
In these stage efforts was directed towards developing and collecting the data. This stage
calls for determining the type of information needed and the most efficient way to gather the
information. A researcher can get the secondary data or primary or both.
This project work strongly depends on the collection of the secondary information or data.
The data is being collected by visiting the different departments of the Mangalam on the
basis of the questionnaire prepared and also the data relating to the ratios are being taken
from the financial results published in news paper or on website of Mangalam Cement Ltd.
www.manglamcement.com
Questionnaire:-
Ques1 What are the raw material used in the production of the cement and segregate it into
the direct or indirect material?
Ques2 What techniques are used for inventory planning and control
ABC analysis
Economic Order Quantity (EOQ)
Perpetual inventory system
Setting of Various Level.
Ques3 What is the production of cement and Clinker in past three months from April to
June?
Ques4 What are the dispatches of cement in the past three months?
Ques5 What is the consumption of raw material for cement production in three months?
According to this questionnaire the effort has been made for collecting the information from
the various department of Mangalam Cement ltd.
Like inventory control techniques from stores department and consumption from the
production department and all other information from the sales, accounts and finance
departments. These all information collected is secondary and used for analytical purpose
The data related to the valuation of inventory is confidential with Mangalam Cement for
that the analysis of the valuation technique cannot be done in this project.
Stage III:-Analyzing the Information:-
The next step in the research process is to extract pertinent information and findings from
data. We have attempted to apply some of the advance statistical techniques and decision
models in the analytical research system in the hope of discovering additional information.
For analysis purpose we have compare the techniques used by Mangalam in inventory
planning with other techniques and have advised the more suitable technique which can also
be implemented.
Stage IV: - Presenting the findings:-
The next step in this process is to find out the useful and fruitful information from the data
or the analytical work done. The researcher should present major findings that are relevant
to the major financial decision facing management. The study is useful when it reduces the
amount of uncertainty facing the financial executive.
Study of Inventory Control System and Trend Analysis in Mangalam Cement
Synopsis:-
1. Technique used for inventory planning and control
2. What is the stock of raw material they maintain during the production?
3. Trend analysis of the financial position of the firm in comparison with the last year
position.
PROJECT WORK
QUES1:-What is the Process of inventory planning and control to classify the different type
of inventory to determine the type and degree of control required for each?
The inventory can be referred as the sum total of the value of the raw material, fuels and
lubricant, spare parts maintenance consumable. Semi-processed material and finished goods
stock at any given point of time. The average business has about 30% of its working capital
tied up in inventories.
The technique used by Mangalam Cement with regards to the process of inventory planning
and control to classify different type of inventory is ABC analysis.
The concept of ABC analysis we have discussed in Research methodology.
Below given table summarizes how Mangalam Cement treats the various category item
according to there consumption value.
1. Every category has fast and slow moving items.
a. Fast moving inventory is one which is used three or more times in a year
b. Slow moving inventory is one which is used less than 3 times a year
2. Category of inventory according to its valuation.
a. A consist of category where the valuation of inventory is 20000 and above
b. B consists of inventory where the valuation of inventory is between 19999
and 10000.
c. C consists of inventory where the valuation of inventory is less than 10000.
Here is the data of the ABC analysis of the Mangalam Cement for the month of April and
May.
31 May 2005
Rs.in lacks
31 April 2005
Rs.in lacks A B
C
Fast Slow Fast Slow Fast Slow
units Rs. units Rs. units Rs. units Rs. units Rs. units Rs.
534 318.17 361 241.86 212 11.95 203 30.34 1168 15.44 5374 380.02
We can see the above data that the company has engaged Rs 968.78 lacks in the month of May and Rs 997.78 lacks in the month of April. So almost 10 crore Rs. has been blocked in from the companies working capital and from that the amount on slow moving items, which is used less than three times in a year, is 647.69 lacks in May and Rs 652.22 lacks in the month of April so almost 7 crore of Rs has been blocked around slow moving items.
Limitation of ABC analysis:-
1. ABC analysis, in order to be fully effective, should be carried out with standardization and codification.
A B C
Fast Slow Fast Slow Fast Slow
units Rs. units Rs. units Rs. units Rs. units Rs. units Rs.
528 293.43 376 234 225 11.76 229 30.56 1198 15.9 5458 383.13
2. ABC analysis is based on gradation of different items, this gradation may include a
lot of subjective elements.
3. The result of ABC analysis should be reviewed periodically and updated.
COMPARISON WITH ANATHER TECHNIQUES
Economic Order Quantity (EOQ):-
The correct quantity to buy is the quantity at which the cost of acquisition equals the cost of possession. This is technically known as the economic order quantity or the reorder quantity.EOQ helps to achieve the lowest unit cost.
The concept of economic order quantity is primarily based on the consideration of the acquisition cost and possession cost, which has been discus below.
Acquisition Cost:-
In order of determining the EOQ the cost of acquiring the inventory should be known like cost of placing the order, cost of stocking material and the quantity discounts available. For the item being purchased.
