Vamsee - Ratioanalysis

7/24/2019 Vamsee - Ratioanalysis

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A Study on

RATIO ANALYSIS

Rashtriya Ispat Nigam Limited (RINL)

SUBMITTED BY

UPPADA VAMSEE

EMPLOYEE No. 124108

CONTROLLING OFFICER

Shri. S GANESAN

AGM (F&A) Corporate Accounts

Visakhapatnam Steel Plant

CONTENTS

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CHAPTER-I

(INTRODUCTION)

COMPANY PROFILE

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The Government of India has decided to set up an integrated Steel Plant at

isakhapatnam to meet the growing domestic needs of steel! isakhapatnam Steel Plant was

the effect of the persistent demands and mass movements! It is another step towards

increasing the country"s steel production!

The decision of the Government to set up an integrated steel plant was laid down #y

the then Prime $inister Smt! India Gandhi! The Prime $inister laid the foundation stone on

%th 'anuary ()*(!

The consultant+ $,s $ - Dastur & Co .Pvt/ 0td! su#mitted a techno1economic

feasi#ility report in 2e#ruary ()*%+ and detailed pro3ect report for the plant+ with an annual

capacity of 4!5 million tones of li6uid steel!

The Government of India and 7SS8 signed an agreement on (% th'une ()*) for the

co1operation in setting up 4!5 million tones integrated Steel Plant! The pro3ect was estimated

to cost to `4+9)*!%9 cores #ased on prices as on 5th:uarter of ()9(!;owever+ on completion

of the construction and commissioning of the whole Plant in ())%+ the cost escalated to

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the importance of steel the following integrated steel plant with foreign colla#orations was

constructed in the pu#lic sector in the post independence era!

ORGANIZATION CHART

5

CHAIRMAN CUM MANAGING DIRECTOR

Director

.Personnel/

Director

.Bperations/Director

.2inance/

Director

.Commercial/

DG$

.$&;S/ I,CG$

.orks/

D

.$aint!/D .$$/

G$

.2inance/G$ .P&A/Addl! G$

.$ktg/Addl! G$

.P&I8/

Addl! G$

:ATD G$

.$aint!/

Company

SecretaryAddl! G$

.$ktg/

1 Services

& ports

DG$ .Trg/ Addl! G$

.Audio &

Telco/

AG$

.Int!

Audit/ DG$ .;8D/ Addl! G$.C8&8$/

DG$ .0egal

Affairs/

Addl! G$

.Services/DG$

.System/

Addl! G$

.Steel/ G$

.D&/&

I,C PCSAddl! G$

.C+ S & C/


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VISION:

VISION 2025

To be the mot e!!"#"e$t tee% m&'e h&"$* the %&*et

"$*%e %o#&t"o$ hoe b&e+ tee% ,%&$t "$ the #o$t.

Coe V&%e:

InitiativeE ;ave a self1propelled & proactive approach

DecisivenessE Decide with speed & clarity!

thicsE ?e consistent with professional & moral values

Accounta#ilityE Take responsi#ility for actions!

0eadershipE 0ead #y eample

SpeedE Demonstrate swiftness and efficiency in

everything we do!

O/0ECTIVES:

Achieve Gross $argin to Turnover ratio F (!

Plan for finishing mill to integrate with *!4 $t capacity and commission the same #y

%(*1(9!

Achieve rated capacity of new & revamped units #y %(*1(9!

Capture markets for high1end value added products #y focusing on sector specific

applications and customer needs!

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Achieve leadership in nergy consumption #y achieving Gcal,tcs #y %(*1(9!

Glo#alisation of operations through ac6uisition of mines and setting up of marketing

network a#road!

Diversify through operationali=ing of ?hilwara $ines+ setting up of Pelleti=ationplant+ D8I1A2 unit+ heel & Ale Plants!

Create a high performance and safe work culture #y nurturing talent and developing

leaders!

To grow in harmony with the environment & communities around us!

CHAPTER-II

(THEORETICAL FRAME 1OR2)

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MEANING OF RATIO AND RATIO ANALYSIS:

According to '!?atty HThe term accounting ratio is used to descri#e significant

relationship which eist #etween figures shown in a #alance sheet in a profit and lossaccount in a #udgetary control system or in any other part of the accounting

organi=ation!

The relationship #etween two figures epressed mathematically is called a

ratio!

It is a numerical relationship #etween two num#ers which are related in some

manner!

DEFINITION:HThe relation of one amount+ a to another #+ epressed as the ratio of a to #

2HOLER

H8atio is the relationship or proportion that one amount #ears to another the first

num#er #eing the numerator and the later denominator!

H3G3GUTHMANN

SIGNIFICANCE OF RATIO ANALYSIS:The ma3or #enefits arising from ratio analysis are as followsE

8atio analysis is a very powerful analytical tool useful for measuring

performance an organi=ation!

