Texmo Project

A Project Report

on

“FINANCIAL ANALYSIS AND REVIEW”

for

“TEXMO PIPES AND PRODUCTS LIMITED”

Submitted by

MANISH INDRALAL ROCHLANI

Under the guidance of

Prof. SUBODH JOSHI

SUBMITTED TO“UNIVERSITY OF PUNE”

In partial fulfillment of the requirement for the award of degree of MASTERS IN BUSINESS ADMINISTRATION (MBA)

ThroughINSTITUTE OF BUSINESS MANAGEMENT AND

RESEARCHCHINCHWAD (PUNE)

ACKNOWLEGEMENT

I hereby take the opportunity to express my gratitude towards those who have made great contribution in completion of this project work. I feel immense pleasure to thanks to the Chief Financial Officer Mr. Sanjay Dalal, to the Manager Corporate Finance Mr. Pravin Gujrati, Mr. Rishabh Jain the Company Secretary who were kind and helped me in providing necessary information and guidance from time to time. Mr. Sanjay Agrawal the Managing Director who has given me the opportunity to work with Texmo Pipes And Products Limited as project trainee. I am immensely thankful to my internal project guide of Prof. Subodh Joshi who has been a constant source of inspiration, who have keen interest and encouraging guidance, which leads to completion of this project in time, is hard to express in words. I offer my sincere thanks to the whole Corporate Finance Staff who spared their valuable time and was always available for guidance in spite of their busy schedule. I am thankful to Miss. Yamini Shah Human Resource Manager and the entire human resource team for reposing faith and support in the endeavor to carry out the project. In the end, I would like to express my gratitude towards the respondents, who selflessly adjusted their schedules to accommodate me in the scheme of things. This project would not have been successful without their valuable help. I also express my sincere thanks to all those who contributed in bringing this project into its current physical form.

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Executive Summary

Project Title: Financial Statement Analysis and REVIEW

Company Name: TEXMO PIPES AND PRODUCTS LIMITED.

The company started as a partnership firm under the name Shree Mohit Industries on may 13 1999. It was converted in to public limited company under the name TEXMO PIPES AND PRODUCTS Limited on July 3, 2008. To consolidate its operations, the company signed Business Transfer Agreement (BTA) on august 5, 2008 for purchase of specified assets of its three promoter groups entities viz. Shree Balaji Industries, Shree Venkatesh Industries and Shree Padmavati Irrigation Private Limited. The company is engaged into manufacturing wide range of products which can be categorized in to two broad categories viz. PVC pipes and HDPE pipes. PVC are generally categorized under Unplasticized Polyvinyl Chloride pipes (UPVC) by virtue of its features like strength, durability, non corrosive and high impact resistance.

Critical Analysis of Financial Statement and Interpretations on basis of Ratio Analysis is an important tool in the hands of management for analyzing the financial performance of the company. This involves calculation of various ratios based on the information Presented in the financial statements of the company. Based on the requirement of the management financial ratios are calculated.

For this study three year comparisons taken for calculating ratio analysis. Main objective in undertaking this project is to supplement academic knowledge with absolute practical exposure to day to day functions of the organization. During the project followings results were found.

The business environment of the company is reasonably good. The company s track record is always oriented towards profitable growth and with strong fundamentals.

As major portion of working capital is invested in sundry debtors, company has to adopt factoring services so that cash realization will be faster.

Company should take corrective actions to write off or sell off the inventory, which is of no use and occupies unnecessary space.\

Other factory capital deals with the expenditure that is done on assets of less value, building and other direct assets. Capital consumption on this head is in company s own hands hence more importance can be given to this head. The capital should be used effectively with the improvement in manufacturing activity and minimizing cost.

Acquisition of new assets of heavy costs should be done with proper capital budgeting supported by payback period.

The training at TEXMO PIPES AND PRODUCTS Limited involved the day to day working at corporate accounts departments with the senior managers in the company. This project helped to get the deeper understanding of the process of portfolio management in TEXMO PIPES AND PRODUCTS Limited and how decisions are taken to strengthen the financial position.

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Introduction to Topic

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Introduction to Topic

Every financial manager is involved in financial decision making and financial planning in order to take right decision at right time, he should be equipped with sufficient past and present information about the firm and its operations and how it is changing overtime. Much of this information that is used by financial manager to take various decisions and to plan for the future is derived from the financial statements. The project Financial Analysis and Review of Texmo Pipes And Products Limited focuses to analyze the financial statements and to study different ratios over the period of 5 years to determine the financial position of Texmo Pipes And Products Limited, Burhanpur.

Financial analysis involves the use of various financial statements. These statements do several things. First, the balance sheet summarizes the assets, liabilities and owners equity of a business at moment in time, usually the end of a year or a quarter. Next the income statement summarizes the revenues and expenses of the firm over a period of time while balance sheet represents a snapshot of the firm s financial position at a moment in time.

Financial management is planning and controlling of financial resources of a firm with a specific objective. Since, financial management as a separate discipline is of recent origin, it is still in a developing stage. It is very crucial for an organization to manage its funds effectively and efficiently.

Financial management has assumed greater importance today as the financial strategies required to survive in the competitive environment have become very important. In the financial markets also new instruments and concepts are coming and one must say that a finance manager of today is operating in a more complex environment. A study of theories and concepts of financial management has therefore become a part of paramount importance for academics as well as for practitioners but there are many concepts and theories about which controversies exist as no unanimous opinion is reached as yet.

The project, Financial Analysis and Review of Texmo Pipes And Products Limited further aims at discussing and understanding the concepts of financial management of; Texmo Pipes And Products Limited, Burhanpur. the functions expect to be performed by the financial management as well as the objectives of financial managements.

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COMPANY PROFILE

-History

-About Texmo Pipes and Products Ltd.

-Objectives

-Products

-Certifications

-Organizational chart

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History

The company started as a partnership firm under the name of Shree Mohit Industries on May 13, 1999. The constitution of the partnership firm was changed from time to time and in the year 2008 the partners as on date viz. Mr. Sanjay Agrawal, Ms. Rashmidevi Agrawal, Mr. Vijay Prasad Pappu ,Mr. Rajesh Agrawal, Mr. Mohanlal Shah, Mr. Mahmood Khan and Mr. Ananda Nago Umale agreed to convert the business into a Public Ltd Company under the name and style of TEXMO PIPES AND PRODUCT LIMTED under the section 566 of the companies act 1956 a fresh certificate of incorporation and commencement of business was issued on July 3, 2008 and July 28, 2008 respectively by the registrar of companies ,M.P. and Chhattisgarh.

To consolidate the operation the company have signed Business Transfer Agreement (BTA) on August 5,2008 and August 6, 2008 for purchase of specified assets and liabilities of 3 promoter group entities viz. Shree Balaji Industries , Shree Venkatesh and Shree

Padmavati irrigation pvt Ltd.

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About Texmo Pipes and Products ltd :-

Texmo Pipes And Products Limited a public limited company incorporated on 3rd July 2008 by conversion of Shree Mohit Industries which was a fast emerging and spearheading industry an associate of Shree Balaji Industries established since 1988 at Burhanpur (Madhya Pradesh). The Company is equipped with professionally managed team of skilled operators, efficient technocrats and dynamic marketing personnel’s. The Company image has been developed in the market due to its high quality products through process excellence by promoting efficiencies, productivity and professionalism with the result our brand TEXMO has spread in the heart of millions of widespread clientele, Govt., Semi Govt. organizations and private sectors with in the country and abroad.

In the year 1988 first unit has been setup there after developed four more units by forming a Group of Industries in the name Shree Balaji Group of Industries. Now all the units have merged and formed one single entity TEXMO PIPES AND PRODUCTS LIMITED. The production capacity has been increased to 75MT per day and now is being known as a market leader in plastic pipes and fitting. Beside this the company introduced new diversified products like CPVC Pipes, Molded Fittings of PVC and SWR, DWC Pipes, Drip Inline. This has been possible to meet business goals because of superior products, quality consciousness supply cycles and customer satisfaction. The company mission is to provide tangible benefits to all end users at every point of work.

Vision & Mission :-

Vision:-

To become World's Most Comprehensive Manufacturer and Services Provider.To manufacture highest quality products through process excellence.To provide most Comprehensive in house Trainings and Consulting in the areas of, Quality Management , Inspections, Design and Testing Techniques and Defect Prevention.To manage projects with matrices.To provide services not only to meet business and engineering goals, but also to demonstrate significant improvements in Productivity, Quality, Cycle time and

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Customer Satisfaction.To provide lots of value additions to our clients by virtue of our unique features.

Mission:-

To provide competitive advantage to our customers through superior products, services and prices.To meet and exceed customers' expectations of service through timely communications and quality information.To achieve tangible benefits by promoting efficiencies, productivity and professionalism.To Provide competitive prices and genuine products to our clients.To Create a climate for voluntary compliance by building mutual trust and providing guidance to promote international Polymer trade.To keep maximum concern on our clients' interest as our own success will follow.To consider our people, capital and reputation as our most important asset and Our continued success depends upon adherence to these standards.To attach great pride in the professional quality of our work and have an uncompromising determination to achieve excellence in everything we undertake.To stress creativity and imagination in everything we do.Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.To work closely with our customers needs so that we can strive to provide superb quality of pipes.

Future Plans:-

To be a world-class organization -- one that becomes a benchmark for other organizations, its source for new ideas, information, professional development and quality standards.One that impresses its customers the first time and Every time.To attain highest level of business efficiency with integrity and honesty.

Group Companies :- Shree Balaji Industries Shree Padmavati Irrigations Pvt. Ltd. Shree Venkatesh Industries

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OBJECTIVES OF THE COMPANY

To establish, own, run, manage and carry on the business as manufactures, producers, developers, traders, buyers, sellers, exporters, importers, operators, engineers, fabricators, contractors, brokers, assemblers, packers, repackers, jobbers, designers, laminators merchants, resellers, dealers distributers, converters, recyclers and/or in any other capacity in which the business may be carried on all kinds of goods used for the purpose of irrigation, water transportation, sanitary system , drainage system, cable ducting or for many other purpose wherein it can be used conveniently such pipes, host, tubes, sprinklers, polyethylene pipes for sprinkler, irrigation system ,drippers, accessories, fittings HDPE material for moldings an extrusion and all other ancillary and auxiliary materials or derivatives or articles or things which can be made of using PVC polythene LDPE, HDPE, PP, LLDPE, plastic granules, polymers monomers, polypropylene, thermoplastic, foam, adhesive, synthetics resigns, emulsions, fiberglass, PVC compound PVC dry blend, PVC premix and the like by whatever name called or their derivatives/mixtures and to do all incidental acts and things necessary for the attainment of the above objects.