By knowing these we can find out the extra cost of servicing an order. It is the incremental cost rather than the average cost per order that is important here, because, within limits the fixed cost of these departments continues regardless of the number of order placed
Possession cost :-
The cost is also referred as the inventory carrying cost. This cost is mostly represented by the items like the rent of storage, cost of insurance, opportunity cost of tying up with large working capital with inventory.
Limitation of EOQ
1. The calculation of EOQ is based on the accuracy of the information of the ordering cost and the carrying cost on which they are based. 2. The concept is based on the assumption that the usage of material is both predictable and evenly distributed. 3. Acquisition cost and the carrying cost is not easy to be calculated.
The data related with the acquisition cost and the possession cost is not available with the company. So it should not be feasible for the company to calculate the acquisition cost and the possession cost as a result it is difficult to calculate the EOQ.
Setting up of various levels
Another important technique of inventory planning and control is the setting the various levels for the inventory control. Various levels should kept in mined. Maximum stock level: - Maximum stock level represents the upper limit beyond which the quantity of any item is not normally allowed to rise. The main object of establishing this limit is to ensure that unnecessary working capital is not blocked in the stores.
Maximum Level = Reordering Level + Reordering - Minimum Quantity Consumption
Mangalam should also maintain the maximum stock level so that its working capital is not engaged in for the slow moving items. Investment for the slow moving items is around 7 crore which is a big amount to invest.
Minimum stock level: - This is the lower limit below which the stock of any item should not allow to fall. This is also known as safety or buffer stock. The main object behind this limit is to protect against the stock out of a particular item.
Minimum stock level = Reorder Level (Normal Usages * Average Per period Delivery time)
Reorder level: - reorder level is fixed between the minimum and maximum stock level. When the purchase of the material reaches at its point the company should initiate for the purchase of the material. The reorder level is slightly more than the minimum stock level to guard against Normal Usages and Abnormal delay in supply.
Reorder-level=Maximum Consumption * Maximum period required During the period for delivery
Danger level: - this is generally fixed below the minimum stock level. Normal stock should not be below the minimum level. If it reaches the danger level at any point of time, urgent action for replenishment of stock must be taken to prevent the stock out. Note: - Due to the lack of data available with the company we cannot able to calculate these levels because the data with the company are confidential.
Evaluating Financial Position By
Using Ratio Analysis
Introduction:-
1.1 Importance of financial statement analysis in an organization.
In our money oriented economy, Finance may be defined as provision of money at the time it is needed. To every one responsible for provision of funds, it is problem of securing importance to so adjust his resources as to provide for a regular outflow of expenditure in face of an irregular inflow of income.
1. The profit and loss account (Income Statement).
2. The balance sheet
In companies, these are the two statements that have been prescribed and there contents have been also been laid down by law in most countries including India.
There has been increasing emphasis on
(a) Giving information to the shareholder in such a manner as to enable them to grasp it easily.
(b) Giving much more information e.g. funds flow statement, again with a view to facilitating easy understanding and to place a year results in perspective through comparison with post year results.
(c) The directors report being quite comprehensive to cover the factors that have been operating and are likely to operate in the near future as regards to the various functions of production, marketing, finance, labour, government policies, environment in general.
Financial statements are being made increasingly used by parties like Bank, Governments, Institutions, and Financial Analysis etc.
The statement should be sufficiently informative so as to serve as wide an curia as possible.
The financial statement is prepared by accountants based on the activities that take place in production and non-production wings in a factory. The accounts convert activities in monetary terms to help to know the position and performance of the enterprise..
1.2 Uses of Financial Statement Analysis.
The main uses of accounting statements for; -
Executives:- To formulate policies.
Bankers:- To establish basis for Granting Loans.
Institutions \ Auditors:- To extend Credit facility to business.
Investors :- To assess the prospects of the business and to know whether they can get a good return on their investments
Accountants:- To study the statement for comparative purposes.
Financial Ration Analysis The Tool Kit
3.1 Ration Analysis :-
Ratio Analysis is the process of determining and interpreting numerical relationship based on financial statement. It is defined as the systematic use of ratio to interpret the financial statement so that the strength and weakness of a firm as well as its historical performance and current financial conditions can be determined.
A ratio is a statically yard stick that provides a measure of the relationship between variables and figures.
The relationship between variables or figures can be expressed in fractions.
For Ex. Quotient of current assets by current Liabilities.
Percentages;-
For Rs. Cost of goods sold as percentage of sales.
Proportion of numbers:-
For Ex. Double the Turnover in last one year.
These alternative methods establish a relationship among variables for the purposes of financial analysis referred to as Ration Analysis.
Ration are simple to calculate and easy to understand, Financial analysis employee these fools to explain financial statements and performance of a company.
3.2 Objectives of Ratio Analysis:-
The main objective of Ration Analysis technique is to reveal the relationship in more meaningful way so as to enable us to draw conclusion from them. The ration analysis thus as a quantitative tool helps the Analyst to draw answers to questions such as
Are the Net Profits Adequate
Are the assets being use efficiently is the firm solvent
Can the firm meet its current obligation and so on
Thus the Ratio Analysis help the
Owner or Investors: For estimating earning capacity.
Creditors: Concerned primarily with liquidity and ability to pay interest and redeem loan within specified period.
