Professional Documents
Culture Documents
BONAFIDE CERTIFICATE
EXCEL ENGINEERING COLLEGE (Affiliated to Anna University of Technology Coimbatore & Approved by AICTE, New Delhi)
DEPARTMENT OF MANAGEMENT STUDIES
Project Guide
Internal Examiner 2
External Examiner
DECLARATION
fulfillment for the award of Master of Business Administration (MBA) is the original work carried out by me. It has not formed the part of any other project work submitted for award of any degree or diploma, either in this or any other University.
ACKNOWLEDGEMENT I express my sincere thanks to our Honorable Chairman Dr.A.K.NATESAN and Vice chairman Dr.N.MATHAN KARTHIC of Excel group of Institutions Komarapalayam for giving me an opportunity to be a student of this reputed institution. I extend my respect to our principal Dr.G.RAMADAS ME., for his valuable support in carrying out my project work. Its my privilege to thank our HOD Mr.G.DHANASEKARAN, MBA., MMM., M.Phil, Ph.D., department of management studies for their support in my project guidance for doing the project guidance for the project work. I express my sincere thanks to my project guide Mr. G.DHANASEKARAN, MBA., MMM., M.Phil, Ph.D.Assistant Professor for her valuable suggestion and guidance for doing the project work. I deem it a privilege to express my sense of gratitude to Mr.
P.P.MOHANAN(GM) M.Com, MBA for given me this wonderful opportunity to do a project in MANNARKKAD STEELS PVT LIMITED I also express my gratitude to all faculty members, my parents who have helped to carry out this work last but not least I thank almighty God for the blessing showered on me during these periods. (ABDUL BASHEER. M)
TABLE OF CONTENTS
Serial no. 1. 1.1 Introduction 1.2 Design Of The Study 1.3 Industry Profile 1.4 Company Profile 1.5 Review Of Literature 1.6 Objective Of Study 1.7 Scope of the study 1.8Limitation Of Study 2. CHAPTER II RESEARCH METHODOLOGY 2.1Data Collection 2.2Tools Of Analysis 2.3 Research Design 2.4 Sample Size 3. CHAPTER III ANALYSIS AND INTERPRETATION 3.1 Ratio Analysis 3.2 Comparative financial statement 4. CHAPTER IV FINDINGS,SUGGESTIONS AND CONCLUSTION 4.1 Findings 4.2 Suggestions 4.3Conclusion BIBLIOGRAPHY APPENDIX Description CHAPTER I INTRODUCTION Page no. 1-21 1 4 5 8 12 19 20 21 22 22 22 22 22 23-63 23 28 64-67 64 65 67 68 69
ABSTRACT
Financial analysis is useful to identify the strengths and weakness of the firm by establishing a relationship between the items of the balance sheet and profit &loss Account. In order to compensate with the fast changes in the requirements of the financial effectives, it is necessary to analyze the financial performance of the organization. The objective of this study is to analyze the financial performance of the MANNARKKAD STEELS PVT LTD through profitability, liquidity and turnover from 2005-2006 to 2009-2010. The data has been collected from the annual reports and hence it is an analytical study. The analysis is made by financial ratios of profitability and liquidity. The analysis shows financial performance of MANNARKKAD STEELS PRIVATE LIMITED. From the profitability analysis it is clear that the companys profit is satisfactory. But the current ratio level is not good. So the company has to take immediate measure to improve the liquidity position.
LIST OF TABLES
Serial no. 1. Description RATIO ANALYSIS a) Table showing Current Ratio b) Table showing Quick Ratio c) Table showing Turnover Ratio 1. Table showing Inventory or Stock Turnover Ratio 2. Table showing Debtors Turnover Ratio 3. Table showing Creditors Turnover Ratio 4. Table showing Fixed Asset Turnover Ratio 5. Table showing Current Asset Turnover Ratio 6. Table showing Net Working Capital Turnover Ratio 7. Table showing Total Asset Turnover Ratio d) Table showing Profitability Ratio 1. Table showing Gross Profit Ratio 2. Table showing Net Profit Ratio 3. Table showing Return On Capital Employed 4. Table showing Operating Profit Ratio 5. Table showing Return On Total Asset 6. Table showing Value added Per Employee e) Table showing Structured Health Ratio 1. Table showing Current Asset To Fixed Asset Ratio 2. Table showing Current Asset To Total Asset Ratio f) Table showing Other Ratios 1. Table showing Raw material consumption to Value of Production 2. Table showing Working Capital In Month Of Production 2. TREND ANALYSIS a) Table showing Fixed Asset Turnover Ratio b) Table showing Net Profit Ratio c) Table showing Return On Capital Employed d) Table showing Current Asset To Total Asset Ratio COMPARITIVE FINANCIAL STATEMENT Balance sheet comparative from 2006-2010 Page no.
3.
LIST OF CHART
Serial no. 1. Description RATIO ANALYSIS a) Chart showing Current Ratio b) Chart showing Quick Ratio c) Chart showing Turnover Ratio 1.Chart showing Inventory or Stock Turnover Ratio 2.Chart showing Debtors Turnover Ratio 3.Chart showing Creditors Turnover Ratio 4.Chart showing Fixed Asset Turnover Ratio 5.Chart showing Current Asset Turnover Ratio 6.Chart showing Net Working Capital Turnover Ratio 7. Chart showing Total Asset Turnover Ratio d) Chart showing Profitability Ratio 1. Chart showing Gross Profit Ratio 2. Chart showing Net Profit Ratio 3. Chart showing Return On Capital Employed 4. Chart showing Operating Profit Ratio 5. Chart showing Return On Total Asset 6. Chart showing Value added Per Employee e) Chart showing Structured Health Ratio 1. Chart showing Current Asset To Fixed Asset Ratio 2. Chart showing Current Asset To Total Asset Ratio f) Chart showing Other Ratios 1. Chart showing Raw material consumption to Value of Production 2. 2. 1. 2. 3. 4. Chart showing Working Capital In Month Of Production TREND ANALYSIS Chart showing Fixed Asset Turnover Ratio Chart showing Net Profit Ratio Chart showing Return On Capital Employed Chart showing Current Asset To Total Asset Ratio Page no.