ANCILARY OBJECT:

1.To carry on the business as manufactures of iron steel or other metal pipes, sheets roads and other products of iron or other metals now known or that may hereafter be invented as also to carry on the business of ironmasters, iron founders, steel converters, metal workers, steel makers and to purchase or otherwise acquire set up erect maintain reconstruct, an adopt any or convenience for the purpose of company.

2. To construct build develop, maintain, operate, own and transfer infrastructure facilities including water supply project, irrigation project inland water ways and ports, water treatment systems, solid waste management systems, sanitation and sewerage systems, or any other public facilities of a similar nature; any project for generation and/or distribution of electricity or any other form of power and any project for providing telecommunication services.

3. To manufacturing processing, spinning, weaving, selling, buying, importing exporting, or otherwise to deal in law and high destiny polythene film, sacks, woven sacks, bags HDPE bags, sheeting, laying of flat tubing and or to convert any of the polythene polypropylene HM/HDPE product whether rigid or flexible for packing wrapping and for use as stationery article , publicity and display and for daily domestic or commercial/industrial use.

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Products:-

S.W.R. Pipes Solvent Cement

Elastomeric Pipes PLB HDPE Duct

Rigid PVC Pipes HDPE Pipes

Casing Pipes For Tube Well

HDPE ID Pipes

Conduits Pipes HDPE Sprinkler Pipes

Plumbing Pipes L.D. (Krishi) Pipes

Suction Hose & Gard Pipes

Submersible Column Pipes

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http://www.texmopipe.com/submersible.html

http://www.texmopipe.com/submersible.html

http://www.texmopipe.com/suction_hose.html

http://www.texmopipe.com/suction_hose.html

http://www.texmopipe.com/ld_krishi.html

http://www.texmopipe.com/plumbing_pipes.html

http://www.texmopipe.com/hdpe_sprinker.html

http://www.texmopipe.com/hdpe_sprinker.html

http://www.texmopipe.com/conduits_pipes.html

http://www.texmopipe.com/hdpe_id.html

http://www.texmopipe.com/cassing_pipes.html

http://www.texmopipe.com/cassing_pipes.html

http://www.texmopipe.com/hdpe.html

http://www.texmopipe.com/ridigpvc_pipes.html

http://www.texmopipe.com/plb_hdpe.html

http://www.texmopipe.com/elastromeric_pipes.html

http://www.texmopipe.com/solvent_cement.html

http://www.texmopipe.com/swr_pipes.html

Certifications:-

SSI Registration CertificateNSIC – CertificateBIS Licence For Potable Water Supply i.e. IS - 4985/2000BIS Licence For Tube wells i.e. IS - 12818/1992BIS Licence for PVC Conduits For Electrical Installation i.e. IS - 9537 Part 3/1983BIS Licence For HDPE Pipes i.e. IS - 4984/1988BIS Licence For SWR Pipes i.e. IS - 13592BIS Licence For Sprinkler Pipes (Pat I & II) i.e. IS - 14151

BIS Licence For Suction Hose i.e. IS – 15265BIS Licence For AGRICULTURE SPRINKLER SYSTEMS i.e. IS – 12786B.S.N.L QA Type Approval Certificate For PLB HDPE Pipes As Per Tele Communication Specification Registered With M.T.N.L ISO-Certification 9001-2000Approval Certificate from M.T.N.L., B.S.N.L., V.S.N.L., B.E.S.T., IDEA, RELIANCE.

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CHIEF FINANCIAL OFFICER

MANAGER FINANCE

ACCOUNTSCASH MANAGER

COMPUTERS

BANK INCHARGESALES TAX MANAGER

ASST . TAX MANAGER ASST. BANK INCHARGE

S/W INCHARGEH/W INCHARGE

SENIOUR A/C ASST.

ACCOUNT ASST.ACCOUNT ASST.

ORGANISATION CHART

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INDUSTRY PROFILE

- OVERVIEW- SWOT ANALYSIS

Industry Overview

Indian pipe industry with presence across all categories of pipes viz. steel pipes, cement pipes and polyvinyl chloride (PVC) pipes is among top three manufacturing hubs

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after Japan and Europe. India is also becoming a major export hub to the countries like USA, Europe and Middle East.

Pipes are essential for transporting fluids like oil water etc. across the country .pipe transportation is economical mode of transport. It helps in saving scare natural energy resources and time taken for transportation.

The 2008-09 financial crisis had a limited impact on the Indian pipe industry affecting new oil and gas exploration and production (E&P) projects worldwide due to fall in global commodity prices including crude oil resulting into reduced orders. With the worst of the financial crisis behind us, we remain optimistic regarding the potential demand for the pipe sector. The E&P projects which were earlier stalled or revoked are being given a new lease of life based on the inevitable rise in crude oil prices. Replacement demand from developed nations remains ever so strong while domestic demand from the oil and gas sector is robust. Also, with the pipeline network of India for oil & gas transport being lower at 17,576 kms as on April 2009, (32% penetration level) it represents a huge scope for growth for the pipe industry.

As most of the Indian pipe manufacturers are converters, the industry is highly Raw Material (RM) intensive with the RM cost accounting for more than 70-80% of the total cost for steel and PVC pipe companies. These companies rely heavily on imports and hence many steel pipe companies have backward integration facilities to reduce dependency on imports and price volatility. Freight cost is another key cost component due to higher imports and exports. With the expected short-term increase in commodity prices and range-bound Baltic Dry Index (a barometer for shipping freight rates), pipe companies will be benefited in the coming quarters as customers will try to place advance orders at attractive rates.

Indian companies produce a wide range of steel, cement and plastic pipes which are used in various critical and non-critical applications. Indian steel pipe manufacturing companies have won several certifications and accreditations from major oil & gas companies across the globe in the recent past. With the low-cost and high-quality products supplemented by various international certifications, Indian companies have augmented their export sales over the last three to four years.

CARE Research expects the positive trend in the Indian pipe industry to continue for the next 3-5 years on the back of higher E&P activities due to resurgence in crude oil price, increased efforts by the Government of India (GoI) on infrastructure development for laying pipelines for oil & natural gas transport (e.g. the National Gas Grid project), replacement demand from North America and European countries, water & sewage transport and irrigation facilities. The growth will mainly be driven by steel pipes especially SAW pipes. The order-book position (currently equivalent to total of FY09 sales) of many steel pipe companies is sufficient for the next 9-12 months.

Demand triggers for the growth are:

Private players like Reliance Industries Limited (RIL), Cairn India etc have shown interest in setting up pipe infrastructure for oil & gas distribution. National gas grid

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will also be set up requiring an investment of Rs.210 bn. City gas pipe is currently available in 10 cities and the coverage is expected to

grow to 40 cities in the next five years, entailing an investment of Rs. 250-300 bn. In addition to the above, the replacement demand from the US and European

countries, having a vast pipeline infrastructure, will be huge. The GoI in its efforts to reduce crude imports has formulated the New Exploration

Licensing Policy (NELP) for exploration and production of oil & gas. The GoI has awarded 256 blocks till date and the number is set to increase to 330 by 2010.

For the Eleventh Five Year Plan, the GoI is aiming to add 11 mn hectares of irrigational facilities, entailing an investment of Rs.1,580 bn.

SWOT analysis of Indian Pipe Industry

Strengths Cheapest mode of transport for liquid and gases Globally cost competitive With proper installation, pipes have very long useful life Available in various types and sizes to meet specific end user needs. Indian companies have won accreditation from major oil and gas

companies. Strong order book position for pipe companies.

Opportunities Low pipe line penetration in India compared to developed nations GoI thurst on infrastructure development and water supply Oil and gas transport projects City gas pipelines project Ageing pipelines need replacement Higher export market due to proximity to middle east which account for 14% of global planned projects as per Simdex data.

Weaknesses Working capital intensive industry higher dependency on government

spending and by oil & gas companies Large number of unorganized players in certain type of pipes

Threats Foreign exchange risk due to high import an export Slow down in world economy to reduce demand for oil and gas Adverse change in GoI regulations. RM being a key cost component, the industry is sensitive to fluctuation in

RM prices.

OBJECTIVES

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To make comparative study of financial statements of different years.

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

impact on the financial position of the company.

To identify the financial strengths and weakness of the company

To find out the reasons for unsatisfactory results.

Evaluating company’s performance relating to Financial Statement Analysis.

To analyze the Cash Flow Statement, and know the cash management of the company.

To analyze the working Capital Management, to know how company manages the cash

for day to day requirement, inventory, debtors, creditors etc.

SCOPE OF THE PROJECT

The project is carried out to evaluate the performance of a firm, compare its current ratios with the past ratios and to do the trend analysis, so as to get an indication of the direction of change and reflects whether the firm s financial performance has improved or deteriorated or remained same over time. The analysis is not only done to determine the change, but more importantly to understand why ratios have changed. The change may be affected by changes in the accounting polices without material change in the firm s performance.

The scope of study is limited to the information made available by Texmo Pipes and Products Ltd. that is profit & loss account &balance sheet.

The period selected for study for study is 3 years as follows:

1) March 20082) March 20093) March 2010

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THEORETICAL BACKGROUND

Financial Statement Analysis

Introduction:

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A Financial Statement is a compilation of data, which is logically and consistently organized according to accounting principles. Its purpose is to convey an understanding of some financial aspects of a business firm. It shows a position at a movement in time, as in the case of balance sheet, or reveals a series of activities over a given period of time, as in the case of an income statement. Financial statements are the major means through which firms present their financial situation to stock holders, creditors and general public .The majority of firms which include extensive financial statements in their annual reports, which receive wide distribution.