Financial Executive: - Interested in evaluating analytical tool that will measure costs efficiency, liquidity and profitability, with a view to making intelligent decisions.
Basis of comparison;-
Ratios are relative figures reflecting the relationship between variables. This enables the analysis to draw conclusion regarding financial operations
The use of ratio as a tool of financial analysis involves their comparison, for a single ratio, like absolute figures, fails to reveal the true position. For ex, P /E ratio (price /earning ratio for particular scrip) should be compared over a period of time to get a true picture of company performance.
Thus comparisons with related facts is the basis of ratio analysis s
In ratio analysis, four types of comparisons are involved.
1 Trend Ratio
2 Inter firm comparisons
3 Comparisons of items within a single year s financial statement of a firm.
4 Comparisons with standard or plans
Trend ratios:-
Comparison of firm over time i.e. present ratios are compared with past ratios. Trend ratios indicate the direction of change in performance improvement deterioration or consistency over the years.
Inter firm comparisons:-
Comparisons of the ratios of a firm with those of other in the same line of business or with the industry reflect its performances in relations to its competitor. The other type of comparisons may relate to comparisons of items with in a single year financial statement of a firm and comparisons with standard or plans.
Types of Ratio
Types of Ratios: -
1. Liquidity ratios 2. Leverage Ratios 3. Turnover Ratios 4. Profitability Ratios 5 Valuation Ratios.
4.1 Liquidity Ratio:
-
Liquidity refers of the ability of a firm to meet its obligation in the short run, usually one year or when the become duration for payment.
A proper balance between liquidly and profitability is required for efficient Financial Management.
Liquidity ratios are based on the relationship between current assets the sources for meeting short-term obligation and current liabilities.
The ratios, which indicate the liquidity of a firm, are: -
1. Current Ratio. 2. Acid test Ratio. 3. Fund-Flow Ratio. 4. Net working capital.
4.1.1 Current Ratio
The current Ratio is the ratio of current liabilities it is calculated as: -
Current assets Current ratio = ________________
Current Liabilities
The current assets include cash and Bank Balance, Marketable securities, Bills, Receivable, Inventories, Loan sand advances, Advances Payment and prepaid expenses.
The current liabilities include creditors, bills payable bank overdraft short-term loans, outstanding expense & income tax payable, unclaimed divided and proposed dividend.
Te current ratio measures the ability of the firm to meet its current liabilities. The current assets get converted into cash into the operational cycle of the firm and provide the fund needed to pay current liabilities. The higher the ratio, to ward off.
4.1.2 Acid Test Ratio: -
The acid test ratio is the ratio between quick current assets and current liabilities.
It is calculated as
Quick assets Acid Test Ratio =
Current liabilities
The term quick asset refers to current assets that can be converted into cash immediately.
Quick assets current assets (inventories + prepaid expenses)
It is based on current asset, which are highly liquid. This also called quick ratio. Generally, an acid test ration of 1:1 considered satisfactory as a firm can easily meet all current claims
4.1.3 Bank to working capital Gap Ratio: -
This ratio establishes a relationship between short-term bank borrowing and working capital gap
It is calculated as
Short term bank Borrowing Bank Finance to working Gap Ratio =
Working capital gap
Working capital equal to current assets less current liabilities other than bank borrowing.
The tondon committee reports suggest this ratio should not exceed 0.75 even under most liberal scheme of financing.
4.1.4 Fund flow ratio: -
A dynamic analysis of liquidity call for examination of cash inflow and cash outflow in addition to the size of the liquid asset balances at a given point of time.
The current ratio and acid test ratio are static in nature.
Quick assets Internal measure =
Average daily flow of operational cash expenditure
4.2 leverage or capital structure ratios: -
These ratios refer to the use of debt finance long term solvency of the firm can be examined by using leverage or capital ratios.
The leverage ratio or capital structure ratio can be defined as the financial ratios which throw light on the long term solvency of a firm reflected in its ability to assure the long term creditors with regards to.
1. Periodic payment of interest during the period of loan. 2. Repayment of Principe on maturity or in predetermined installments at due dates.
Leverage ratio help in assessing the risk arising from the use debt capital. Two type of ration that is commonly used to analyze financial ration are.
1. Structural ratios. 2. Coverage ratios
4.2.1 Structural ratios: -
Structural ratios are based on the proportion of debt and equality in the financial structure of the firm, two important coverage ratios are interest converge ratios and fixed charge coverage ratio 5:3:1 Structural ratios
Debt equity ratio
This ratio reflects the relative claims of creditors and share holders against the assets of the firm, debt equity ratios establishment relation ship between borrowed funds and owner capital to measure the long term financial solvency of the firm. The ratio indicates the relative proportions of debt and equity in financing the assets of the firm.
It is calculated as follows
Debt
Debt equity ratio =
Equity
The debts side consist of all liabilities (that include short term and long term liabilities) of the firm. The equity side consists of new worth (plus) preference capital.
The lower the debt equity ratio the higher in the degree of protection enjoyed by the creditors.
The debt equity ratio defined by the controller of capital issue, debt is defined as long term debt plus preference capital which is redeemable before 12 years and equity is defined as paid up equity capital plus preference capital which is redeemable after 12 years.