8atio analysis concentrates on the interrelationship among the figures

appearing in the financial statements!

8atios make comparison easy! The said ratio is compared with the standard

ratio and this shows the degrees of efficiency utili=ation of assets+ etc!!

8atio analysis helps the management to analy=e the past performance of the

firm and to make further pro3ections!

8atio analysis allows interested parties like shareholders+ investors+ creditors+

government and analysts to make on evaluation of certain aspects of a firm"s

performance!

LIMITATIONS OF RATIO ANALYSIS:

The following limitations must #e taken in to accountJ

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Bver use of ratios as controls on managers could #e dangerous+ in that management

might concentrate more on simply improving the ratio that on dealing with the

significant issues! E the return on capital employed can #e improved #y reducing

assets rather than increasing profits! 8atios provide only guidelines to the management they are only the mean however+

they scratch surfaces and raise 6uestions!

Since ratios are calculated from past records+ there are no indicators of future!

The change is price level due to inflation will distort the relia#ility of ratio analysis!

8atios are calculated from financial statements which are agented #y the financial

#ases and policies adopted on such matters as depreciation and the valuation of

stocks!

The analyst should have through knowledge of methods of window dressing!

Since ratios are calculated from past records+ there are no indicators of future!

8atio are #ased only on the 6uantitative information+ hence 6ualitative information

.i!e!+ character+ managerial a#ility+ etc!+/ puts limit on the ratios!

8atios are computed on the #asic financial statements which are historical in nature!

CLASSIFICATION OF RATIOS:

Classification from the point of view of financial management or o#3ective

0i6uidity ratios!

Turnover ratios!

Profita#ility ratios! Solvency ratios

(! LI4UIDITY RATIOE .Shot tem o%e$#.)

K0i6uidity" means a#ility of a firm to meet its current o#ligations! The li6uidity

ratios+ therefore+ try to esta#lish a relationship #etween current lia#ilities+ which are

the o#ligations soon #ecoming due and current assets+ which presuma#ly provide the

source from which these o#ligations will #e meet! In other words the li6uidity ratios

answer the 6uestions E H will the company pro#a#ly #e a#le to meet its o#ligationwhen they #ecome dueL The following ratios are commonly used to indicate the

li6uidity of #usiness!

Current ratio!

:uick ratio!

A#solute li6uid ratio!

I3 CURRENT RATIO:

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This ratio is most commonly used to perform the short1term financial analysis!

Also known as the working capital ratio+ this ratio matches the current assets of the

firm to its current lia#ilities!

2ormulaE

Current asset

Current ratio M NNNNNNNNNNNNNNN

Current lia#ilities

SIGNIFICANCE AND O/0ECTIVE:

Current ratio throws good light on the short term financial position and

policy! It is an indicator of a firm a#ility to promptly to meet the current lia#ilities! A

relatively high current ratio indicates that the firm is li6uid and has the a#ility to meet its

current lia#ilities! Bn the other hand a relatively low current ratio indicates that the firm will

find it difficult to pay its #ills!

-ormally a current ratio of % E ( is considered satisfactory in other words+

current assets should #e twice the amount of current lia#ilities! If the current ratio is (E( it

means that funds yielded #y current assets are 3ust sufficient of pay the amounts due to

various creditors and there will #e nothing left to meet the epenses which are #eing currently

incurred! Thus the ratio should always #e more than ( E ( a very high current ratio is also not

desira#le #ecause it indicates idleness of fund which is not a sign of efficient financial

management!

II3 4UIC2 RATIO:

This ratio is also known as acid test ratio or li6uid ratio! It is a more severe test of

li6uidity of a company! It shows the a#ility of a #usiness to meet its immediate financial

commitments! It is used to supplement the information given #y the current ratio!

2ormulaE

:uick assets

:uick ratio M NNNNNNNNNNNNNNNNNNNNN

:uick lia#ilities


:uick ratio is a more rigorous test of li6uidity of a firm than the current ratio!

hen 6uick ratio is used along with current ratio+ it gives a #etter picture of the firm"s a#ility

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to meet its short term lia#ilities out of its short term assets! This ratio is of great importance

for #anks and financial institutions!

Generally a 6uick k ratio of ( E ( is considered to represent a satisfactory

current financial position! In the illustration (5 !% a#ove+ the 6uick ratio of !5*E ( is not all

satisfactory #ecause it is less than ( E (! Bn account of such a low ratio the #usiness may gind

itself in serious financial difficulties!