RATIO ANALYSIS
Ratio Analysis is one of the most powerful tools of Financial Analysis. It aims at making use of quantitative information for decision making. A ratio is an expression of relationship between two figures or two amounts. It is a yard-stik which measures relationship between two variables. Ratios are simply a means of highlighting in arithmetical term the relationship between figures drawn from various financial statements. Robert Anthony defines a ratio as simply one number expressed in terms of another. A great number of ratios can be computed from the basic financial statements Balance Sheet and Profit and Profit and Loss Account.
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Ratio Analysis is the most important method of financial analysis. Ratio analysis is not just comparing different numbers from the Balance Sheet, Income Statement and Cash Flow Statement. It is comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between
individual values and relate them to how a company has performed in the past and might perform in the future. All stakeholders within the company need to be able to appreciate how the company is performing. Their understanding of how the firm is performing is enhanced through ratio analysis.
OPERATING CYCLE
The Operating Cycle id duration in time taken by a unit of cash to circulate through the business operation. The time between purchase of raw materials and their conversion into cash in know as operating Cycle. It is also called Working Capital Cycle. A useful tool for managing working capital is the Operating Cycle. The Operating Cycle analysis the accounts receivable, inventory and accounts payable cycles in terms of number of days. In other words, accounts receivable are analyzed by the average number of days it takes to collect an account. Inventory is analyzed by the average number of days it takes to collect an account. Inventory is analyzed by the average number of days it takes to turn over the sale of a product ( from the time it comes in the store to the point it is converted to cash or an account receivable). Account Payable are analyzed by the average number of days it takes to pay a supplier invoice.
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CAPITAL STRUCTURE
It refers to the determination of ratio of capital to be raised from different sources like issue of shares, debentures and bonds. It is a managerial decision regarding the proportion of different capital mix at the lowest cost of capital. According to Geristenberg capital structure of a company refers to the composition or markup of its capitalization and it includes all Long Term Debts, Preference Share Capital and Share holders und Components: Capital Structure= Total Assets Total Liabilities (or) Equity Share Capital+Preference Share Capital+Long term Debt + Reserves and Funds. Financial Structure=Total Liabilities (or) Long term liability + Current Liability
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been going on along the world, especially the infrastructural works and real estate projects that has been on the boom around the developing countries. Steel Industry was till recently dominated by the United State of America but this scenario is changing with a rapid pace with the Indian steel companies on an acquisition spree. The most significant growth that can be seen in the Steel Industry has been observed during the period 1960 to 1974 when the consumption of steel around the whole world doubled. Between these years, the rate at which the Steel Industry grew has been recorded to be 5.5%. This roaring market saw a phase of deceleration from the year 1975 which continued till 1982. After this period, the continuous fall slowed down and again started its upward movement from the early 1990s. this main demand creators for Steel Industry are Automobile industry, Construction Industry, Infrastructure Industry, Oil and Gas industry, and Container Industry. Indian steel Industry:The iron and steel industry in India is over 122 years old. However, a concerted effort to increase the steel output was made only in the early years of planning. Three integrated steel plants were set up at Bhilai, Dugapur and Rourkela. Later two more steel plants, at Bokaro and Vishakhapatnam, were set up. Private sector plants, of which the Tata Iron and Steel Company (TISCO) is the biggest, have been allowed to raise their capacity. TISCO and a large number of mini steel plants in the country contribute about 40 per cent of the steel production in the country. The Government has given a push to sponge irion plants to meet the secondary sectors requirement of steel scrap. During Ancient Period:The history of iron and steel making in India goes back by several centuries. It dates to 480 BC when archers in India used arrows tipped with steel. The iron pillar of Dhar near Indore in Madhya Pradesh dates back to about 321 AD, the iron pillar of Kanab Minar near Delhi dates back to about 400 AD and the iron beams of Sun temple of Konark in Orissa dates back to 13th century. These pillars are a testimony to ancient Indias expertise in the making of steel.
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Before Independence:The roots of the Indian Steel industry in modern times can be traced to the year 1874, when a company called Bengal Iron works at Kulti near Asansol in West Bengal produced iron. One of the most important landmarks in the history of Indian steel industry was the commencement of the Tata Steel Company at Jamshedpur in the state of Bihar in 1907. The other prominent steel manufacturers before independence were Indian Iron and steel Company (1922), Mysore Iron steel Works(1923) and Steel Corporation of Bengal(1937). After Independence:India found it difficult to sustain development in steel sector after independence on its own due to the lack of technological development. The high cost of developing decided to go for synergy with other countries for technology transfer. Some of the prominent steel plant set up then was in Rourkela in collaboration with West Germany and in Bokaro in collaboration with Russia. These steel plants came under the purview of public sector enterprises. Future trends: It has to be said that the global recession has affected the Indian steel industry especially stainless steel, but the steel industry is trying to offset the negative effect of the recession by focusing on transportation and construction projects which are usually funded by the government. India is the only country globally to record a positive overall growth in crude steel production at 1.01 per cent for the period January March 2009. It is estimated that Indias steel consumption will grow at nearly 16% annually till 2012. The National steel Policy has forecasted the demand for steel would reach 110 milllion tons by 2019-2020.
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BOARD OF DIRECTORS
Mannarkkad, steel is a private limited company with 6 share holders. They are the owners of the company. Managing director:The managing director is in charge of the running of the company. He maintains a good rapport with the workers and ensures the good employer-employee relationship.
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General Manager:In Mannarkkad Steels, the general manager is in charge of the all department of the company. He advises on selection and recruiting procedures of personnel, work compensation method and employee welfare activities. He acts as liaison between the laboures and the management. He also oversees the functioning of the inventory management and the pubic relations office.
VARIOUS DEPARTMENTS
Purchase department:Purchase manger is the in-charge of purchase department. In this department they purchase the raw materials for their production process. Under this department there are two sections-internal purchase and import purchase. Account department:The account is in charge of the finance and accounting activities of the company. The accountant also oversees the fund flow in the company and handles the communication with the creditors and the debtors. He also collects information regarding the credit worthiness of distribution and plays a key role in determining sales targets. They stored information relating with management wise and also department wise. Sales department:In these department all sales activities are directed and controlled. In this department a sales manger is appointed and under this sales manager a number of subordinates are work together. The main objective of sales department is to maximize the sales with minimum expenses. Maintenance department:In these department they maintain electrical and mechanical sections. The main function of this department is to maintain a good of machines and equipments and ensure the smoothe work flow.