The general norm for this ratio is 2:1. on case of capital intensive industries as norms of 4:1 is used for fertilizer and cement industry and a norms of 6:1 is used for shipping units.
Debt asset ratio:-
The debit asset ratio establishes a relationship between borrowed funds and the assets of firm.
It is calculated as:
Debt Debt Asset Ratio = -------------------------------
Asset
Debt includes all liabilities. Short term as well as long term and the assets include the total of all the assets (the balance sheet total)
This ratio is related to the debt equity as follow.
Debt -----------------------
Equity
Debt asset ratio = -- ------------------------------------------ 1+ Debt ---------- Equity
4.2.2 Coverage Ratios.
These ratios are computed from the information available in the profit and loss account. The coverage ratios measure the relation ship between what is normally available from operations of the firm and the claims of the outsider.
The various coverage ratios are
1. Interest coverage ratio 2. Fixed charges average ratio 3. Dividend coverage ratio
Interest coverage Ratio
This ratio is also know as Time interested Earned ratio This ratio measures the debt servicing of capacity of a firm in so far as fixed interest on long term loan is concerned. Interest coverage ratio determined by dividing the operating profits or earning before interest and taxes by fixed interest charges on loans
It is calculated as
Earning Before Interest &Taxes (EBIT)
Interest coverage Ratio = -------------------------------------------- Debt Interest
The EBIT is used in the numerator of this ratio because the ability of a firm to pay interest is not affected by tax payment as interest on debt fund in a tax deductible expenses.
The ratio apparently measure the margin of safety the firm enjoys with the respect to its interest burden.
A high interest coverage ratio implies that the firm can easily meet its interest burden even if EBIT decline.
A low interest coverage ratio results in financial embarrassment when EBIT declines. This ratio is not appropriate measures of interest coverage because the source of interest payment is cash flow before interest and taxes.
In this view, we may use the modified interest coverage ratio. EBIT +depreciation
Coverage ratio Modified Interest Coverage Ratio = ----------------------------- Debt Interest
Fixed charges coverage Ratio:
This ratio helps in measuring the debt servicing ability adequately because it considers both interest and the principal repayment obligations. It is calculated as:
EBIT +depreciation Fixed charges coverage Ratio: - ---------------------------------------
Repayment of Loan
If the denominator of this ratio only the repayment of loan is adjusted upwards for the tax factor because the loan repayment amount un like interest, is not tax deductible.
This ratio may be amplified to include other fixed charges like lease payment and preference dividend.
Thus,
Earning After Tax (EST) Dividend Coverage Ratio = -------------------------------------------------
Preference Dividend
This ratio like the interest coverage ratio reveals the safety margin available to the preference share holder. The higher the coverage the better it is from their point of view.
4.3 Turnover Ratio
Turnover Ratios are also referred to as Activity ratio or Assets. Management ratios. This ratio establishes relationship between the level of activity represented by sales or cost of good sold and levels of various assets.
The important turnover ratios are: -
Inventory Turnover ratio
Average collection period ratio
Receivable Turnover ratios
Fixed Asset Turnover ratios
Debtors Turnover ratios
Creditors Turnover ratios
Inventory Turnover ratio: -
This Ratio is computed by dividing net sales by inventory
Thus,
Net sales Inventory Turnover ratio = ----------------
Inventory
The numerator of this ratio is the net sales for the year and the denominator is the Inventory balance at the end of the year.
This ratio is deemed to reflect the efficient the management of inventories and vice versa. This statement need not be always true. A low level of inventory may cause a higher inventory turnover ratio.
It might be argued that the inventory turnover ratio may be
Cost of goods sold Inventory Turnover ratio = _________________________
Avg. inventory
Cost of Goods Sold = Sales -Gross Profit
Average Inventory = Average of (Opening +Closing Stock)
This ratio also indicates how fast inventory is sold
A high ratio is good from the viewpoint of liquidity and vice versa. Average collection period.
Receivable Average collection period. = ------------------------------
Average sales per day
The receivable figure of the ratio generally represents the receivables balance at the end of the year. When sales the highly seasonal, the average of receivable figure at the and of each month or each season can be used and when sales growth is high the average of the beginning and ending receivables balances are to be used. An average sale per day in the denominator is simply the sales of the year divided by 365.
The average collection period should be compared with firm credit terms to judge the efficiency of receivables management.
As a rule of thumb, the average collection period should be not exceeding 1½ times the credit period.
Receivable Turnover ratios
The Receivable Turnover ratio measures the relationship between credit sales during a particular accounting period and the average receivables (sundry debtors) outstanding during the period.
It is expressed in two forms Net Sale
Receivable Turnover ratios = ----------------- Receivables
Average collection period after calculating daily sales (sales day) and dividing accounts receivable by sales per day.
The receivables figures used is the receivables figures at the end of the period . The receivables turnover ratio and the average collection period are a follows.
360 Average Collection Period = ------------------------------
Receivables turnover Ratio
The shorter the average collection period the higher the receivables turnover ratio.