Nature of financial statement Analysis:

Financial Statement Analysis consist of the application of analytical tools and techniques to the data in financial statements in order to derive from them measurements and relationships that are significant and useful for decision making. The process of financial analysis can be described in various ways, depending on the objectives to be obtained. Financial analysis can be used as a preliminary screening tool in the selection of stocks in the secondary market. It can be used as a forecasting tool for future financial conditions and results. It may be used as a process of evaluation and diagnosis of managerial, operating or other problem areas. Above all, financial analysis reduces reliance on intuition, guesses and thus narrows the areas of uncertainty that is present in all decision making processes. Financial analysis does not lesson the need for judgment but rather establishes a sound and systematic basis for its rational application.

Sources of Financial Information:

The financial data needed in financial analysis come from many sources. The primary source is the data provided by the firm itself in its annual report and required disclosures. The annual report comprises the income statement, the balance sheet, and the statement of cash flows, as well as footnote to these statements. Besides this information such as the market price of securities publicly traded corporations can be found in the financial press and the electronic media daily. The financial press also provides information to stock price indices for industries and for market as a whole.

History of financial Analysis

Analysis of financial statements has had its greatest growth since 1990 s. A major impetus came from increasing need from increasing need on the part of grantors of credit

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such as bankers, financial institutions etc, to understand the condition of their customer. At the same time businessman need to understand their own conditions of their own enterprise in order to assure its survival in stress of competition. Satisfaction of these needs has been assisted by the continuous development of accounting as a science and passing of income tax law in1993. This required preparation of balance sheets and income statements, as they are the basic statements required for the income tax purpose. Thus a reasonably reliable data from which typical financial ratios could be calculated has become increasingly available. Between 1919 and 1929 four men pioneered in development of financial ratios.These where James bliss who published a book on this subject in 1923. Alexander wall, head of Robert Morris associates and Raymond W Dunning, published a work on this subject in1928 and Roy Foulke, who made some of the first detailed compilations and studies between 1925 and 1928.

Conceptual Framework of Ratio AnalysisFinancial ratios are always fascinating because they convey the impression of precision in analyzing the financial position of the company. Financial ratios are only tools of analysis. However their effectiveness depends upon the know how of using them for specific purpose. The ratio is relationship between two variables. Any number of relationships that is ratio can construct provided we first identify the variables to be studied. Therefore there is nothing like standard set of ratios which can be used at any time for any purpose. New ratio can be developed specifically for the purpose or the mechanics of constructing the given ratio can be suitably adjusted to suit the purpose. Intact a resourceful financial analyst can develop novel and fascinating ratios which can serve his purpose better than the pedestrian stock. Having established the point that ratios should be constructed and used keeping in view the purpose, we shall examine generally the purpose for which the ratio analysis could be employed. Ratios are used as tools of ppraising financial performance of the company. There two distinct viewpoints in such analysis; the managements viewpoint and the investors viewpoint. The interests of both these groups are not mutually exclusive; they are complimentary to each other. Both these groups are interested in key areas that compromise the financial performance of the company.

Users of Accounting Information

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

Investors Financial analystsLenders Environmental group

Managers of the organization Research : both academic and professional Employees Suppliers and other trade creditors Customers Governments and their agencies Public

IMPACT OF OTHER DISCIPLINES ON FINANCE IN DIGRAMATIC FORM:-

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FINANCIAL DECISION AREAS

-Investment analysis-Working capital

management-Cost of capital

-Capital structure-Dividend policy-Risk and returns

OTHER DISCIPLINE-Marketing-Production

-Quantitative methods

PRIMARY DISCIPLINE- Accounting

-Macroeconomics -Microeconomics

SHAREHOLDES WEALTH MAXIMISATION

RESEARCH METHODOLOGY

Research: Introduction

Research is a purposive investigation of hypothetical propositions. Research as a process involves defining and redefining problems, hypothesis formulation, organizing and evaluating data, deriving deductions, inferences and conclusion, after careful testing.

Research: Definition “Research concerns itself with obtaining information empirical observation that can used to systematically develop logically related propositions so as to attempt to establish casual relationship among variables.”

-Black and Champion

The method used in this project is:-

Primary Data:

Data obtained first hand by the researcher in called as primary data. Primary data related to the project was collected from the discussion and interaction with the senior employees and executives in the organization from Accounts and Finance department.

Secondary Data:

The secondary data is readily available and compiled data from statistical statement reports etc. The data can be obtained from either published or non published sources as Newspapers, News Letters, Web-Sites and Magazines.

Sources of Data Collection in this Project

Company’s financial statements. Balance sheet Profit and loss statement

Newspapers and Journals. Company prospectus

Internet.

METHODOLOGY FOR ANALYSIS

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The methodology opted for carrying out project was by way of collection of data from the company s annual reports for the past three years i.e. from 2007-2008 to 2009-2010, for the calculation of ratios. The theory related to ratios was gathered from various financial management books, which served the purpose of calculation and analysis of ratios. Further based on the above statements ratios related to liquidity, turnover, solvency, profitability and over profitability groups and miscellaneous groups have been calculated and interpreted in an intra firm comparison method. Similarly the ratios have been presented in graphical format to have clear understanding of it during three financial years and changes in it.

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DATA ANALYSIS AND INTERPRETATION

- RATIO ANALYSIS- DU-PONT ANALYSIS- LEVERAGES

- CASH FLOW STATEMENT - WORKING CAPITAL - BREAK-EVEN ANALYSIS

Summary of Literature24

Ratio Analysis

Introduction:

Ratio analysis is a powerful tool of financial analysis. A ratio analysis is defined as the indicated quotient of two mathematical expressions and as the relationship between two or more things. In financial analysis, a ratio is used as an index or yardstick for figures reported in the financial statements do not provide a meaningful understanding of the performance and financial position of the firm. An accounting figure conveys meaning when it is a related to some other relevant information. The relationship between two accounting figures expressed mathematically is known as a financial data and to make a qualitative judgment about the firm s financial performance.

Standard of Comparison:

The ratio analysis involves comparison for a useful interpretation of the financial statements. A single ratio in itself does not indicate favorable or unfavorable condition. It should be compared with some standard. Standard of comparison may consist of:

Ratios calculated from the past financial statements of the same firm. Ratios developed using the projected or pro forma, financial statements of the same

firm. Ratios of some selected similar companies, especially the most progressive and

successful at the same point in time. Ratios of the industry to which firms belongs.

To evaluate the performance of a firm, compare its current ratios with the past ratios. When financial ratios over a period of time are compared, it is known as time series or trend analysis. It gives an indication of the direction of change and reflects whether the firm s financial performance has improved or deteriorated or remained same over time. The analyst should not simply determine the change, but more importantly he should understand why ratios have changed. The change may be affected by changes in the accounting polices without material change in the firm s performance.

Sometimes future ratios are used as the standard of comparison. Future ratios can be developed from the projected or Performa financial statements. The comparison of past ratios with future shows the firms relative strength and weaknesses in the past corrective actions should be initiated. Another way of comparison is to compare ratios of one firm with some selected firm in the same industry at the same point in time. This kind of comparison is known as the cross sectional analysis. In most cases it is more useful to compare the firm s ratios of carefully selected competitor, which have similar operations. This kind of comparison indicates the relative financial position and performance of the firm. A firm can easily resort to such a comparison, as it is not difficult to get the published financial statements of similar firms.

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To determine the financial condition and performance of a firm, its ratios may be compared with average ratios of industry to which the firm belongs. This sort of analysis, known as the industry analysis helps to ascertain the financial standing and capability of the firm in the industry to which it belongs. Industry ratios are important standards in view of the fact that each industry has its characteristics, which influence the financial and operating relationships. But there are certain practical difficulties in using the industry ratios. First it is difficult to get average ratios for the industries. Second, even if industry ratios are available, they are the averages of the strong and weak firms. Sometimes spread may be so wide that the average may be little utility. Third, the average may be meaningless and the comparison futile if the firms with in the same industry widely differ in their accounting policies and practices. If it is possible to standardize the accounting data for companies in the industry and eliminate extremely strong and extremely weak firms. The industry ratios will prove to be very useful in evaluating the relative financial condition and performance of the firm.

Ratios are generally expressed in various forms. They are:

a) Pure ratios which are arrived at by the simple division of one number by other e.g. Current assets to current Liabilities ratio are 2:1.b) Rate, which is the ratio between two numerical facts usually over a period of time e.g. stock turnover, is three times a year.c) Percentage, which is special type of rate expressing the relation in hundredth e.g. gross profit, is 25% on sales.d) Ratio analysis when rightly used offers the following advantages:

i. It facilitates the compression of financial statements and evaluation of several aspects such as financial health, profitability and operational efficiency of the undertaking.ii. It provides inter firm comparison to measure the efficiency and help the management to take remedial measures.iii. It is also helpful in forecasting corporate sickness and help the management to take corrective actions.iv. Trend analysis with the help of ratios help in planning and forecasting. It helps in investment decision in the case of investors and lending decisions in the case of bankers and financial institutions.

Uses of ratio analysis:-

It helps to understand the efficiency and performance of the firm as a whole.

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Its main purpose is to gain insights into the operating and financial problems confronting the firm.

It helps to identify the trouble or potential trouble spots of the firm. This would impel the management to investigate those areas more thoroughly.

It helps to pinpoint relationship that is not obvious from the financial statements.

It helps to highlight the factors responsible for the present state of financial statements.

It helps the shareholders in evaluating the firm’s activities and policies that affect the profitability, liquidity and ultimately the market price of the shares

It helps to examine the adequacy of funds, the solvency of the firm and its ability to meet the financial obligations as and when they become due.

It is very useful in inter-firm and intra-firm analysis. A trend can be established by calculating ratios for number of years.

Limitations of ratio analysis:-

There may be a difference between the inventory methods followed by various firms or different method in the same firm.

Firms follow various methods of depreciation. There may be a difference between the capital structures of the firms. Window dressing, which means artificially improving the financial statements

is another major drawback Inflationary factors are not taken into consideration. Thus when the past

performance is analyzed, the figures may have become outdated.

The categories of the ratios used in the analysis are:

1. Profitability: has the business made a good profit compared to its turnover?2. Return Ratios: compared to its assets and capital employed, has the business madea good profit?3. Liquidity: does the business have enough money to pay its bills?4. Asset Usage or Activity: how has the business used its fixed and current assets?5. Gearing: does the company have a lot of debt or is it financed mainly by shares?