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Production department:Production department is the main functioning department of the company. The production manager is in charge of production activities of the company. In steel industry, production is the main function. Above 85% of the expenses of the company is incurred in the course of production. So main objective of production department is to increase production, and minimize the wastage. Maximum utilization of available resources is the one of the principle followed in this department. Under this department there are other various section like store section, production section, laboratory section, delivery section.
MANUFACTURING ACTIVITIES OF MS INGOTS:Scraps:Scraps are received from different suppliers including imported scraps, sponge iron etc. Inspection:After receiving the scrap, the same is inspected visually and unloaded the same as per the type of scrap, and then the samples are drawn for chemical analysis. If it is mixed scrap, composition sample is drawn for testing. Then the scraps are segregated to remove the foreign matter, ie rubber, cast iron , alloy materials etc to ensure the scrap is as per IS2830-1992. Charging to furnace:After preparation of furnace, scraps are charged to furnace for melting. While melting, sample at , level are taken for analysis of % carbon, % manganese, aluminum fines etc are added to get the required quality. To purify the metal, de sulphar, de phosphorous/oxidize will be added to achieve required composition. A ladle sample will be taken for testing as soon as heat is ready for tapping and analysis for all required elements. Ingot of that heat will be kept separates as per the grade to which it confirms with the nose marked in the hot chalk.
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MS SCRAP
STORAGE
HEATING FURNACE RENAIRS ETC PREPARATION OF CHARGE SECONDARY PREPARATION MIXING THE CHARGE
FINAL INSPECTION
INGOTS
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management by analyzing the Working Capital management policies of 32 non-financial industries in USA. According to their findings significant differences exist between industries in Working Capital practices over time. Moreover, these Working Capital practices, themselves, change significantly within industries over time. In order to validate the results found by Soenen on large sample and with longer time period, jose et al. examined the relationship between aggressive working capital management and profitability of US firms using Cash Conversion Cycle (CCC) as a measure of working capital management where a shorter CCC represents the aggressive relationship
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between the cash conversion cycle and profitability indicating that more aggressive working capital management is associated with higher profitability. Generally, researchers and economists evaluate firms performance using a variety of financial ratios. There are abundant studies that investigated prediction of the financial performance of a firm. Bahtiar jamili Zaaini, Siti Mariyam Shamsudin and Saiful Hafizah Jaaman provide a comprehensive review on their work on the year 2008, Predicting the Financial Performance of Publicly-Traded Malaysian firms using Rough sets based feature selection techniques. They stated that the different also the techniques used to determine optimal ratios and classifiers used to classify firms performances. There were numerous financial ratios that can be considered, therefore, finding the most significant financial ratio is very crucial as it will affect the accuracy. In this section, in order to have more information about the related methods regarding two points of view Dividend policy and Cost of capital which selected companies are going to be analyzed based on them, various works and theories regarding them are reviewed.
Dividend Policy
As introduced, dividend is the distribution of companys profits or surplus among shareholder members. This surplus may be paid out as dividends or reinvested in the business called retained earnings. The firm distributes its profits in order to benefit the shareholders in case of their financials. Hence, it is one of the important strategies that companies undertake. On the other hand, shareholders usually do not rely on such dividends because their major benefits from shares and stocks come from stock exchange and buying and selling shares which they earn or in the bad case, lose considerably. A companys dividend policy refers to the changes in value of the firm and consequently the price of its stock and shares when dividend increases or conversely decreases. Thus, it is a trade of between the retained earnings on one hand and the distribution of cash or other types of securities on other. In general, as Alex Tajirian explains in his book, dividend can be given to shareholders in four forms. These types of dividend are as follows:
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Cash dividend company distributes dividend to shareholders in form of cash. As an example, shareholders receive $0.50 for each of their shares. Stock dividend instead of having a cash outflow, company distributes the dividend in form of stock. For example, company gives one new stock to the respective shareholder for each ten shares he/she holds. Stock Repurchase to overcome the problem of leaving the cash in the regular form of dividend, company use a strategy to purchase the sold shares from shareholders. Property dividends in this form of dividend which is very rare, shareholders receive assets in the issuing company or other relevant subsidiaries. There are some critics regarding dividend payouts. Many financial researchers as well as managers and board members are in this belief that if the company retains the surplus and profits and reinvest them in the company and projects with positive net present value, it will result more benefits for the company rather than paying out as dividends. An important ration regarding dividends is Pay-out Ratio which give information about the amount of dividend has paid out by the company and the amount saved in order to increase the internal growth. Dividend payout ratio is calculated as:
In general, companies and individuals look for stocks and shares issued by companies with dividend payout ration between 40 to 60 percentages. This shows that good portion of the profit of the company is used to be paid out as dividend and a good portion is also used for reinvestment in the firm and increases the rate of internal growth. It is possible for companies to have dividend payout ration greater than 100% but it is difficult to sustain and hinders the growth of the company. Some of the theories regarding the corporate dividend policy are discussed in the following section. These theories are divided into two general categories Full information models (taxfactor) and models of information asymmetry.
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1. Full information models The discussion started with the Miller-Modigliani Proposition and later research finds the clientele effect is responsible for only nominal alteration in portfolio composition rather than the major differences predicted by Miller Masulis and Truemans model predicts that investors with differing tax liabilities will not be uniform in their ideal firm investment/dividend policy. They discuss that as liability on dividend increases, dividend payment decreases and earning investment would increase. Conversely if the liability on dividend decreases, dividend payment increases and earning investment decreases. Farrar and Selwyn work implies that investors tend to maximize after-tax income. This model suggests no dividend to be paid out rather stock repurchase should be used. This model was extended by Brennan later. In another work, Miller suggests a strategy if tax-sheltering of income by high-tax-bracket individuals. 2. Models of Information Asymmetry These models can be further divided into signaling models, Agency cost models, Free cashflow models, and Behavioral models. a) Signaling Models - The path of signaling models was all started from the work by Akerlof which used the car market and then generalized later by Spence and became a prototype of financial modeling of signaling. Many other researchers have worked on signaling that because of our limitation in this work, we refuse to explain. Examples of such works are Bhattacharya, Talmor, Hakansson, John and Williams, Miller and Rock, Bar-Yosef amd Juffman and so fourth. b) Agency Cost Models - The famous works in this field are Adam Smith, Scott, Carlos, Jensen & Meckling, Fama & Jensen which introduced the use of covenants to tackle the potential shareholders-bondholders conflict. c) Free Cash-flow Hypothesis Jensen combined te agency theory and Market information asymmetry.