53 TURNOVER RATIO:

Turnover ratios are used to indicate the efficiency with which assets

and resources of the firm are #eing utili=ed! These ratios are known as turnover

ratios #ecause they indicate the speed with which assets are #eing converted or

turned over into sales! These ratios thus epress the relationship #etween sales and

various assets! A higher turnover ratio generally indicates #etter use of capital

resources which in turn has a favora#le effect on the profita#ility of the firm!

Im,ot&$t T$oe &t"o:

Inventory turnover ratio

De#tors turnover ratio

2ied assets turnover ratio

orking capital turnover ratio

Capital turnover ratio

Creditor"s turnover ratio!

INVENTORY TURNOVER RATIO:

This ratio is calculated #y dividing the cost of goods sold #y average

inventory!

2ormulaE

Cost of goods sold

Inventory turnover ratioM NNNNNNNNNNNNNNNNNNNNNNN

Average stock .or inventory/

SIGNIFICANCE AND O/0ECTIVES:

Inventory or stock turnover ratio indicates the efficiency of a firm"s inventory

management! This ratio gives the rate at which h stocks are converted into sales and

then into cash a low inventory or unsala#le gods etc! generally speaking+ a high stock

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turnover ratio is considered #etter into indicated that more sales are #eing produced

#y each rupee of investment in stock #ut a higher stock turnover ratio may not always

#e an indicator of a favora#le results! It may #e the result of a very low level of stock

whis meeting customers" demands and the company cannot earn maimum profits!

Thus too high and too low inventory turnover ratio may not #e good and

should #e investigated further a company should have a proper inventory turnover

ratio so that it is a#le to earn a reasona#le margin of profit!

DE/TORS TURNOVER RATIO:

This ratio indicates the relationship #etween net credit and trade

de#tors! it shows the rate at which cash is generated #y the turnover of de#tors!

2ormulaE

Credit sales

De#tors turnover ratioMNNNNNNNNNNNNNNNNNNNNNN

Average de#tors

SIGNIFICANCE AND O/0ECTIVES:

The significance of this ratio lies in the fact that de#tors constitute the important items

of current assets and this ratio indicates as follows to how many days" average sales are tied

up in the amount of de#tors! Changes in this ratio are an ecellent supplement to the

information provided #y current ratio!

1OR2ING CAPITAL TURNOVER RATIO:

This ratio indicates the efficiency or inefficiency in the utili=ation of forking capital in

making sales! It is computed as followsJ Sales .or Cost of Sales/

orking capital turnover 8atioM

-et working Capital


A high working capital turnover ratio shows the efficient utili=ation working capital in

generating sales! A low ratio+ on the other hand+ may indicate ecess of net considered

capital! This ration thus shows whether working capital is efficiently of the entire working

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capital whereas stock #etter than Stock Turnover 8atio #ecause it shows the utili=ation of

the inventories which is only a part of working capital!

CAPITAL TURNOVER RATIO:

This ratio shows the relationship #etween cost of sales .or sales/ and the total capitalemployed!

2ormulaJ

Cost of Sales .or sales/

Capital Turnover 8atioM

Total Capital mployed


This ratio shows the efficiency with which capital employed in a #usiness is used! A

high capital turnover ratio indicates the possi#ility of greater profit and a low capital turnover

ratio is assign of insufficient sales and possi#ility of lower profits!

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CHAPTER 6III

(DATA ANALYSIS AND INTERPRETATION)

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DATA ANALYSIS 7 INTERPRETATION

R&t"o &$&%." "$ VSP8RINL

93 LI4UIDITY RATIO:

CURRENT RATIO

Current assets

Current ratio M 11111111111111111111111111111111111111111

Current lia#ilities

TA/LE SHO1S YEAR 1ISE CURRENT RATIO

.`in Crores!/

YEAR CURRENT

ASSETS

CURRENT

LIA/ILITIES

RATIOS

%(1%(( >!(* 4%*(!54 (!*4

%((1%(% 95)%!(( *%%(!>( (!(*

%(%1%(4 ))**!*< ((95!>* !)9

%(41%(5 95!>> (%((! !9%

%(51%(< )>4*!5> (


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INTERPRETATION:

It has #een o#served that the 6uick ratio of SP is high compared with ideal ratio

till %(1%((! ?ut it is #elow ideal ratio for the year %((1%(% onwards!

As the 6uick ratio during the period of study is higher than that of the ideal ratio

till %((11%(%+ the li6uidity position was very good #ut it is not satisfactory from

the year %(%1%(4!