Classification of ratios:-

27

LIQUIDITY RATIOS:-

The importance of adequate liquidity is the ability of a firm to meet current or short term obligations when they become due for payment can hardly be overstressed. Liquidity is the prerequisite for the survival of the firm. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required for efficient financial management. Liquidity ratios indicate the financial strength or solvency of a firm.

PROFITABILTY RATIOS:-

The creditors, shareholders and management are eager to measure its efficiency and financial soundness. The shareholders invest their funds in the expectation of reasonable returns. The profitability ratios can be determined on the basis of either sales or investments

ACTIVITY RATIOS:-

Activity ratios are concerned with measuring the efficiency in asset management. The efficiency with which the assets are used would be reflected in the speed and rapidity with which the assets are converted into sales. The greater the rate of conversion, the more efficient is the utilization of assets, other things being equal.

28

CLASSIFICATION OF RATIOS

LIQUIDITY RATIO

PROFITABILITY RATIO

ACTIVITY RATIO

MARKET VALUE RATIO

CAPITAL STRUCTURE

MARKET VALUE RATIOS:-

Market Value ratios are those ratios which are measured by using market value of the shares. This ratio is calculated to know the returns the

shareholders as compared to the amount invested in market value of the shares.

CAPITAL STRUCUTRE:-

The long term lenders 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. The long term solvency is examined by the capital structure ratio.

These ratios are further divided into:-

LIQUIDITY RATIOS:-

29

1.> CURRENT RATIO :-

Rs. In lakhs

YEAR 2008 2009 2010

CURRENT ASSETS, LOANS AND ADVANCES

2190.66 3015.89 9424.58

CURRENT LIABILITIES AND PROVISION

508.05 448.04 874.04

CURRENT RATIO 4.31 6.73 10.78

INFERENCE:-

This ratio indicates the solvency of the company. It shows the proportion of current assets to current liabilities. Normally, it is expected that current ratio should be 2: 1, which indicates that current assets should be twice as compared to current liabilities. As the current ratio exceed than the ideal ratio which shows that the company maintain excess amount of liquidity. Which is due to the idle cash that is not deployed and it is not favorable for the firm.

2.> ACID TEST RATIO :-

30

CURRENT ASSETS CURRENT RATIO = ----------------------------- CURRENT LIABILITIES

2008 2009 20100

2

4

6

8

10

12

Current Ratio

CURRENT RATIO

YEAR

RA

TIO

YEAR 2008 2009 2010

QUICK ASSETS 1738.72 1755-33 6821.28

QUICK LIABILITIES 508.05 448.04 874.04

ACID TEST RATIO 3.42 3.91 7.80

Rs. In lakhs

2008 2009 20100

1

2

3

4

5

6

7

8

9

Acid Test Ratio

Acid test ratio

YEAR

RA

TIO

INFERENCE:-

This ratio indicates the proportion of quick assets to quick liabilities. The ideal Acid Test Ratio should be 1:1 which means that the quick assets should be equal to quick liabilities. But in the above chart it shows that the ratio is much higher than the ideal ratio which shows that the company is not taking benefit of the credit limit allowed by the creditors.

3. PROPREITORY RATIOS :-

31 TOTAL ASSETS

PROPREITORY RATIO= ------------------------------------ PROPREITORY FUNDS

QUICK ASSETS ACID TEST RATIO = ---------------------------- QUICK LIABILITIES

YEAR 2008 2009 2010

TOTAL ASSETS 2425.71 3595.98 10109.07

PROPREITORY FUNDS 941.21 1285.50 5547.02

PROPRITORY RATIO 2.57 2.79 1.82

Rs. In lakhs

2008 2009 20100

0.5

1

1.5

2

2.5

3

Propreitory Ratio

Propreitory Ratio

YEAR

RATI

O

INFERENCE:-

This ratio indicates the proportion of proprietors funds used for financing the total assets. Ideally 2/3rd of assets should be financed through proprietors’ funds while balance should be financed through borrowed funds. In 2010 the ratio is favorable but in,2008,2009 the ratio is quite high hence the firm was not using external funds adequately.

2.> CURRENT ASSETS TO FIXED ASSETS :-

32

CURRENT ASSETS CURRENT ASSETS TO FIXED ASSETS = ----------------------------- FIXED ASSETS

Rs. In lakhs

YEAR 2008 2009 2010

CURRENT ASSETS 1812.74 2484.5 5485.71

FIXED ASSETS 233.47 945.41 1551.59

RATIO 7.76 2.62 3.53

2008 2009 20100

1

2

3

4

5

6

7

8

9

Current to fixed assets Ratio

Current to fixed assets

YEAR

RATI

O

INFERENCE:-

This ratio indicates the proportion of current assets to fixed assets. Current assets are held for short-term purpose while fixed assets are held for long-term purpose. In firm current assets are more than fixed assets.

PROFITABILITY RATIOS :-

1.> GROSS PROFIT RATIO :-

33

GROSS PROFIT GROSS PROFIT RATIO = ------------------------ x 100 NET SALES

Rs. In lakhs

YEAR 2008 2009 20010

GROSS PROFIT 1085.09 1091.09 1196.97

NET SALES 5743.03 6141.42 7619.42

GROSS PROFIT RATIO[%]

18.89 17.76 15.71

2008 2009 20100.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%18.00%20.00%

Gross Profit Ratio

Gross Profit Ratio

YEAR

RA

TIO

INFERENCE:-

This ratio shows the margin left after meeting the purchase and manufacturing costs. It measures the efficiency of production as well as pricing. A high gross profit ratio means a high margin for covering other expenses like administrative, selling and distribution expenses. Gross profit ratio is showing the downward trend in 2009 and 2010 which should be increased so as to meet other selling, administrative and distribution expenses

2.> NET PROFIT RATIO:-

34

NET PROFIT NET PROFIT RATIO = -------------------- x 100 NET SALES

Rs. In lakhs

YEAR 2008 2009 2010

NET PROFIT 577.17 641.02 626.03

NET SALES 5743.03 6141.42 7619.42

NET PROFIT RATIO[%]

10.05 10.43 8.21

2008 2009 20100.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

NET PROFIT RATIO

Net Profit Ratio

YEAR

RATI

O

INFERENCE:-

This ratio shows the earnings left for share-holders as percentage of net sales. It measures the overall efficiency of all the functions of business firm like production, administrative, selling, financing, pricing, tax management etc. Higher the ratio the better it is because it gives an idea of overall efficiency of the firm. As we see the ratio is decreasing in the year 2010 which is not favorable for the company and should be increased.

3.> OPERATING NET PROFIT RATIO :-

35

OPERATING NET PROFIT OPERATING NET PROFIT RATIO = ------------------------------------- x 100

SALES

Rs in lakhs

YEAR 2008 2009 2010

OPERATING NET PROFIT

607.32 709.64 707.87

SALES 5743.03 6141.05 7619.42

OPERATING NET PROFIT RATIO[%]

10.57 11.46 9.29

2008 2009 20100.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Operating NetProfit

Operating NetProfit

YEAR

RA

TIO

INFERENCE:-

This ratio establishes the relationship between the net sales and the operating net profit. Operating net profit is the profit arising out of business operations only. Higher the ratio the better it is because it gives an idea of overall efficiency of the firm. In 2009 the ratio is high but in 2010 it should be increased to increase the profitability.

4.> OPERATING RATIO:-

36

COST OF GOODS SOLD+OPERATING EXPENSES OPERATING RATIO = ------------------------------------------------------------------ x 100 NET SALES

Rs. In lakhs

YEAR 2008 2009 2010

COST OF GOODS SOLD 4657.23 5050.33 6422.45

OPERATING EXPENSES 478.48 381.45 489.10

NET SALES 5743.03 6141.05 7619.42

OPERATING RATIO 89.42 88.44 90.70

2008 2009 201087.00%

87.50%

88.00%

88.50%

89.00%

89.50%

90.00%

90.50%

91.00%

Operating Ratio

Operating Ratio

YEAR

RATI

O

INFERENCE:-

This ratio indicates the proportion of cost of goods sold and operating expenses to net sales. The higher the ratio lower margin is left for operating profit hence the ratio should be low. In the above chart the expenses are more than 60% which reduces the profitability hence it should be reduced.

5.>RETURN ON CAPITAL EMPLOYED:-

Rs. In lakhs

37

EBIT RETURN ON CAPITAL EMPLOYED = ----------------------------- x 100 CAPITAL EMPLOYED

YEAR 2008 2009 2010

EBIT 577.17 641.03 626.03

CAPITAL EMPLOYED

1917.62 3571.5 10058.12

RETURN ON CAPITAL EMPL.[%]

30.09 17.95 6.22

2008 2009 20100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Return On Capital Employed

Return On Capital Employed

YEAR

RET

UR

N

INFERENCE:-

This ratio indicates the percentage of earnings before interest and tax to total capital employed. This ratio is considered to be very important because it reflects the overall efficiency with which capital is used. This ratio is highest in 2008 as compared to other years and it shows a downfall in 2009 as well as 2010 as company has issued shares in this year and invested fresh capital which might give good return in coming years.

NOTE: EBIT - EARNINGS BEFORE INTEREST & TAXES.

6.> RETURN ON EQUITY :-

38

SHARE-HOLDERS EARNINGS RETURN ON EQUITY = --------------------------------------------- x 100

EQUITY SHARE-HOLDERS FUNDS

YEAR 2008 2009 2010

OWNERS EARNINGS 483.31 479.48 400.93EQUITY SHARE HOLDERS FUNDS

941.21 1285.5 5547.02

RETURN ON EQUITY[%] 51.34 37.29 7.21

Rs. In lakhs

2008 2009 20100.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Return On Equity

Return On Equity

YEAR

RETU

RN

INFERENCE:-

This ratio indicates the productivity of the owned funds employed in the firm. It shows the percentage of net profit available for share-holders. In the above chart it shows a downward trend which is not favorable for company and share-holders as it decreases the earnings of share-holders. Hence it should be increased. This decrease is due to the reason as the profit of the firm has not increased in the proportion of capital employed, and might give good return in upcoming years.