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d) Behavioral Models Schillers model implies that investor behavior is influenced by societal nouns and attitudes. Based on the personal style of living and decision making,different investors act differently in the same situations. Schillers work explains this phenomenon. Michaels work implies that the managers like investors are influenced by other managers in other firms in making decisions in case of dividend payouts. Other works in this field that worth mentioning here are Ho and Robinson and Frankfurter and Lane. As the summary and conclusion of this section, this can be said that policy of dividend payout is still a puzzle for managers and stakeholders. Managers decrease dividend only when necessary in the event of the poor earnings with insufficient reserve to find the dividend.
Cost of Capital
Cost of capital is referred to cost of obtaining funds for, or conversely, the return necessary to ensure a positive net present value to a capital budgeting project. In general, Capital is used for funding the business which returns for those who financed the business by their money. Hence, they expect their return on capital to be greater than cost of capital. The cost of capital is an opportunity cost of finance, because it is the minimum return which an investor requires. Managers use this measure in order to estimate the long-term capital budgeting projects, mergers and acquisitions analysis and etc. For shareholders it is the dividend they expect to receive plus a capital gain on the value of their shares, while for loan holders it is the rate of interest which is quoted on the loan. Failure to pay such required return will result in the providers of finance transferring their holdings to other opportunities with a better rate of return. Cost of capital includes Cost of Debt and Cost of Equity. Cost of debt A company uses different forms of debt (such as bonds and loans), hence these debts must be paid back in a particular rate of return. Cost of debt is a measure which helps to give an idea to the investors about the rate of return and riskiness of the company. Therefore for comparing different companies, investors can use this measure cost of debt to identify riskier investments in companies. Normally, risky companies have higher cost of debt.
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Since the Cost of capital is the payout rate of the debts, it can be calculated based on beforetax and after-tax. To calculate the after tax rate of cost of capital, we simply multiply the before-tax rate by one minus marginal tax:
Cost of equity In finance, the cost of equity refers to the minimum rate of return a firm must offer the shareholders to compensate them for standing the risk of investment as well as the delay in their returns. The cost of equity is generally the rate of return on an investment that is required by ordinary shareholders. This return includes both dividend and capital gains. Therefore the cost of equity is the cost of capital which equate the current market price of the share with the discounted value of all future dividends in perpetuity. In other words, it reflects the opportunity cost of investment for individual shareholders and is calculated as follows:
There are some other methods that the cost of equity can be calculated by. An example of such methods is CAPM (Capital Assessment Pricing Model). Which is used to theoretically determination of required rate of return on an asset.
Another way of calculating the cost of equity is to take the Risk free return (return of the government bond) and adding to that the companys Beta (as published frequently by certain investment services companies) times the difference of an Average stock return minus the Risk-free return:
In above equation, risk free return refers to interest rate that would be returned on an investment which was completely free of risk. Beta is a figure regarding a stock or portfolio which describes the relation of its returns with the financial market as a whole.stock returns are usually calculated for holding periods month, quarter or a year.
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Another way of calculating the cost of equity can be resulted by the reformation of above equation into: In this formula, risk free premium is the minimum difference a person or an investor is willing to take an uncertain bet, between the expected value and the certain value that he/she is indifferent to. In other words, risk premium is the expected rate of return above the risk free interest rate. Equity Beta in the above formula is a measure that reflects the systematic business risk and financial risk of a company. And last but not least, the riskless rate is the rate of return regarding a risk-free investment. Now that the concepts and calculations of different dimensions that we want to analyze on our three companies are defined and explained, we are going to have a brief introduction of those companies as well as the analysis of their financial reports in the next chapter, followed by a comparison of the overall performance of each company and required recommendation to improve their performance in the market.
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1. Studying the financial statements analysis needs and its implication for the MANNARKKAD STEELS PVT. LTD. 2. Impact of ratio analysis for MANNARKKAD STEELS PVT. LTD. 3. To study how the short term funds and long term funds generated.
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2.1
DATA COLLLECTION
The companys annual reports and annual financial statement were used as sources
of data. The study is mainly based on secondary data obtained from the financial reports and other necessary records provided by the firm for the study. Observation is widely used in this study.
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4)
Change of accounting procedure Change in accounting procedure by a firm often makes ratio analysis misleading,
e.g., a change in the valuation of methods of inventories from FIFO to LIFO increase the cost of sales and reduces considerably the value of closing stocks which makes stock turnover ratio to be lucrative and an unfavorable gross profit ratio. 5) Window dressing Financial Statements can easily be window dressed to present a better picture of its financial and profitability position to outsiders. Hence, one has to be very careful in making a decision from ratios calculated from such financial statements. But it may be very difficult for an outsider to know about the window dressing made by a firm. 6) Personal bias Ratios are only means of financial analysis and not an end in itself. Ratios have to be interpreted and different people may interpret the same ratio in different ways. 7) Incomparable Not only industries differ in their nature but also in the firms of the similar business widely differ in their size and accounting procedures, etc. It makes comparison of ratios difficult and misleading. Moreover comparisons are made difficult due to differences in definitions of various financial terms used in the ratio analysis. 8) Absolute figures distortive Ratios devoid of absolute figures may prove distortive as ratio analysis is primarily a quantitative analysis and not a quantitative analysis. 9) Price level changes While making ratio analysis, no consideration is made to the changes in price levels and this makes the interpretation of ratios invalid. 10) Ratios no substitutes Ratio analysis is merely a tool of financial statements. Hence, ratios become useless if separated from the statements from which they were computed.
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CLASSIFICATION OF RATIOS:Ratios may be classified in a number of ways depending upon one or the other similarity. Some important classifications are given below:
I.