Net Sales Fixed Assets Turnover Ratio = ----------------------
Fixed Assets
The net sales indicate the net sales for the period and fixed assets are the balance in the net fixed assets account at the end of the year.
This ratio measures the efficiency with which fixed assets are employed. If the fixed assets turnover ratio is high it indicates the there is a high degree of efficiency in assets utilization.
Similarly if the ratio is low if reflects in efficient use of assets.
It is important to note that when the fixed assets of the firm are old and substantially depreciated, the fixed turnover ratio tens to be high because the denominator ratio is very low.
Total assets turnover ratio:-
The main objectives of the total assets turnover ratio are to measure how efficiency assets are employed. It is a kind to the out capital ratio in economic analysis.
Net Sales Fixed Assets Turnover Ratio = ----------------------
Fixed Assets
Total assets simply the balance sheet total at the end of year.
If the total assets turnover ratio is high it implies that there is high degree of efficiency in assets utilization and vice-versa.
Debtor s turnover ratio: -
The debtor s turnover ratio is determined by dividing the net credit sales by average debtors outstanding during the year.
Therefore
Debtors turnover ratio = Net credit sales
Average debtors
Here net sales consist of gross credit less returns. Average debtors are simply average of debtors at the beginning and at end of the year.
The main function of this ratio is to measure how rapidly debts are collected.
A high ratio is indicative of shorter time lag between credit sales and cash collection/
A low ratio indicates that debts are not being collected rapidly.
Creditor turnover ratio:-
Creditor turnover ratio is a rate between net purchase and average amount of creditor out standing during the year.
Creditors turnover ratio = net credit purchases
Average of creditors
Net credit purchase = gross credit
Purchase less returns to supplier
Average creditors = Average of creditors outstanding at the Beginning and at the end of the year.
A low turnover ratio reflects liberal terms granted by suppliers, while a high turnover ratio shown that accounts are settled rapidly.
The creditor s turnover ratio is an important tool as a firm can reduce its requirement of current assets by relying on suppliers creditors.
The intent to which trade creditors are willing to wait for payment can be approximated by the creditors turnover ratio.
4.4 Profitability Ratios:-
Profitability is measured of efficiency and the search for its provides an incentive to achieve efficiency.
Profitability the final results of business operations mainly the owners and management are in the financial soundness of the firm.
The management of the firm is eager to measure its acting efficient. Similarly the owners invest their funds with the expectation of reasonable return. Thus it all depends on the profit for the ensure operating efficiency to the management and ensure reasonable return to the owners.
1. Profit margin ratio (gross and net)
2. Expenses ration or operating ratio profitability ratios in relation to investment are.
3. Return on investment
4. Return on assets
5. Return on equity
6. Return on capital employed.
7. Net income to total assets ratio.
4.4.1 Profit margin ratio:-
Profit margin ratio measures the relationship between profit and sales; there are two profit margin ratios
Gross margin ratio
Net margin ratio
Gross profit margin ratio: -
Gross profit can be defined as the difference between net sales and cost of goods sold. Gross margin profit ratio is also known as gross margin gross profit margin ratio is calculated by dividing gross profit by sales.
Gross profit margin ratio = gross profit
Net sales
Net sales-cost of goods sold.
The gross profit margin ration shows the margin left after meeting manufacturing cost. The ratio also measures.
The efficiency of production as well as pricing. The Gross profit to sales is a sign of good management s as it implies that the cost of production of the firm is relatively low. A high ratio may also imply of a higher sales rise without a corresponding increase in the cost of goods sold.
Whereas a low gross profit margin in a danger signals, warranting a careful and detailed analysis of the factors responsible for the same.
The main contributing factors responsible for low ratio maybe high cost of production as will as inefficient utilization of fixed as well as current assets a low selling price resulting from severe competition, inferior quality. Lock of demand etc.
Net Profit Margin Ratio:
The Net Profit Margin Ration determines the between Net profit and sales of business firm. This relationship is also known as net margin. This ratio shows the earning left for shareholder (both equity and preference) as percentage of Net sales. Net Margin Ratio measures the over all efficiency of production, Administration selling, Financing and pricing.
Thus,
Net Profit
Net profit Margin Ratio: - ------------------- Net Sales
A high Net profit Margin indicates adequate return to the owners as will as enable a firm to withstand adverse economic conditions when selling price is decanting, cost of production is rising and demand for product is falling.
A low Net Profit Margin has opposite implications. A firm with low net profit margin can earn a high rate of return on investment it has a higher inventory turnover.
Jointly considering gross and net profit margin provides a valuable understanding of the cost and profit structure of the firm and enables the analyst to identity the source of business efficiency of inefficiency.
4.4.2 Profitable Ratios in regard to Investment
The profitable ratios can also be computed by relating the profits of a firm to its investments. These ratios are popularly termed return on investment (ROI).
There are three different concept of investment in vogue assets. Capital employed and Shareholders Equity.
Based on each of the above there are three board categories of ROI s
They are
Return on Assets
Return on Capital Employed
Return on Shareholders Equity.
Return on Assets: -
Return on Assets ration measure the profitability ratio in terms of relationship between Net Profit and Assets. There are various approaches possible to define net profit and Assets.