A/SOLUTE LI4UID8 CASH RATIO

A?SB07T ASSTS

A#solute li6uid, cash ratioE 11111111111111111111111111111111111111

C788-T 0IA?I0ITIS

TA/LE SHO1ING YEAR 1ISE A/SOLUTE LI4UID RATIO

(`"$ Coe)

YEAR CURRENT

ASSETS

CURRENT

LIA/ILITIES

RATIOS

%(1%(( ())9!9) 4%*(!54 !>(

%((1%(% %>9!45 *%%(!>( !%9

%(%1%(4 (>%* !(>

%(41%(5 (* !%

%(51%(< >4!)5 (


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2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

ABSOLUTE LIQUID RATIOS

RATIOS

INTERPRETATION: Ideal 8atio E


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2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

0

0.1

0.2

0.3

0.4

0.50.6

0.7

0.8

LIQUID RATIOS

RATIOS

INTERPRETATION:

The li6uid ratio in the year %(41%(5 is !55

It is slightly decrease in %(51%(>!5< (%%9!44 4!5

%(51%(< >%!49 )4(5!4> !>*

CHART PREPARATION

2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

0

1

2

3

4

5

6

OPERATING PROFIT RATIOS

RATIOS

INTERPRETATION:

It indicates the company"s operational efficiency!

RETURN ON INVESTMENT RATIO

-T P8B2IT .A2T8 TAO/

8eturn Bn Investment 8atio M

S;A8 ;B0D8 27-DS

TA/LE SHO1N ON RETURN ON INVESTMENT RATIO

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43 TURNOVER RATIO:

STOC2 TURNOVER RATIO

SalesStock Turnover 8atio M

Stock

TA/LE SHO1N ON STOC2 TURNOVER RATIO

(`"$ Coe)

YEAR SALES STOC2 RATIOS

%(1%(( (5*(!(9 4%( 454!(( 4!9)%(%1%(4 (%((!>) 49%9!> 4!(>

%(41%(5 (%%9!44 49>4!5 4!((

%(51%(< )4(5!4>


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The Inventory Turnover 8atio during the year %(51(< was (!9

less stock turnover ratio in the year %(51%(!)% 15

%(51%(< )4(5!4> 1


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It can #e concluded that the management is not efficient in converting the Assets into cash!


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EARNING PER SHARE

TA/LE SHO1ING YEAR 1ISE EARNING PER SHARE

(`"$ Coe)

Ye& RATIO

%(1%(( =>

%((1%(% 95?

%(%1%(4


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arnings per share ratio are used to find out the return that the shareholder"s

earn from their shares! After charging depreciation and after payment of ta+ the remaining

amount will #e distri#uted #y all the shareholders!

-et profit after ta is decreased due to the huge decrease in the income from

services! That is the amount which is availa#le to the shareholders to take! The share capital

is constant from the year %9! Due to the decrease in net profit the earnings per share is

decreased in %(

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CHAPTER-IV

(FINDINGS AND SUGGESTIONS)

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SUMMARY:

isakhapatnam Steel Plant was founded on % th'an "*( #ut #ecame fully operational

on (stAug ")%! SP is the first shore #ased integrated steel plant with new technology+ large

scale computeri=ation and automation! The organi=ational manpower has #een rationali=ed

to operate it at international levels of efficiency and to attain international la#or productivity!

The production+ commercial and financial performance has #een improving with the

passage of years! The financial analysis of SP #y the use of various techni6ues i!e! 8atio

analysis shows thatE

(/ The li6uidity position of the company is good!

%/ The company is low de#t company!

4/ The net worth of SP is satisfactory

5/ It is noted that the inventory level is increasing!

/ 0i6uidity position of SP is very good!

*/ The company"s accumulated funds are #eing used for epanding #usiness

operations and epansion works and there #y the Current Assets are reducing

and the Current ratio is decreasing year #y year!

9/ Security to share holders is envisaged!

)/ The working capital utili=ation is efficient in the particular year

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SUGGESTIONS

The following suggestions will improve the financial position of the SP!

PRODUCTION

(/ -eed for continuous up gradation of technology for improving the processes!

%/ ffort should #e made at cost savings particularly in spares and energy

consumption!

4/ 7sing the natural gas reserves of @G #asin+ ;ot metal production capacity can

#e enhanced with the present ?2 facility with negligi#le investment!

FINANCE

(/ Improving financial leverage ratio for #etter returns!

PERSONNEL:

(/ 8ationali=ation of eisting man1power with effective training for future

epansion of the plant!

%/ Improving efficiency through #etter ;8D programs!

4/ Providing #etter motivation!

5/ Striving towards #ecoming the most chosen employers!

MAR2ETING

(/ Continuously monitoring the indigenous sale+ eport sale ratio to capture the

#est of markets!

%/ Increasing the net reali=ation #y selling in the most profita#le region!

4/ Identifying new markets and new application of the company"s product!

5/ Improving reali=ation #y identifying value added products and providing

feed#ack to production department!


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/I/LIOGRAPHY

/OO2S:

93 F"$&$#"&% M&$&*eme$t: Theo. 7 Pt"#e (

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