This classification is based on the statement from which items are taken. a) Balance Sheet Ratios:- These ratios deal with relationship between items or groups of items which are both in the balance Sheet. E.g. current Ratio, Acid Test Ratio, Debt Equity Ratio, etc. b) Income Statement Ratios:- These ratios focus on the relationship between the two items or group of items, all of which are drawn from the revenue statement. These ratios are also known as Operating Ratio. E.g. gross Profit Ratio, Stock Turnover Ratio, Net Profit Ratio, etc. c) Combined Ratios:- these ratios depict the relationship between two items, one of which is drawn from the Balance Sheet and the other from the revenue statement. E.g : Debtors Turnover Ratios, Asset Turnover Ratio, Turn on Capital Employed, etc. II. Classification According to Nature
This mode of classification includes in its fold four different types of accounting ratios which are as follows: a) Liquidity Ratios:- These ratios portray the capacity of the business unit to meet its shortterm resources. E.g. current Ratio, Acid Test Ratio, etc. b) Leverage Ratios:- These ratios are also called efficiency ratios. These ratios measure the owners stake in the business vis--vis that of outsiders. The long term solvency of the business can be examined by using leverage ratios. E.g : Debt-Equity Ratio, Proprietary Ratio, etc. c) Activity Ratios: These ratios evaluate the use of the total resources of the business concern along with the use of the components of total assets. More precisely, they are intended to measure the effectiveness of the assets 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 turnover, the more efficient the management would be E.g. stock Turnover Ratio, fixed Assets Turnover Ratio, etc. d) Profitability Ratios: The profitability of a business concern can be measured by the profitability Ratios. These ratios highlight the result of business activities by which alone the overall efficiency of a business unit can be judged.
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III.
It is evident that some ratios are more important than others. This classification has been recommended by the British Institute of Management. a) Primary ratios:- As the success of any business undertaking id measured by the quantum of profit earned by it, the ratio which relates the profit to capital employed is termed as primary ratio. E.g Return on capital employed, operating profit ratio, etc. b) Secondary ratios: This classification is effected to facilitate inter firm comparison and to focus on some factors responsible for the success of the unit. When such factors are isolated by means of ratios, they are called secondary ratios.
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3.2
The comparative financials statements are statements of the financial position at different periods of time. The two comparative financial statements are: (I) Comparative Balance Sheet (ii) Comparative incomes statement.
The Comparative Balance Sheet analysis is the study of the trend of the same items, group of items and computer items in two or more Balance Sheets of the same enterprise on different dates. The change in periodic balance sheet items reflects the conduct of the business. The comparative balance sheet has two columns for recording the data of original balance sheet, a third column for recording increase of decrease in figures and a fourth column for showing the percentage of increase or decrease in values.
While interpreting comparative balance sheet, the interpreter is expected to study the following aspects.
1. 2. 3.
Current financial position and liquidity position. Long term financial position. Profitability of the business.
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MANNARKKAD STEEL PVT LTD : KANJIKKODE PALAKKAD BALANCE SHEET (Rs. In Lakhs) 31.03.2008 31.03.2007 31.03.2006
Particulars SOURCE OF FUNDS Share Capital Reserve & Surplus Grant - In - Aid LOAN FUNDS Secured Loans Corp./Unit account(Credit) Profit of the year
31.3.2010
31.3.2009
6,474.68 1,012.28
6,584.76 1,178.97
6,718.48 1,344.13
6,969.51 1,509.29
Nil 1,642.89
1,234.25 41,105.39 -
49,826.60
42,349.00
36,686.11
49,041.98
39,560.54
17,990.95 8,782.63
17,901.27 8,281.18
18,085.90 8,022.49
17,440.93 7,313.26
9,401.36 6,903.97
9,208.32 -
9,620.09 1.47
10,063.41 17.45
10,127.67 252.31
2,497.39 283.76
9,208.32
9,621.56
10,080.86
10,379.98
2,781.15
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INVESTEMENTS CURRENT ASSETS , LOANS & ADVANCES Inventories Sundry Debtors Cash & Bank Balances Loans & Advances 1,578.67 20,647.60 239.37 1,434.48 1,432.50 22,012.91 3.19 1,224.43 2,720.90 35,108.12 75.55 1,969.52 2,402.26 27,141.28 127.24 1,791.96 2,631.35 20,547.63 852.94 1,521.01
26,470.33 1,034.66
29,751.00 678.64
48,686.04 576.46
24,879.45 368.63
15,186.17 31.65
27,504.99
30,429.64
49,262.50
25,248.08
15,217.82
NET CURRENT ASSETS Corp. Office/ unit account( debit) Loss for the year
(3,604.87)
(5,756.61)
(9,388.41)
6,214.66
10,335.11
41,606.20 2,616.95
38,484.05
35,993.66
32,447.35
26,444.28
TOTAL
44,223.15
38,484.05
35,993.66
32,447.35
26,444.28
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INTERPRETATION
3. The current Assets, cash and bank balance shows an increase from Rs.0.75Cr in 2007
08 to Rs.2.39Cr in 2009-10.
4. The Negative Net Current Asset is shown from the period 2007-08 to 2009-10,
which is due to withdrawal of working capital by corporate office as stated at 3 above.
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2. COMPARATIVE INCOME STATEMENT It is statement prepared to compare the various items of income statements of different periods and to ascertain the changes i.e. the increase or decrease that have taken place in the income statements from one period to another. The income statement or profit and loss account gives the result of the operations of a business. The comparative Income Statement gives an idea of the progress of a business over a period if time. The change in absolute data in money values and percentage can be determined to analyze the profitability of the business. It is prepared just like Comparative balance Sheet.
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MANNARKKAD STEEL Pvt. Ltd. PROFIT & LOSS ACCOUNT Particulars INCOME Sales(net of sales - tax and excise duty) Services Total Sales & Services Transfer Price margin Interest Earned Others Transfer From Grant in aid 0.57 264.27 166.69 16,133.76 39.35 315.93 165.16 20,427.37 1.17 44.79 243.87 26,556.37 30.82 182.18 21,850.29 53.23 229.87 15,557.75 31.3.2010 31.3.2009 31.03.2008 31.03.2007 31.03.2006
41
EXPENDITURE Consumption of Raw materials & Production Stores Purchase for direct sales Stores & Spares parts Sundry Charges on installation and maintenance of X'ges Cost & Expenses on Tools Packing & Forwarding Charges salaries, Wages& Ex-gratia Co's contribution to P.F/others Workmen & staff welfare expenses Power, Light & Water charges Maintenance & Repairs Depreciation Interest D.R.E Written off Voluntary Retirement Scheme Others 11,646.70 644.61 9.07 11,975.35 389.90 12.02 17,155.85 1,455.73 33.34 10,412.37 2,576.78 21.53 7,066.00 1,194.24 12.60
104.08
88.48
96.60
87.71
87.65
LESS:
42
Accretion/Decretion Inter Unit Transfers Total cost of sales Profit for the year before tax Prior period adjustments
(2,608.20) (8.75)
1,839.62 (344.28)
1,622.29 270.64
2,627.41 (133.10)
935.53 11.53
(2,616.95)
1,495.34
1,892.93
2,494.31
947.06
INTERPRETATION 1. The cost of raw material consumption for the year 2009-10 has increased to 78.34%. Whereas the same was 62.18% for 2008-09. 2. Allocation of interest by Corporate Office is not in proportion to the working capital allotment by Corporate Office. This lump sum amount constituted a major role for the net loss for the year 2009-10. 3. The Gross profit during the year 2008-2009 has gone up by 9.29%, even though a sale has come down by 24.06%. This indicates that there has been a substantial reduction in cost of goods sold. 4. The main reason for reduction in cost of production is due to reduction in consumption of raw material i.e. 62.18%, where as it was 70.98% during 2007-08. 5. The Gross profit during the year 2009-10 has come down drastically due to the sale turnover reduction. The consumption of raw material is also highest among the previous years under study, i.e. 78.34%, 6. As against the increase in gross profit of 9.29% the operating net profit has also increased by 9.29%. This indicates that the operating expenses have been at the same level during the year. 7. However the net profit subject to prior period adjustment has gone up by 13.40% which is due to increase in non-operating income by 79.59%.