7.> RETURN ON TOTAL ASSETS:-

39

NET PROFIT AFTER TAX RETURN ON TOTAL ASSETS = -------------------------------------- x 100 TOTAL ASSETS

Rs. In lakhs

YEAR 2008 2009 2010

NPAT 483.31 479.48 400.93

TOTAL ASSETS 2425.71 3595.98 10109.07

RETURN ON TOTAL ASSETS[%]

19.92 13.32 3.96

2008 2009 20100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Return On Total Assets

Return On Total Assets

YEAR

RET

UR

N

INFERENCE:-

Returns on assets crudely reflect how well the firm uses its assets in total. The higher the ratio is favorable as it indicates that the firm is utilizing its assets profitably. In the above chart the ratio high in year 2008 and start decreasing after that which is not favorable for the company hence it should be increased. In 2010 the assets are not generating good return as they are not employed completely.

8.> RETURN ON NETWORTH:-

Rs. In lakhs.

40

NET PROFIT AFTER TAX RETURN ON NETWORTH = ------------------------------------ NET - WORTH

YEAR 2008 2009 2010

NPAT 483.31 479.48 400.93

NET WORTH 941.21 1285.50 5547.02

RETURN ON CAPITAL EMPLOYED[%]

51.34 37.29 7.22

2008 2009 20100.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Return On Networth

Return On Networth

YEAR

RET

UR

N

INFERENCE:-

This ratio indicates the productivity of the owned funds employed in the firm. It shows the percentage of net profit after tax available for share-holders which also includes the net worth of the company. In the above chart it shows a downward trend which is not favorable for company and share-holders as it decreases the earnings of share-holders. Hence it should be increased.

9.> EARNINGS PER SHARE:-

Rs. In lakhs

41

OWNERS EARNINGS EARNINGS PER SHARE = ----------------------------------- NO. OF EQUITY SHARES

YEAR 2008 2009 2010

OWNERS EARNINGS 483.31 479.48 400.93

NO. OF EQUITY SHARES 9412190 6270000 11270000

EARNING PER SHARE RS. 5.13 7.64 3.55

2008 2009 20100.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Earning Per Share

Earning Per Share

YEAR

RATI

O

INFERENCE:-

This ratio is an important indicator of performance of the company. It indicates the amount of profit available for distribution amongst the equity shareholders. This ratio should be higher as return to increases. Market price of the company’s shares is directly proportional to earnings per share of the company. In the above chart it shows a downward trend in 2010 hence it should be increased.

ACTIVITY RATIO:-

1.> WORKING CAPITAL TURNOVER RATIO:-

Rs. In lakhs

42

NET SALES WORKING CAPITAL TURNOVER RATIO = --------------------------------------- NET WORKING CAPITAL

YEAR 2008 2009 2010

NET SALES 5743.03 6141.42 7619.42

NET WORKING CAPITAL 1684.15 2567.85 8550.54

WORKING CAPITAL TURNOVER RATIO

3.41 2.39 0.89

2008 2009 20100.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Working Capital Turnover

Working Capital Turnover

YEAR

RA

TIO

INFERENCE:-

This ratio compares the net sales with the net working capital of the business firm. This ratio indicates number of times working capital is turned around a particular period. The higher the ratio, the better is utilization of the working capital and also indication of lower working capital. However a very high ratio is a sign of over trading and a firm may face shortage of working capital. In the above chart it shows a downward trend hence it is not favorable for the firm.

NOTE: - NET WORKING CAPITAL=CURRENT ASSETS – CURRENT LIABILITIES

2.> DEBTORS TURNOVER RATIO:-

YEAR 2008 2009 2010

43

CREDIT SALES DEBTORS TURNOVER RATIO = ----------------------------------------- AVERAGE ACCOUNTS RECEIVABLE

CREDIT SALES 5743.02 6141.05 7619.42

AVERAGE DEBTORS 1291.62 1181.92 1192.13

DEBTORS TURNOVER RATIO

4.44 5.19 6.39

Rs. In lakhs

NOTE: -

AVERAGE ACCOUNTS RECEIVABLE =

OPENING DEBTORS, BILLS RECEIVABLE + CLOSING DEBTORS, BILLS RECEIVABLE

2

2008 2009 20100

1

2

3

4

5

6

7

8

Debtors Turnover Ratio

Debtors Turnover Ra-tio

YEAR

RA

TIO

DEBTORS COLLECTION PERIOD:-

Rs. In lakhs

44

365 DAYS DEBTORS COLLECTION PERIOD = ------------------------------------- DEBTORS TURNOVER RATIO

YEAR 2008 2009 2010

DAYS 365 365 365

DEBTORS TURNOVER RATIO 4.44 5.19 6.39

DEBTORS COLLECTION PERIOD(DAYS)

82 70 57

2008 2009 20100

102030405060708090

DEBTORS COLLECTION PERIOD

DEBTORS COLLECTION PERIOD

YEAR

DA

YS

INFERENCE:-

This ratio indicates the efficiency of the firm in collecting its receivables from its customers to whom the firm has sold on credit. It also indicates how quickly the debtors are turned into cash. The higher the ratio lower is the collection period, on the other and lower the ratio higher will be the collection period. In the above charts the debtor turnover ratio should be increased further so as to reduce the collection period.

3.> CREDITORS TURNOVER RATIO: -

45

CREDIT PURCHASES CREDITORS TURNOVER RATIO = -------------------------------------------- AVERAGE ACCOUNTS PAYABLE

Rs. In lakhs

YEAR 2008 2009 2010

CREDIT PURCHASES 4467.70 4722.46 6018.63

AVERAGE CREDITORS 286.93 266.35 379.27

CREDITORS TURNOVER RATIO

15.57 17.65 15.82

NOTE: -

AVERAGE ACCOUNTS PAYABLE =

OPENING CREDITORS, BILLS PAYABLE +CLOSING CREDITORS, BILLS PAYABLE

2

2008 2009 20100

5

10

15

20

25

30

Creditors Turnover Ratio

Creditors Turnover Ra-tio

RATI

O

CREDITORS PAYMENT PERIOD:-

46

365 DAYS CREDITORS PAYMENT PERIOD = -------------------------------------------- CREDITORS TURNOVER RATIO

Rs. In lakhs

2008 2009 201018.5

1919.5

2020.5

2121.5

2222.5

2323.5

CREDITORS PAYMENT PERIOD

CREDITOR PAYMENT PERIOD

YEAR

DA

YS

INFERENCE:-

The Creditors Turnover Ratio indicates the credit period allowed by the creditors to the firm. A high turnover ratio indicates that the payment to the creditors is quite prompt but it also implies that the firm is not taking full advantage of the credit allowed by the creditors. A lower ratio indicates that there is not much promptness in payment made to creditors and needs to be improved. In the above charts creditors turnover ratio is very high and creditors payment period is very low which shows that the firm is not utilizing the credit limit allowed to firm, which is favorable for the firm.

4.> INVENTORY TURNOVER RATIO :-

NOTE: -

AVERAGE INVENTORY =47

COST OF GOODS SOLD INVENTORY TURNOVER RATIO = ----------------------------------- AVERAGE INVENTORY

YEAR 2008 2009 2010

DAYS 365 365 365

CREDITORS TURNOVER RATIO 15.57 17.65 15.82

CREDITORS PAYMENT PERIOD 23 20 23

OPENING INVENTORY + CLOSING INVENTORY--------------------------------------------------------------------- 2

Rs. In lakhs

YEAR 2008 2009 2010

COST OF GOODS SOLD 4657.23 5050.33 6422.45

AVERAGE INVENTORY 451.94 856.25 1931.93

INVENTORY TURNOVER RATIO 10.30 5.90 3.32

2008 2009 20100

2

4

6

8

10

12

Iventory turnover ratio

Inventory turnover

YEAR

RATI

O

INVENTORY HOLDING PERIOD:-

Rs. In lakhs

48

365 DAYS INVENTORY HOLDING PERIOD = ------------------------------------------ INVENTORY TURNOVER RATIO

YEAR 2008 2009 2010

DAYS 365 365 365

IVENTORY TURNOVER RATIO 10.30 5.90 3.32

INVENTORY HOLDING PERIOD 35 61 109

2008 2009 20100

20

40

60

80

100

120

Inventory Holding Period

Inventory Holding Period

YEAR

DA

YS

INFERENCE:-

This ratio establishes the relationship between the cost of goods sold during a given period and the average amount of inventory held during that period. The higher ratio is better as it shows the rapid turnover of stock and consequently shorter holding period, on the other hand if the ratio is lower indicate that the stock is slow moving and there is longer holding period. In the above chart inventory turnover ratio is showing a downward trend, hence it should be increased to reduce the holding period.

5.> FIXED ASSETS TURNOVER RATIO:-

Rs. In lakhs

49

NET SALES FIXED ASSETS TURNOVER RATIO = ----------------------------- NET FIXED ASSETS

YEAR 2008 2009 2010

NET SALES 5743.03 6141.05 7619.42

NET FIXED ASSETS 233.47 945.41 1551.59

FIXED ASSETS TURNOVER RATIO

24.59 6.49 4.91

NOTE: - NET FIXED ASSETS= COST OF ASSETS – DEPRECIATION

2008 2009 20100

5

10

15

20

25

30

Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio

YEAR

RA

TIO

INFERENCE:-

This ratio indicates the amount of sales realized per rupee of investment in fixed assets. This ratio is more important in manufacturing concerns, as it indicates the utilization of fixed assets. The higher the ratio higher will be the amount of sales generated per rupee of investment in fixed assets. In the above chart it is showing the downward trend so it is advisable to the firm to increase the ratio, which will result in higher amount of turnover.

5.> SALES TO CAPITAL EMPLOYED :-

Rs. In lakhs

50

NET SALES SALES TO CAPITAL EMPLOYED = ------------------------------- CAPITAL EMPLOYED

YEAR 2008 2009 2010

NET SALES 5743.03 6141.05 7619.42

CAPITAL EMPLOYED 1917.62 3571.5 10058.12

RATIO 2.99 1.71 0.75

2008 2009 20100

0.5

1

1.5

2

2.5

3

3.5

Sales To Capital Employed

Sales To Capital Employed

YEAR

RA

TIO

INFERENCE:-

It indicates the frequency with which sales are generated in relation to capital employed. Higher the ratio, the better it is as it will indicate better utilization of capital employed, which will result in higher amount of turnover. In the above chart the ratio is continuously showing downward slope which should be increased.