The concept of Net profit may be
Net Profit after Taxes.
Net Profit after Taxes plus Interest
Net Profit after Taxes plus Interest minus Tax Saving.
Assets may be variants of return on assets are
Net Profit after Taxes Return on Assets = ---------------------------------
Average Total Assets
The Return on Assets based ration would be an under estimate as the interest paid to the creditor is excluded from the Net Profit.
Net Profit after Taxes +Interest Return on Assets = ---------------------------------
Average Fixed Assets
Net Profit after Taxes +Interest
Return on Assets = --------------------------------- Average Tangible Assets
The above may not provide correct results for inter firm comparison. As a measure of operating performance, the above equations should be substituted by the following: -
Net Profit after Taxes +Interest Tax Advantage on Interest Return on Assets = --------------------------------------------------------------------
Average Total \ Fixed Tangible Assets
This equation correctly reports about the operating efficiency of firms if they all are equity financed. The main purpose of return on assets is to measure the profitability of the total funds Investment of a firm.
Return on Capital Employed (ROCE):-
Return on capital employed is same as return on assets except for the difference that the profits are related to the capital employed. In this ratio the term capital employed refers to the long term funds supplied by the creditors and owners of the firms.
The return on capital employed can be computed \calculated in two ways firstly it is equal to non-current liabilities (Long Term Liabilities) plus owner s equity. Secondly it is equivalent to net working capital plus fixed assets.
Net profit After Taxes +Interest ROCE = -----------------------------------------------------
Average Total Capital Employed
Net profit After Taxes +Interest Tax Advantage on Interest ROCE = -----------------------------------------------------
Average Total Capital Employed
Net profit After Taxes +Interest ROCE = -----------------------------------------------------
Average Total Capital Employed-Average Intangible Assets
In the ratio is compared with similar firms, with industry average and over time would provide sufficient insight into how efficiently the long term funds of owners and creditors are being used.
The higher the ratio, the more efficient in used of the capital employed.
Return on Equity:-
The return on equity the profitability of equity funds invested in the firm. Return on equity is regarded as very important measures because it reflects the productivity of the ownership (or risk capital employed in the firm)
Thus
Equity Earning Return on Equity = -------------------
Net Worth Equity earning of this ratio is equal to profit after tax less preference divided
Net worth includes all contribution made by equity shareholder (paid up capital + reserve & surplus)
This ratio is called as return on net worth.
This ratio is influenced by several factors return on investment, debt equity ratio average cost of Debt. Funds and tax rate.
Return on investment:-
The return on investment is a measure of business performance, which is not affected by interest charges and tax payments.
Thus
Return on investment = EBIT
Total assets
Numerator represent pre-earning belonging to all sources of finance, total assets represent total financing.
This ratio focuses on operation performance and obstructs away the effect of financial structure and tax rate. It is eminently suited for inter firm comparisons. This ratio is internally consistent.
Net income to total assets ratio: -
The main purpose of net income to total assets ratio is measure how efficiency the capital is employed.
Net income of total assets ratio = Net income / Earning Per Profit Share
The market price per share may be the price prevailing on a certain day or preferably the average price over a period of time.
The earning per share (EPS) is simply profit after tax divided by number of outstanding equity shares. The PE ratio is a summary measures & which primarily reflects the following factors growth, prospects, risk characteristics, share holders, orientation, corporate image and degree of liquidity.
Yield: -
Yield: - Divided + price change
Initial price
This may be split into two parts
Divided Price change +
Initial yield divided yield Initial price capital gain/loss yield
Generally companies with low growth prospects after a high divided yield and low capital gains yield, companies with superior growth prospects after a low divided yield and high capital gains yield.
Market value to book value ratio: -
Market value per share Market value to book value ratio =
Book value per share
This ratio reflects the contribution of a firm to the net wealth of the society. If the market value to book value ratio is equal to 1. All the three ratios return on equity, earnings per share (which is inverse to PE ratio) and total yield are equal
If the ratio is say 2 the firm has created a net wealth of one rupee for every rupees invested in it. If the ratio is equal to 1 it implies that the firm has neither contribution nor detracted from the net wealth of the society.