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RATIO ANALYSIS
Ratio analysis is powerful tool of financial analysis. Ratio analysis is the process of determining and interpreting numerical relationship based on financial statements. For this purpose ratios are calculated. Accounting ratios are relationships expressed in mathematics terms between which are connected with each other in some manner. According to Sir Robert Antony, Ratio is simply nothing but one number expressed in terms of another. A ratio is a means of highlighting in arithmetical terms the relationship between two or more variables in the basic financial statements such as income statement or Position statement. A ratio as a financial analysis can be expressed as percentage, fraction or a stated comparison between numbers. Ratio analysis helps to reveal the relationship between two variables in a meaningful way so as to draw conclusion from them. Ratio analysis makes related information comparable. A single figure by itself has no meaning, but when expressed in terms of related figure will yield significant inferences. Ratios can be classified into your broad groups. 1. Liquidity ratios. 2. Solvency or capital structure or Leverage Ratios. 3. Activities Ratios and 4. Profitability ratios. The following chart shows the ratios, which are calculated to analysis the financial performance of MANNARKKAD STEELS PVT Ltd.
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A. CURRENT RATIO
INTRODUCTION This ratio is an indicator of the firms commitment to meet its short term liabilities. Current ratio = Current Assets to Current Liabilities. This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses. CURRENT RATIO= CURRENT ASSET CURRENT LIABILITY
Table 4.1
Chart 4.1
60000 50000 40000 30000 20000 10000 0 20052006 2006- 2007- 20082007 2008 2009 20092010 CURRENT ASSET CURRENT LIABILITY
INTERPRETATION:The current ratio is ranging from 0.81 -1.68. It is at the highest in 2005-2006, i.e. (1.68) and lowest in 2007-2008 and 2008-2009 (0.81).The average current ratio for the period of study is 1.084: 1 .The standard thumb rule is 2:1.
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B. QUICK RATIO
INTRODUCTION It shows the ability of firms to meet its current liability with its most liquid assets. Quick ratio is a ratio between quick assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash is (the most liquid asset Generally, a quick ratio is (0.5:1) is considered to represent a satisfactory current financial condition. A quick ratio of (0.5:1) or more does not necessarily imply sound liquidity position of dead stock is fairly low. QUICK RATIO=
Table 4.2
QUICK ASSET CURRENT LIABILITY QUICK ASSETS 22921.58 29060.48 37153.19 23240.33 22321.45 CURRENT LIABILITY 15217.82 25248.08 49262.50 30429.64 27504.99 QUICK RATIO 1.51:1 1.15:1 0.75:1 0.76:1 0.81:1
6000 5000 4000 3000 2000 1000 0 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010
QUICK CURRENT
INTERPRETATION:The ideal quick ratio is 1:1. The quick ratio of the company ranging from 0.75 to 1.51.The average quick ratio of the company for the period under study is 0.996:1.The current year quick ratio is only 0.81. The average quick ratio of the company is satisfactory.
46
C.TURNOVER RATIOS
INTRODUCTION Funds of creditors and owners are invested in various assets to generate sales and profits. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called turnover ratio. Because, they indicate the speed with which assets are being converted or turned over into sales. Activity ratios, thus, involve a relationship between sales and assets. A proper balance between sales and assets generally reflects that assets are managed well. 1. Debtors Turnover Ratio 2. Creditors Turnover Ratio 3. Average Collection Period 4. Average Payment Period
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INTRODUCTION This ratio indicates the number of times the stock has been turned over during the period. This ratio is calculated by dividing the cost of goods sold by average inventory. This ratio shows how fast the inventory is sold. This ratio generally reflects the efficiency of inventory management. STOCK TURN OVER RATIO= SALES AVERAGE STOCK
Table 4.3
20062007
20072008
20082009
20092010
INTERPRETATION:Average stock turnover ratio of the company is 9.148. It shows increasing trend in previous year, where the highest is during 2008-09.i.e.10.43. It indicates that the company is efficient in utilizing its inventory in generating sales.
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INTRODUCTION Debtors turnover ratio or receivables turnover ratio is obtained by dividing the net credit sales by average debtors outstanding during the year. Net credit sales means sales less sales returns, average debtors mean average of opening and closing debtors. DEBTORS TURNOVER RATIO= SALES AVERAGE DEBTORS AVERAGE DEBTORS= OPENING DEBTORS + CLOSING DEBTORS 2
Table 4.4
YEAR
AVERAGE DEBTORS
35000 30000 25000 20000 15000 10000 5000 0 20052006 20062007 20072008 20082009 20092010
INTERPRETATION:Debtors turn over ratio is high in the year 2006-2007i.e. (0.91) and low in the year 20082009i.e. (.70) current years debtors turnover ratio is (.74) and average collection period is high (521), this in turn adversely affect the liquidity position of the company
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3) CREDITORS TURN OVER RATIO INTRODUCTION This ratio indicates the velocity which the creditors are turned around over in relation to purchase. creditors. CREDITORS TURNOVER RATIO = CREDIT PURCHASE AVERAGE CREDITORS It measures the average credit period enjoyed from
AVERAGE CREDITORS = OPENING CREDITORS+CLOSING CREDITORS 2 AVERAGE PAYMENT PERIOD = 365 CREDITORS TURNOVER RATIO
Table 4.5
YEAR
AVERAGE CREDITORS
25000 20000 15000 10000 5000 0 20052006 20062007 20072008 20082009 20092010 NET CREDIT PURCHASE AVERAGE CREDITORS
Chart 4.5
Interpretation: The creditors turn over ratio of the company is low during the year 2008-2009, (0.75). It is highest during the year 2007-2008(1.27). Average of this ratio for the period under study is .992.