NOTE: -NET SALES= TOTAL SALES – RETURN INWARD

CAPITAL EMPLOYED = SHARE HOLDERS FUNDS + LONG TERM LIABILITY

6.> TOTAL ASSETS TURNOVER RATIO:-

51

SALES TOTAL ASSETS TURNOVER RATIO = -------------------- TOTAL ASSETS

Rs. In lakhs

YEAR 2008 2009 2010

SALES 6623.86 6931.79 8213.79

TOTAL ASSETS 2425.71 3595.98 10109.07

RATIO 2.73 1.92 0.81

2008 2009 20100

0.5

1

1.5

2

2.5

3

Total Asset Tunover Ratio

Total Asset Tunover Ratio

YEAR

RATI

O

INFERENCE:-

This ratio indicates the amount of sales realized per rupee of investment in total assets. This ratio is more important in manufacturing concerns, as it indicates the utilization of total assets. The higher the ratio higher will be the amount of sales generated per rupee of investment in assets. In the above chart it is advisable to the firm to increase the ratio, which will result in higher amount of turnover.

CAPITAL STRUCTURE RATIOS:-

1.> CAPITAL GEARING RATIO:-

52

FIXED CHARGES BEARING SECURITIES CAPITAL GEARING RATIO = ----------------------------------------------------- EQUITY SHAREHOLDERS FUNDS

Rs. In lakhs

2008 2009 20100

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Capital Gearing Ratio

Capital Gearing Ratio

YEAR

RATI

O

INFERENCE:-

This ratio indicates the proportion between fixed charge bearing securities and equity capital. A firm raises finance through owned funds and borrowed funds. A firm will be considered to be highly geared, if the major portion of total capital is raised through fixed charges bearing securities. In the above chart the ratio is showing the increasing trend which shows that firm is utilizing external funds in better way.

2.> DEBT-EQUITY RATIO:-

Rs. In lakhs

YEAR 2008 2009 2010

53

LONG-TERM DEBT DEBT-EQUITY RATIO = --------------------------------- SHARE-HOLDERS FUNDS

YEAR 2008 2009 2010

LOAN FUNDS 976.41 2286.01 4511.11

EQUITY SHAREHOLDERS FUNDS 941.21 627.00 1127.00

CAPITAL GEARING RATIO 1.03 3.64 4.00

LONG-TERM DEBT 976.41 2286.00 4511.1

SHARE-HOLDERS FUNDS 941.21 1285.21 5547.02

DEBT-EQUITY RATIO 1.03 1.77 0.81

2008 2009 20100

0.20.40.60.8

11.21.41.61.8

2

Debt-Equity Ratio

Deb-Equity Ratio

YEAR

RATI

O

INFERENCE:-

This ratio indicates the proportion of borrowed funds to proprietor’s funds. Ideally this ratio should be 2:1 which means that the debt should be twice the owned capital, if it is less than 2:1 will indicate that firm is not taking any risk. As Debt Equity Ratio is less than the ideal ratio hence it is advisable to increase this ratio to be in a more favourable position.

3.> INTEREST COVERAGE RATIO :-

Rs. In lakhs

54

EARNINGS BEFORE INTEREST & TAXES INTEREST COVERAGE RATIO = --------------------------------------------------- INTEREST

YEAR 2008 2009 2010

EBIT 577.17 641.03 626.03

INTEREST 85.32 187.29 296.72

RATIO 6.76 3.42 2.10

2008 2009 20100

1

2

3

4

5

6

7

8

Interest Coverage Ratio

Interest Coverage Ratio

YEAR

RATI

O

INFERENCE:-

This ratio measures how ably the firm can meet its interest obligations. It describes how well and how easily the firm can service its debt. The higher the ratio the better is the ability of the firm to discharge its interest expense. In the above chart it shows a downward trend, hence should be improved.

DU-PONT ANALYSIS

A method of performance measurement that was started by the DuPont Corporation of USA in the 1920s, and has been used by them ever since. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher Return on Investment (ROI). It is system of financial analysis, which has received very good recognition and acceptance world-wide. DuPont analysis helps locate the part of the business that is underperforming. DuPont analysis tells us that ROE is affected by three things:-

Operating efficiency, this is measured by profit margin. Asset use efficiency, which is measured by total asset turnover.

55

Financial leverage, which is measured by the equity multiplier. The higher the result the higher will be the return on equity.

Du-Pont analysis divides a particular ratio into components and studies the effect of each and every component on the ratio. Comparative analysis gives an idea where a firm stands across the industry and studies the financial trends over a period of time.

FORMULA:-

COMPARATIVE ANALYSIS OF RETURN ON ASSETS (INVESTEMENT)

Rs. In lakhs

PARTICULARS 2008 2009 2010

NET PROFIT RATIO 10.05% 9.79% 8.21%

56

RETURN ON EQUITY = NET PROFIT RATIO x ASSETS TURNOVER RATIO x EQUITY MULTIPLIER

ASSETS EQUITY MULTIPLIER = -------------------------------- EQUITY SHAREHOLDERS

RETURN ON ASSETS = NET PROFIT MARGIN (RATIO) x TOTAL ASSETS TURNOVER RATIO

NET PROFIT NET PROFIT RATIO = --------------------

NET SALES

SALES TOTAL ASSETS TURNOVER RATIO = ---------------------

TOTAL ASSETS

TOTAL ASSETS TURNOVER RATIO

2.36 1.70 0.75

RETURN ON ASSETS 23.71 16.64 6.15

COMPARATIVE ANALYSIS OF RETURN ON EQUITY:- Rs. In lakhs


NET PROFIT RATIO 10.05% 9.79% 8.21%


2.36 1.70 0.75

EQUITY MULTIPLIER 25.77 57.35 89.63

RETURN ON EQUITY 611.21 954.47 551.36

DU-PONT ANALYSIS TREE DIAGRAM FOR RETURN ON ASSETS (INVESTEMENT):-

57

DU-PONT ANALYSIS TREE DIAGRAM FOR RETURN ON EQUITY:-

58

RETURN ON TOTAL ASSETS

NET PROFIT MARGIN

NET PROFITNET SALES+NON OPERATING SURPLUS

OR DEFICIT

TOTAL COSTS

NET SALES


NET SALES

AVERAGE TOTAL ASSETS

AVERAGE FIXED ASSETS

AVERAGE INVESTMENTS

AVERAGE NET CURRENT ASSETS

INFERERNCE:- In Du-Pont Analysis the higher the result the higher will be the return on equity. In the above calculation it shows a downward trend of returns in 2010 in both the cases in Return on Assets and Return on Equity which is not favorable for the company. Hence it is advised to firm to increase the sales and the surplus on sale.

LEVERAGES

Leverage represents a power or an influence of one financial variable over the other related financial variable. Leverages are classified into three categories namely, Operating Leverage, Financial Leverage and Combined Leverage. Generally, it is said that

59

RETURN ON EQUITY

NET PROFIT MARGIN

NET PROFITNET SALES + NON OPERATING SURPLUS OR

DEFICIT

TOTAL COSTS

NET SALES


NET SALES

AVERAGE TOTAL ASSETS

AVERAGE FIXED ASSETS

AVERAGE INVESTMENTS

AVERAGE NET CURRENT ASSETS

EQUITY MULTIPLIERTOTAL ASSETS

FIXED ASSETS

CURRENT ASSETS

EQUITY SHARE HOLDERS

one leverage should be low accompanied by the other high leverage. If operating leverage is on lower side, financial leverage can be kept on higher side by employing more debt in the capital structure. There are three types of leverages they are as follows:-

OPERATING LEVERAGE: -

The Operating Leverage measures the change in the earnings before interest and tax as a result of change in sales. This leverage is because of fixed cost in the cost structure. A higher operating leverage indicates that the proportion of fixed cost is higher, but at the same time it cannot be overlooked that if sales decrease, the earnings before interest and tax will decrease at higher rate. Therefore operating leverage is said to be a double edged weapon.

FINANCIAL LEVERAGE:-

The Financial Leverage measures the percentage change in earnings before tax as a result of changes in earnings before interest and tax. Financial Leverage will be higher if the difference between earnings before interest and tax and earnings

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LEVERAGES

OPERATING LEVERAGE

COMBINED LEVERAGE

before tax is higher. This difference will be higher if amount of interest is high. Therefore it indicates the proportion of debt in capital structure is high or low. The financial leverage helps to identify the financial risk.

COMBINED LEVERAGE:-

The Combined Leverage expresses the relationship between contribution and the taxable income. It helps in finding out the resulting percentage change in taxable income on account of percentage change in sales

FORMULA:-

COMPARATIVE STATEMENT OF LEVERAGESINCOME STATEMENT

Rs. In lakhs

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CONTRIBUTION OPERATING LEVERAGE = --------------------------------------------------

EARNINGS BEFORE INTERST AND TAX

EARNINGS BEFORE INTERST AND TAX FINANCIAL LEVERAGE = -----------------------------------------------------

EARNINGS BEFORE TAX

CONTRIBUTION EARNINGS BEFORE INTERST AND TAXCOMBINED LEVERAGE = ------------------------------------------ x --------------------------------------- EARNINGS BEFORE INTERST AND TAX EARNINGS BEFORE TAX


SALES 5743.03 6141.42 7619.02

LESS: VARIABLE COST 4628.55 4850.49 6120.00

CONTRIBUTION 1114.48 1290.93 1499.02

LESS : FIXED COST 684.12 766.35 938.60

EARNINGS BEFORE INTEREST AND TAX

430.36 524.58 560.42

LESS: INTERST 85.32 187.29 296.72EARNINGS BEFORE TAX 345.14 337.29 263.7

LEVERAGESRs. In lakhs


OPERATING LEVERAGE 2.58 2.46 2.67

FINANCIAL LEVERAGE 1.24 1.55 2.12

COMBINED LEVERAGE 3.19 3.81 5.66

INFERENCE: -

Operating Leverage:-

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In the above calculation operating leverage is very high and shows a downward trend after 2007 but it is still not favorable as fixed cost is very high. Hence it is advised to reduce operating leverage to some extent.

Financial Leverage:- In the above calculation of financial leverage it has shown a downward trend after 2007 but it is still favorable for the firm.

Combined Leverage:- In the above calculation combined leverage is very high and shows an upward trend after 2008 which is not favorable for the firm hence, should be reduced to some extent.