Application of Ratio
Analysis Techniques
Application Of Ratio Analysis Technique
6.1 Liquidity ratio
1. Current ratio = Current assets Current liabilities
2. Acid test ratio = Quick assets Current liabilities
Financial year Current ratio Acid test ratio 1994-95 1.68 1.11 1995-96 1.57 1.32 1997-98 1.45 1.22 1998-99 1.13 1.08 1999-00 1.17 1.06 2000-01 1.09 1.03 2001-02 1.22 1.18 2002-03 3.21 2.19 2003-04 4.69 2.39 2004-05 5.12 2.77
Current ratio
1.68 1.57 1.45 1.13 1.17 1.09 1.22
3.21
4.695.12
0
1
2
3
4
5
6
1994-95
1995-96
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
Financial Year
Acid test ratio
1.111.32 1.22 1.08 1.06 1.03
1.18
2.192.39
2.77
0
0.5
1
1.5
2
2.5
3
1994-95
1995-96
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
Financial Year
6.2 Leverage ratio
1. Debt Equity Ratio = Debt/Equity
2. Debt Asset Ratio = Debt/Assets
3. Total debt to total capital employed = Total Debt/ TotalCapital Employeed
4. Interest coverage ratio = EBIT + Dep/Debt Interest
Debt Assets Ratio
0.41 0.43 0.43 0.42 0.43 0.47 0.490.41
0.520.62
00.10.20.30.40.50.60.7
1995
-96
1996
.97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
Debt Equity Ratio
1.211.161.171.151.151.171.251.271.38
2.12
0
0.5
1
1.5
2
2.5
1995
-96
1997
-98
1999
-00
2001
-02
2003
-04
Total Debt to total capital employed
00.10.20.30.40.50.60.70.80.9
1995
-96
1996
.97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
Financial year Debt Equity Ratio Debt Assets Ratio Total Debt to total capital employed
1995-96 1.21 0.41 0.63 1996.97 1.16 0.43 0.60 1997-98 1.17 0.43 0.60 1998-99 1.15 0.42 0.61 1999-00 1.15 0.43 0.56 2000-01 1.17 0.47 0.61 2001-02 1.25 0.49 0.65 2002-03 1.27 0.41 0.67 2003-04 1.38 0.52 0.68 2004-05 2.12 0.62 0.77
6.3 Turnover Ratio
Net sales 1. Inventory turnover ratio =
Average Inventory
Net Sales 2. Debtors turnover ratio =
Total Debtors
Net Sales 3. Fixed assets turnover ratio =
Fixed assets
Net Sales 4 current assets turnover ratio =
Current assets
Net sales 5. Net Capital employed (Avg.) =
Capital Employed
Financial year
Inventory turnover ratio
Debtors turnover ratio
Fixed asset turnover ratio
Current assets turnover ratio
Net capital employed (AVG)
1995-96 5.88 7.67 1.51 2.42 1.05 1996.97 6.55 7.07 1.57 2.97 1.06 1997-98 7.86 8.55 1.53 3.29 1.03 1998-99 7.50 8.93 1.38 2.71 0.93 1999-00 6.81 9.61 1.36 2.58 1.32 2000-01 5.85 12.06 1.28 3.51 0.97 2001-02 7.31 8.93 1.68 2.71 1.64 2002-03 5.89 11.32 2.33 2.59 1.03 2003-04 6.96 13.22 2.51 3.32 1.56 2004-05 5.76 11.62 1.96 2.61 1.22
Inventory turnover ratio
5.886.55
7.86 7.56.81
5.857.31
5.896.96
5.76
0
2
4
6
8
10
1995
-96
1996
.97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
Debtors turnover ratio
7.67 7.078.55 8.939.61
12.06
8.93
11.3213.22
11.62
02468
101214
1995
-96
1996
.97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
Fixed asset turnover ratio
1.511.571.53 1.381.36 1.281.68
2.33 2.51
1.96
0
0.5
1
1.5
2
2.5
3
1995
-96
1996
.97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
Current assets turnover ratio
2.422.97
3.292.71 2.58
3.51
2.712.59
3.32
2.61
00.5
11.5
22.5
33.5
4
1995
-96
1996
.97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
Net capital employed (AVG)
1.051.061.030.93
1.32
0.97
1.64
1.03
1.56
1.22
0
0.5
1
1.5
2
1995
-96
1997
-98
1999
-00
2001
-02
2003
-04
6.4 Profitability Ratio:
Gross profit 1. Gross profit to sales =
Turnover-Excise
Net profit (PAT) 2. Net Profit to sales =
Net sales
Net profit 3. Net profit on Fixed Assets =
Fixed Assets
Financial year Gross profit to sales
Net profit to sales Net profit on fixed assets
1995-96 8.18 1.39 2.19 1996.97 8.54 1.81 2.63 1997-98 11.99 4.88 7.83 1998-99 11.91 2.43 6.279 1999-00 11.63 2.86 3.36 2000-01 10.12 2.81 4.56 2001-02 7.93 1.98 3.29 2002-03 10.23 2.33 6.89 2003-04 9.66 2.74 6.90 2004-05 7.60 2.41 4.70
Gross profit to sales
8.18 8.54
11.9911.9111.6310.12
7.9310.23 9.66
7.6
02468
101214
1995
-96
1996
.97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
Net profit on f ixed assets
2.192.63
7.836.279
3.364.56
3.29
6.89 6.9
4.7
0
2
4
6
8
10
1995-96
1997-98
1999-00
2001-02
2003-04
Net profit to sales
1.39 1.81
4.88
2.43 2.86 2.811.98 2.33 2.74 2.41
0123456
1995
-96
1996
.97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
6.5 Return on Investments
Net profit (before tax)-Interest 1. Return on total capital employed =
Total capital employed
Net profit after tax 2. Return on net worth =
Net worth
Net Profit (after Tax) 3. Return on Assets =
Total Assets
Financial year Return on total capital employed
Return on net worth
Return on assets
1995-96 12.82 3.65 1.23 1996.97 16.61 5.20 1.90 1997-98 17.75 12.08 4.47 1998-99 14.23 5.68 3.56 1999-00 11.29 11.25 2.29 2000-01 9.63 7.56 3.59 2001-02 10.23 9.25 2.98 2002-03 16.29 11.51 6.89 2003-04 14.26 10.25 3.99 2004-05 8.89 9.37 2.69
12.82
16.6117.75
14.23
11.299.6310.23
16.29
14.26
8.89
0
2
4
6
8
10
12
14
16
18
1995-96 1997-98 1999-00 2001-02 2003-04
Return on total capital employed
3.65
5.2
12.08
5.68
11.25
7.56
9.25
11.5110.25
9.37
0
2
4
6
8
10
12
14
1995-96 1997-98 1999-00 2001-02 2003-04
Financial Year
Return on net worth
1.231.9
4.473.56
2.293.592.98
6.89
3.992.69
0
1
2
3
4
5
6
7
1995-96
1998-99
2001-02
2004-05
Conclusion
CONCLUSION
Conclusion drawn from the study of Inventory control system in Mangalam Cement ltd.