50
4) FIXED ASSETS TURN OVER RATIO:INTRODUCTION This ratio indicate the extend to which investment in fixed assets contribute towards sales. The term fixed asset for this ratio is the depreciated value of fixed asset.
YEAR
NETSALES
FIXED ASSET
FIXED ASSET TURN OVER RATIO (IN TIMES) 5.49 2.08 2.61 2.07 1.71
30000 25000 20000 15000 10000 5000 0 20052006 Chart 4.6 20062007 20072008 20082009 20092010 NET SALES FIXED ASSET
Interpretation: Fixed asset turnover ratio is highest during the year 2005-2006i.e. (5.49) and lowest during the year 2009-2010 (1.71). Average fixed asset ratio for the period of study is 2.792 current years ratio is far below average.
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5. CURRENT ASSET TURN OVER RATIO INTRODUCTION it indicates the number of times current assets are converted to sales. CURRENT ASSET TURN OVER RATIO = SALES CURRENT ASSET
Table 4.7
YEAR
NETSALES
CURRENT ASSET
CURRENT ASSET TURN OVER RATIO (IN TIMES) 0.60 0.69 0.66 0.81 0.66
50000 40000 30000 20000 10000 0 20052006 20062007 20072008 20082009 20092010 NETSALES CURRENT ASSET
Chart 4.7
Interpretation: Current ratio is highest in the year 2008-2009 i.e. (0.81) and lowest in the year 20052006 i.e.(0.60). The average of this ratio is 0.684 for the period of study. Current asset turnover ratio is satisfactory.
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6. NET WORKING CAPITAL TURN OVER RATIO INTRODUCTION This ratio shows the number of times working capital is turned over in a stated period. NET WORKING CAPITAL TURNOVER RATIO= SALES NET WORKING CAPITAL NET WORKING CAPITAL= CURRENT ASSET - CURRENT LIABILITY
Table 4.8
YEAR
NETSALES
WORKING CAPITAL
WORKING CAPITAL TURN OVER RATIO( IN TIMES) 1.48 3.48 (2.80) (3.46) (4.36)
Interpretation: The ratio is high during the year 2006-2007 and declining in working capital due to increased creditors. On the contrary, from 2007-2008 to 2009-2010 the working capital turnover ratio is negative working capital as a result of increase in sundry creditors.
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7. TOTAL ASSET TURN OVER RATIO INTRODUCTION It shows the number of times total assets are turned over in a stated period. TOTAL ASSET TURN OVER RATIO= SALES TOTAL ASSET
Table 4.9
YEAR
NETSALES
TOTAL ASSET
TOTAL ASSET TURN OVER RATIO (IN TIMES) 0.54 0.52 0.53 0.58 0.47
60000 50000 40000 30000 20000 10000 0 20052006 20062007 20072008 20082009 20092010 NETSALES TOTAL ASSET
Interpretation: Total asset turn over ratio is at its lowest during 2009-2010 i.e. (0.47) and highest during the period 2008-2009 (0.58). The average of this ratio for the period under study is 0.528 Current years ratio lies below this. It means idle utilization of fixed asset. The traditional standard for this ratio is 2 times. Current years ratio is much below standard.
54
C. PROFITABLITY RATIO
INTRODUCTION These ratios measure the results of business operations or overall performance and effectiveness of the firm. 1) GROSS PROFIT RATIO:It indicates the average spread between the cost of goods sold and sales revenue. GROSS PROFIT RATIO= SALES COST OF GOODS SOLD X 100 SALES
Table 4.10
30000 25000 20000 15000 10000 5000 0 2005- 2006- 2007- 2008- 20092006 2007 2008 2009 2010
Chart 4.10
Interpretation: Gross profit ratio is highest during 2008-2009(30.54%) and it is lowest during 20092010(8.11). Current years gross profit ratio is below the average i.e. (23.16%).
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20052006
20062007
20072008
20082009
20092010
Interpretation:
Net profit is the lowest during the year 2009-2010 i.e. (16.67%) and highest during the year 2006-2007 i.e. 11.53%. The average net profit ratio of the company for the last five years is 3.156. The current years net profit ratio has become negative.
56
3) RETURN ON CAPITAL EMPLOYED INTRODUCTION This ratio is an indicator of the earning capacity employed in the business. RETURN ON CAPITAL EMPLOYED= NET PROFIT CAPITAL EMPLOYED
Table 4.12
Chart 4.12
18000 16000 14000 12000 10000 8000 6000 4000 2000 0 20052006 20062007 20072008 20082009 20092010
Interpretation: The return on Cap employed is at its highest during 07-08 i.e. 749.96% and it is at its lowest during the year 2009-10. i.e. 13.78 the average return on capital employed is 189.75%
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8. OPERATING PROFIT RATIO INTRODUCTION This ratio indicates the portion remaining out of every rupee worth of sales after meeting all operating cost. OPERATING PROFIT RATIO = OPERATING PROFIT *100 SALES
Table 4.13
30000 25000 20000 15000 10000 5000 0 20052006 20062007 20072008 20082009 20092010
Chart 4.13
Interpretation: The ratio is highest during the year 2008-2009 i.e. (27.72) and lowest during the year 2009- 2010 is 10.74. The average of this ratio of the period under study is 23.146. The current ratio is below the average.
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5. RETURN ON TOTAL ASSET INTRODUCTION It is an indicator of earning potential of total asset of an organization. RETURN ON TOTAL ASSET =
Table 4.14
NET PROFIT *100 TOTAL ASSET TOTAL ASSET 28334.08 41842.72 49954.95 34294.59 33108.44 ROTA(%) 3.34 5.96 3.79 4.36 (7.90)
YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 60000 50000 40000 30000 20000 10000 0 -10000 20052006
20062007
20072008
20082009
20092010
Chart 4.14
Interpretation: This ratio is its highest during the year 2006-2007 i.e. 5.96 and lowest during 2009-2010 (7.90). The average of this ratio for the period of study is 1.91.