CASH FLOW ANALYSIS

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Cash Flow Statement is a statement which indicates sources of cash inflows and transactions of cash outflows of a firm during an accounting period. The activities which generate cash inflows are known as sources of cash and activities which cause cash outflows are known as uses or application of cash. It is appropriately termed as “Where Got Where Gone Statement”

The Institute of Chartered Accountants of India (ICAI) issued Accounting Standard-3 (AS-3) relating to the preparation of cash flow statement for accounting period commencing on or after April 1, 2000 for enterprise which:-

Have turnover of more than Rs 50 crore. Is listed in stock exchange (in India or outside India). Are in the process of listing their equity or debt securities as evidenced by the

board of directors’ resolution in this regard.

Cash happens to be the most liquid of all the current assets. It is this liquid asset which constitutes the medium of exchange. Every financial transaction has an ultimate effect on cash at some time or the other. A large cash holding reduces profitability. Similarly, inadequate cash holdings would have effect on liquidity and therefore on profitability. Cash flow statement analysis can therefore be helpful in the examining the cash effect of financial transactions. It reveals the complete story of cash movements. It helps to know the reasons for low cash balance inspite of high profits and high cash balance inspite of low profits. It also helps to understand at what point of time during the period there was idle cash or excessive cash holdings or inadequate cash. Appropriate steps can therefore be ensured to correct such situations.

Objectives of cash flow statement:-

To identify the causes of increase or decrease in the cash position of the firm during the specific period.

To understand the cash generated on account of business operations during the year.

To understand the cash impact on the current assets and current liabilities during the year.

To understand the investment and financing pattern followed during the year. To ensure necessary action for maintenance of adequate liquidity. To help in the projection of future cash flows.

Uses of cash flow statement:-

Payment of dividend in cash.

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Repayment of borrowings. Redemption of preference shares in cash. Purchase of fixed assets. Acquisition of other current assets as securities. Payment to creditors. Adapt to changing circumstances and opportunities. Assessing the ability of the company. Enhances comparability. To know how much cash is generated from business. To know the liquidity position.

There are two methods of cash flow:-

COMPARATIVE CASH FLOW STATEMENT(RESTATED)

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METHODS OF CASH FLOW STATEMENTDIRECT METHOD

INDIRECT METHOD

Rs. In lakhs

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PARTICULARS 31:03:08 02:07:08 31:03:09

Profit before tax 584.18 52.83 606.27

DEPRECIATION 30.15 9.18 46.96

LOSS ON ASSETS SOLD, DEMOLISHED,DISCARDED & SCRAPPED

0.26 0.63

LOSS ON SALE OF INVESTMENT -WRITTEN DOWN OF OBSOLETE & NON-MOVING COMPONENT

-

BAD DEBTS & IRRECOVERABLE BALANCES WRITTEN OFF

-

PROVISIONS FOR DOUBTFUL DEBTS & ADVANCES

-

INTEREST AND FINANCIAL EXPENCES

98.05 32.12 177.85

VRS COMPENSATION PAID -

PROFIT ON SALE OF UNDERTAKING

-

PROFIT ON SALE OF INVESTMENT

-

PROFIT ON SALE OF MUTUAL FUNDS

-

SURPLUS ON SALE OF ASSETS -INTEREST RECEIVED (14.51) (0.17) (3.72)DEBITS(EXPENSES)PERTAINING TO EARLIER YEARS

-

SUNDRY CREDIT BALANCES APPROPRIATED

-

PROVISIONS NO LONGER REQUIRED WRITTEN BACK

-

DIVIDEND RECEIVED -LEASE EQUILASITION -

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES

698.13 93.96 828.00

ADJUSTMENTS FOR:- -DECRESE/(INCREASE)TRADE & OTHER RECEIVABLES

(898.37) (84.38) 303.78

DECRESE/(INCREASE) IN INVENTORIES

(275.92) 157.08 (965.70)

DECRESE/(INCREASE)IN LOANS AND ADVANCES

(275.92) 89.60 (267.78)

INCREASE/(DECREASE) IN CURRENT LIABILITIES & PROVISION

(275.99) 5.88 (61.72)

CASH GENERATED FROM OPERATIONS

(378.36) 262.14 (163.41)

DIRECT TAXES PAID (NET) (65.15) (0.02) (133.04)

CASH FLOW BEFORE EXTRA (443.51) 262.12 (296.45)

INFERENCE:-

The profit before tax has shown an upward trend In the above calculation the operating profit has shown an upward trend but after deducting working capital changes the profit has declined, hence working capital should be managed efficiently. The operating profit and non-operating profit has shown a upward trend due to which even if the there is loss from activities the cash balance has shown a upward trend which is not favorable for the firm, hence, it is recommended to reduce the losses from activities and increase the profits.

WORKING CAPITAL MANAGEMENT :-

Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exist between them. The goal of working capital management is to manage the firm’s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high level of any one of them. Each of short term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The interaction between the current assets and current liabilities is therefore, the main theme of the theory of working management.

Working capital is the amount of financing required to sustain optimal balances of the firm’s working capital assets. Working capital represents that portion of capital which circulates from one form to another in the ordinary conduct of business. This idea embraces the recurring transition from cash to inventories to receivables to cash that forms the conventional chain of business operation. Working assets are those assets that will turnover or release cash within a relatively short period of time; they include inventory, accounts receivable, liquid assets etc. Current Assets are those assets that should be converted into cash within a year. A portion of the current assets is financed by current liabilities i.e. sundry creditors, bills payable, outstanding liabilities, etc. Current Liabilities are those obligations which are due within a year.

Marketable securities are considered as a part of working capital as they are a substitute for cash, similarly, the inclusion of prepaid expenses may be

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justified because they represent services owed to the company that are used in carrying out activities, thereby obviating the need for cash outlays. Gross working capital is the total of current assets. Net working capital is the current assets less current liabilities. In other words, net working capital is that portion of current assets financed by long-term debt and equity sources. The concept of working capital is built on three important elements:-

Financing working capital assets i.e. current assets. The amount of cash tied up in working assets. The speed with which these assets are converted into cash

The task of the finance manager in managing working capital efficiently is to ensure sufficient liquidity in the operations of the enterprise. The liquidity of a business firm is measured by its ability to satisfy short-term obligations as they become due. The three basic measures of the firm’s overall liquidity are:

WORKING CAPITAL CYCLE:-

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The Current Ratio

The Acid Test Ratio

The Net Working Capital

CASH PAYABLES

EQUITY & LOANS

OPERATING CYCLE FOR MANUFACTURING FIRM:-

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Work -in-Progress

Raw Materials Stock

Wages & overheads

Sales

Finish Goods Stock

Trade Creditors

Selling Expenses

Trade Debtors

Taxation Shareholders

CASH

SALES

COMPARATIVE WORKING CAPITAL STATEMENT

. In lakhs

SR.NO.


A CURRENT ASSETS LOANS & ADVANCES

2189.68 3015.89 9424.50

I INVENTORIES 451.94 1260.56 2603.30

A STORES & SPARES 6.49 26.13B STORES IN TRADE

-RAW MATERIAL 228.81 673.82 1391.95-REUSABLE MATERIAL 6.29 131.19 241.47-WIP NIL NIL NIL-FINISHED GOODS 216.82 649.06 789.57

C TRADED GOODS 154.96D MATERIAL IN BONDED

WAREHOUSE

II SUNDRY DEBTORS 1291.62 1072.22 1312.04A O/S FOR A PERIOD OF

6MONTHS1291.62 1072.22 1312.04

B GOODC DOUBTFUL

LESS : -PROVISIONSD OTHERS

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Lease Payments

Loan Creditors

E RECEIVABLESF DOUBTFUL

LESS:- PROVISION

III CASH & BANK BALANCE 69.18 151.71 1570.36A CASH IN HAND 18.05 14.20 11.79B BANK BALANCE :-

UNITED WESTERN BANK MUMBAI

NIL NIL NIL

UNITED WESTERN BANK INDORE

NIL NIL NIL

STATE BANK OF INDORE 0.72 NIL NILIDBI BANK 24.86 61.48 17.41FIXED DEPOSIT 25.55 76.02 1541.42

IV OTHER C.A.A INCOME RECEIVABLEB LEASE AJUSTMENTC INCENTIVE RECEIVABLESD EXPORT INCENTIVEE LEASE RENTALS

V LOANS & ADVANCES 377.93 531.39 3938.87A STAFF ADVANCE 14.68B SECURITY DEPOSITS 14.27 36.43 60.73C ADVANCES RECOVERABLE

-GOOD 95.11 55.37 50.63-DOUBTFUL-LESS:- PROVISIONS

D OTHER LOANS AND ADVANCE

253.87 - 1421.87

E ADVANCE TO SUPPLIERS 299.43 1323.23E BALANCE WITH

COLLECTORATE OF CENTRAL EXCISE & CUSTOMS

97.74 975.04

F TAX PAID IN ADVAMCE 42.40 106.87LESS:-PROVISION

B CURRENT LIABILITIES & PROVISIONS

1484.55 2246.71 5213.17

I LIABILITIES 508.05 448.04 874.04A SUNDRY CREDITORS 286.93 163.01 394.90

B SUNDRY DEPOSITS 1.80 1.75 3.14C OTHER CREDITORS 19.00 63.76 136.87

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D UNSECURED LOANS - 487.33 171.94E UNCLAIMED DEBENTURES

INVESTORS EDUCATION PROTECTION FUND

G DERIVATIVE LIABILITYH ADVANCE FROM

CUSTOMER17.29 13.10 64.57

I OTHER LIABILITIES 40.66 88.22

II PROVISION 183.03 147.28 186.31A PROVISIONS FOR GRATUITY

B PROVISIONS FOR LEAVE ENCASHMENT

C PROVISIONS FOR LONG SERVICE

D PROVISIONS FOR WARRANTY CLAIMS

E PROVISIONS FOR TAXATION 183.03

LESS:- TAX PAIDF PROPOSED DIVIDEND

G PROVISION FOR TAX ON DIVIDEND

147.28 186.31

508.05 448.04 874.04

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WORKING CAPITAL = CURRENT ASSETS LOANS & ADVANCES – CURRENT LIABILITIES & PROVISIONS

WORKING CAPITAL CALCULATION

Rs. In lakhs

SR.NO. PARTICULARS 2008 2009 20101. CURRENT ASSETS

LOANS & ADVANCES2189.68 3015.89 9424.50

2. CURRENT LIABILITIES & PROVISIONS

508.05 448.04 874.04

3. WORKING CAPITAL 1684.15 2567.85 8550.52

INFERENCE:-

Working capital represents that portion of capital which circulates from one form to another in the ordinary conduct of business. Current assets are those assets which should be converted into cash within a year. Current liabilities are those obligations which are due within a year. Gross working capital is total of current assets whereas net working capital is the current assets less current liabilities. In the above table working capital has shown an upward trend till the year 2009 which is good, but in the year 2010 it shows a heavy increase which might create a problem while fetching loan from bank for work in capital.