Mangalam Cement has adopted ABC analysis for inventory planning. And from that
we come to know that that company engaged its 10 core in the inventory in stock and from that 7 corers in slow moving items which is been used less than three time a year. We suggest bringing that inventory to some lower amount so that its working capital may get stronger than before.
We suggest that the company should set maximum and minimum level for its inventory so that its investment should become less in the inventor
There is no acquisition cost and the possession cost calculated by the company for that the calculation of economic order quantity (EOQ) is not possible. So it should be difficult for the company to calculate the reordering level for that company has to bear the extra cost other than fixed cost like the ordering charges, transportation charges etc.
Zero level inventory system is also the most efficient way of maintaining the proper inventory but Mangalam Cement cannot able adopt this because it is in the remote area and 60 km away from kota so that it will take time to get the item from there and some important and costly equipments are to be exported. So it is not feasible for the company to adopt zero level inventory system.
In the end I suggest Mangalam Cement that it should set the various levels for its inventory planning like the maximum level, minimum level and danger level. From that the investment in the inventory is being lowered.
Now a day through the advance technology of computers and internet. The work of setting levels for the inventory has been easier through efficient Management Information System (MIS).
The conclusion drawn from the analysis of ratio is the previous chapter is presented in the following section
6.1 Return on Investment
Mangalam Cement ltd return on assets (ROA) return on total capital employed and return on shareholders equity have increased considerably from 1995-96 to 2004-05. Return on assets (ROA) return on total capital employed and return on shareholders equity how increased by about 35% from 1995-96 to 2004-05 indicating an excellent overall performance by the management.
This ROA is comparable to some highly profitable companies like the Colgate Palmolive Ltd. Hindustan Lever Ltd who are active in the consumer product business Rajasthan Spg. Wvg. Mills is into highly specialized industrial products hence their achievement in return on investment should set p example for other to follow: -
6.2 Turnover Ratios
The turnover ratios show fairly good performance by the company. The inventory turnover ratio (approx. 4 times) indicates good inventory management. The average collection period (varies between 50-70 days with an expectation in year 2004-05 indicate a liberal credit contract. It does not border a cash and carry system. The fixed asset turnover ratio indicates a low profitable deployment of fixed assets (approx. 2 times) the capital employed to turnover ratio indicates fair utilization of capital employed.
The average collection period should to exceed1.5 times the credit period companies like Colgate Palmolive has a average collection period of 15 days compared to this Mangalam Cement ltd. should bring its average collection period. The company should concentrate on profitable deployment of fixed assets.
6.3 Liquidity Ratio
The current ratio (approx. 1.5) and quick ratio (approx. 1.3) indicates an effective liquidity management by Mangalam Cement ltd. A high current and quick ratio indicates that the company can meet its current obligation liabilities.
The high liquidity ratios reflect a very strong short term financial structure. Mangalam Cement ltd. should maintain current assets in the form of receivables and cash rather than in inventory so as to meet its current obligation efficiency.
6.6 Profitability Ratio
Mangalam Cement ltd. Gross profit Margin ratio and the net profit margin ratio on an average of is about 35% and 10% respectively. These figures and during the last three financial years are truly remarkable. The gross profit margin ratio and the net profit margin ratio have increased during 1995-96 to 2004-05 in spite to low profit suffered by the company during 1995-96 which indicates that company heavy capital expenditure for expansions of spindles and looms by the company.
It may by noted as Net profit Margin has Been around 15%in the last three financial years reflecting a better earning for the shareholders.
6.7 Leverage Ratio
The high Debt equity, debt assets and debt to total capital ratio indicates a moderate existence of equity and capital employed these ratio indicate that the company has a low geared capital structure Mangalam Cement ltd. is able to maintain an average interest coverage ratio indicating that the firm enjoys the margins of safety with the respect to this interest burden.
The company maintains a modest interest coverage ratio so that it can easily meet its interest burden even if EBIT suffers a decline.
Considering the above ratios for a period of time during 1995-96 and 2004-05, it is clear that Mangalam Cement ltd. has achieved an overall efficiency in production Administration Selling, Financing, Pricing and Tax Management.
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