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BREAK-EVEN ANALYSIS

The term Break-Even Analysis is interpreted in two senses namely narrow sense and broad sense. In its narrow sense, it refers to find out break-even point that is a “point of no profit no loss”. In broad sense, it is an analysis used to determine the probable profit or loss at any level of operation. Break-Even Analysis is method of studying the relationship among sales revenue, variable cost and fixed cost to determine the level of operation at which all the costs are equal to its sales revenue and it is no profit no loss situation. This is an important technique used in profit planning and managerial decision-making. Margin of safety is the difference between the actual sales and the break-even sales this gap has to be increased to be in a favorable situation. Profit Volume Ratio is ratio of contribution to sales.

A break-even analysis is concerned with the study of revenues and costs in relation to sales volume and, particularly, the determination of that volume of sales at which the firm’s revenue and total will be exactly equal (or net income is equal to zero). Thus, the break-even point may be defined as a point at which the firm’s total revenues are exactly equal to total costs, yielding zero income. The “no profit, no loss” point is a break-even point or a point at which losses cease and profits begin.

The organizations study break-even analysis to know how far they are from the break-even point which can be calculated by Margin of Safety. The excess of actual sales revenue over the break-even sales revenue is known as margin of safety. When the margin of safety is divided by the actual sales, the margin of safety ratio is obtained. The Margin of Safety Ratio indicates the percentage by which he actual sales

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may be reduced before they fall the break-even sales volume. It is important that there should be a reasonable margin of safety, lest a reduced level of activity should prove disastrous. The higher the Margin of Safety Ratio, the better it is from the point of view of the company as it indicates that a “sizeable” sales volume can fall before the break-even point is reached. This measure acquires special significance in depression or recession.

FORMULA:-

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CONTRIBUTION = SALES – VARIABLE COST

CONTRIBUTION PROFIT VOLUME RATIO = ---------------------- x 100

SALES

FIXED COST BEP (SALES) = -------------------------------

PROFIT VOLUME RATIO

BREAK-EVEN ANALYSIS CHART

COMPARATIVE STATEMENT OF BREAK-EVEN ANALYSIS Rs. In lakhs.

YEAR 2008 2009 2010

SALES 5743.03 6141.42 7619.42

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MARGIN OF SAFETY =ACTUAL SALES – BREAKEVEN SALES

VARIABLE COST 4628.55 4850.49 6120.00

CONTRIBUTION 1114.48 1290.93 1499.02

FIXED COST 684.12 766.35 938.60

PROFIT 430.36 524.58 560.42

P/V RATIO 19.40% 21.00% 19.67%BEP (SALES) 3526.39 3649.28 4771.73MARGIN OF SAFETY 2216.64 2492.14 2847.69

INFERENCE:-

In the above table the sales, contribution, profit and margin of safety has shown an upward trend which is favorable trend, the variable cost, fixed cost should be reduced to increase contribution and profits. For this, the company has to increase sales and reduce or control the costs. The profit volume ratio (P/V Ratio) is showing a downward trend hence, it should be increased as it shows the contribution through sales volume hence sales show increasing but still contribution is less due to high cost. Hence, cost should be controlled and sales should be increased.

OBSERVATION AND FINDINGS

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OBSERVATION TABLE

RATIOS 2008 2009 2010CURRENT RATIO 4.31 6.73 10.78QUICK RATIO 3.42 3.91 7.8PROPRITORY RATIO 2.57 2.79 1.82GROSS PROFIT [%] 18.89 17.76 15.71NET PROFIT [%] 10.05 10.43 8.21OPERATING PROFIT [%] 10.57 11.46 9.29

RETURN ON CAPITAL EMPLOYED [%] 30.09 17.95 6.22

RETURN ON SHARE HOLDER FUNDS [%] 51.34 37.29 7.21

RETURN ON TOTAL ASSETS 19.92 13.32 3.96

RETURN ON NET WORTH 51.34% 37.29% 7.22%

EPS 5.13 7.64 3.55WORKING CAPITAL TURNOVER 3.41 2.39 0.89

DEBTOR TURNOVER RATIO 4.44 5.19 6.39

DEBTORS COLLECTION PERIOD(DAYS) 82 70 57

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CREDITOR TURNOVER 15.57 17.65 15.82

CREDITORS PAYMENT PERIOD 23 20 23

INVENTORY TURNOVER RATIO 10.3 5.9 3.32

INVENTORY HOLDING PERIOD 35 61 109

FIXED ASSETS TURNOVER 24.59 6.49 4.91

SALES TO CAPITAL EMPLOVED 2.99 1.71 0.75

TOTAL ASSETS TURNOVER 2.73 1.92 0.81

DEBT-EQUITY RATIO 1.03 1.77 0.81

OBSERVATION AND FINDINGS

Current ratio is increasing due to idle cash which is not deployed, because of the idle cash the operating profit margin is reduced and there is drastic fall in return on capital employed.

Even company is having huge cash and creditor turnover is very high as compared to debtors turnover, as the company is getting the payment period which is 23 days where as the receivable period is 57 days.

From the table it is evident that the company needs a strong course of action or plan to deploy the cash available so that the profitability and EPS can be restored to 2009 levels. The appropriate use of cash will also improve the return on capital employed and return on net worth.

There is marginal increase in sales but the inventory levels are increased by 66%. The increase in creditor turnover and increase in inventory level indicates the poor

symptoms of inventory management. so there is need for efficient inventory management.

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LIMITATIONS

81

LIMITATIONS

The analysis in all the research programmers’ and conclusion are extremely crucial. Therefore, earnest of efforts were made to extract the true information and present them in a comprehensive manner, yet the findings are tied up within the following boundaries: -

As our project is based on the data recorded by the company, we face the limitation of extracting that particular data because our access is limited for the sake of confidential information of the company.

The grouping of different items in the balance sheet also created hindrances, as it is very difficult to identify which item is clubbed with which head. But thanks to finance personal who made it easy to understand these clubbing.

Findings of the study are based on the assumptions that the respondents have given the correct information.

The research is limited to the period of three years, i.e. 2007-2008 and 2008-2009, 2009-2010.

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SUGGESTIONS AND RECOMMENDATION

83

SUGGESTIONS AND RECOMMENDATION

Idle cash should be invested to generate returns. Creditor period should be increased. Specific focus is required on inventory management.

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CONCLUSION

85

CONCLUSION

The business environment of the company is reasonably good. The company s track record is always oriented towards profitable growth and with strong fundamentals.

As major portion of working capital is invested in sundry debtors, company has to adopt factoring services so that cash realization will be faster.

Company should take corrective actions to write off or sell off the inventory, which is of no use and occupies unnecessary space.\

Other factory capital deals with the expenditure that is done on assets of less value, building and other direct assets. Capital consumption on this head is in company s own hands hence more importance can be given to this head. The capital should be used effectively with the improvement in manufacturing activity and minimizing cost.

Acquisition of new assets of heavy costs should be done with proper capital budgeting supported by payback period.

The company has raised sufficient fund which should be invested properly in operating activities so as to give maximum return.

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BIBLIOGRAPHY87

BIBLIOGRAPHY

M.Y. KHAN AND P.K. JAIN “FINANCIAL MANAGEMENT” , TATA MC-GRAW HILL PUBLICATIONS.

I.M. PANDEY “FINANCE MANAGEMENT”, VIKAS PUBLICATIONS. Dr. S.N. MAHESHWARI”FUNDAMENTALS OF FINANCIAL

MANAGEMENT “,SULTAN CHAND PUBLICATIONS. WEBSITE OF TEXMO PIPES AND PRODUCT LIMITED AND COMPANY

PROSPECTUS.

.

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Annexure

89

Balance Sheets

Texmo Pipes and Products limited

Figures in rs. Lakhs

Liabilities 31-03-2008 1/7/2008 Assets 31-03-2008 1/7/2008

Partners capital 941.21 600 Fixed Assets 233.47 216.96

P/L A/c 3.44 Capital work in progress

61.66

Loans & Borrowings

Current Assets loans and Advances

Secured loans 976.41 922.39 Current assets

Unsecured Loans 294.85 Sundry debtors 1291.62 1376

Current liabilities and provisions

Cash & Bank balances

69.18 107.64

Current Liabilities Closing Stock 451.94 294.86

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Sundry Creditors 286.93 282.38 Loans & Advances

Security deposit from dealers

1.8 1.75 Staff Advances 14.68 16.64

Other creditors 19 25.52 Advance Recoverable in cash or kind for value to be received

95.11 128.32

Advance from dealers

- - Security deposit 14.26 17.19

Sundry debtors having credit balance

17.29 13.1 Other loans & advances

253.87 126.19

Provisions 183.03 204.15 Deferred tax 1.54 2.12 Total 2425.67 2347.58 Total 2425.67 2347.58

Balance sheet

Figures in rs. lakhs

Particular 2-7-2008 to 31-3-2009 31-3-2010 (unaudited)

Amt AmtSources of funds

Share capital 627 1127Reserve and surplus 658.5 4420.02

Loan funds Secured loan 1798.67 4339.16

Unsecured loan 487.33 171.94

2286.01 4511.11Deffered tax liability 24.46 50.94

3595.98 10109.07

Application of funds Fixed assets

Gross block 1156.83 1844.85

Depreciation 211.41 293.25

Net block 945.41 1551.59

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Current assets loans and advances

Inventories 1260.56 2603.3

Sundry debtors 1072.22 1313.04

Cash and bank balance 151.71 1570.36

Loans and advances 531.39 3938.87

3015.89 9424.58Less: current liabilities and

provisions

Current liabilities 300.76 687.73

Provisions 147.28 186.31Net current assets 2567.84 8550.53

Miscellaneous expenditure 82.73 6.95 3595.98 10109.07

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Documents

Texmo Project