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6. VALUE ADDED PER EMPLOYEE INTRODUCTION This ratio is considered to be the most important by the corporate world in the recent past. It is calculated by, VALUE ADDED PER EMPLOYEE = VALUE ADDED NUMBER OF EMPLOYEES VALUE ADDED= VALUE OF PRODUCTION-(RAW MATERIAL CONSUMPTION+POWER CHARGE) Table 4.15 YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
20062007
20072008
20082009
20092010
Interpretation: From the above table it is clear that the number of employees of the company is decreasing year by year. The value added per employee is highest in the year 20062007 i.e. 12.72 and lowest during the year 2009-2010 i.e. 6.04. Current years value added per employee has decreased when compared to previous year. The situation is very much unfavorable from company point of view and needs improvement in production.
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YEAR
FIXED ASSET
CURRENT ASSET TO FIXED ASSET RATIO 9.19 3.03 3.96 2.56 2.59
50000 40000 30000 20000 10000 0 2005- 2006- 2007- 2008- 20092006 2007 2008 2009 2010 CURRENT ASSET FIXED ASSET
Interpretation: The ratio is at its highest in the year 2005-2006 i.e. 9.19 and the ratio is at lowest at 2008- 2009 i.e. 2.56 . The average of this ratio for the period under study is 4.266.
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2) CURRENT ASSET TO TOTAL ASSET RATIO It shows the ratio of current asset of the company to its fixed asset.
YEAR
CURRENT ASSET
TOTAL ASSET
CURRENT ASSET TO TOTAL ASSET RATIO 0.90 0.75 0.80 0.719 0.721
CURRENT
ASSET
TOTAL ASSET
20052006
20062007
20072008
20082009
20092010
Chart 4.17
Interpretation: This ratio is at its highest during the year 2005-2006 i.e. 0.90 and the ratio is lowest in the year 2008-2009 ie.0 .719. The average is 0.778.
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E. OTHER RATIOS
1) RAWMATERIAL CONSUMPTION TO VALUE OF PRODUCTION
30000 25000 20000 15000 10000 5000 0 20052006 20062007 20072008 20082009 20092010 RAW MATERIAL CONSUMPTION VALUE OF PRODUCTION
Chart 4.18
Interpretation: The raw material consumption in relation to value of production is not satisfactory in all 5 years except 2005-2006. A manufacturing companys standard raw material consumption in relation to value of production is 60%. ITI is always keeping a raw material ratio above the standard fixed except the year 2005-2006. The ratio is lowest in 2005-2006 i.e.54% and highest in 2009-2010 i.e. 77%.
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=
Tabel 4.19
100% 80% 60% 40% 20% 0% -20% -40% 2005- 2006- 2007- 2008- 20092006 2007 2008 2009 2010
64
TREND ANALYSIS
FIXED ASSET TURNOVER RATIO
Table 4.20
20052006 5.49
20062007 2.08
20072008 2.61
20082009 2.07
20092010 1.71
20102011 5.22
Interpretation: In the year 05-06 the fixed assets ratio is 5.49. But in the following years it is falling down. But as per the trend analysis, 2010 11 will have a fixed asset turnover ratio of 5.22. it has an upward trend and it shows that the management efficiently uses its fixed asset
2
1 0
Series1
65
20052006 6.2
20062007 11.53
20072008 7.21
20082009 7.51
20092010 -16.67
20102011 -24.03
Interpretation: In the year 2005-06 , 06-07, 07-08, 08- 09, the net profit ratio is in good position. But in the year 2009-10, net profit ratio is negative and as per the trend analysis 2010 -11 will also have a negative ratio. So the companys profitability is low and the shareholders return will get affected.
Series1
-10 -15 -20 -25 -30
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20052006 30.06
20062007 31.9
20072008 749.96
20082009 123.03
20092010 13.78
20102011 -51.87
Interpretation: In the year 2005-06, return on capital employed is 30.06. then in the following years it is increasing and reach 749.96 in 2007 -08. But in the year 2009 10, it again decreases. As per the trend analysis return on capital employed will be -51.87. Chart showing the trend analysis of Return on Capital Employed
Chart 4.22
800 700 600 500 400
300
200 100 0 -100
Series1
67
20052006 0.9
20062007 0.75
20072008 0.8
20082009 0.719
20092010 0.721
20102011 0.9015
Interpretation: In the year 2005-06 , current assetto total asset ratio is 0.9. then it is 0.75 . but as per the trend analysis in the year 2010- 11 , the ratio will be 0.9015.
Chart showing the trend analysis of Current Asset to Total Asset Ratio
Chart 4.23
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
Series1
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Particulars SOURCE OF FUNDS Share Capital Reserve & Surplus Grant - In - Aid LOAN FUNDS Secured Loans Corp./Unit account(Credit) Profit of the year
31.3.2010
31.3.2009
6,474.68 1,012.28
6,584.76 1,178.97
6,718.48 1,344.13
6,969.51 1,509.29
Nil 1,642.89
1,234.25 41,105.39 -
49,826.60
42,349.00
36,686.11
49,041.98
39,560.54
17,990.95 8,782.63
17,901.27 8,281.18
18,085.90 8,022.49
17,440.93 7,313.26
9,401.36 6,903.97
9,208.32 -
9,620.09 1.47
10,063.41 17.45
10,127.67 252.31
2,497.39 283.76
9,208.32
9,621.56
10,080.86
10,379.98
2,781.15
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INVESTEMENTS CURRENT ASSETS , LOANS & ADVANCES Inventories Sundry Debtors Cash & Bank Balances Loans & Advances 1,578.67 20,647.60 239.37 1,434.48 1,432.50 22,012.91 3.19 1,224.43 2,720.90 35,108.12 75.55 1,969.52 2,402.26 27,141.28 127.24 1,791.96 2,631.35 20,547.63 852.94 1,521.01
26,470.33 1,034.66
29,751.00 678.64
48,686.04 576.46
24,879.45 368.63
15,186.17 31.65
27,504.99
30,429.64
49,262.50
25,248.08
15,217.82
NET CURRENT ASSETS Corp. Office/ unit account( debit) Loss for the year
(3,604.87)
(5,756.61)
(9,388.41)
6,214.66
10,335.11
41,606.20 2,616.95
38,484.05
35,993.66
32,447.35
26,444.28
TOTAL
44,223.15
38,484.05
35,993.66
32,447.35
26,444.28
INTERPRETATION 1. The fixed asset of the company is an increasing trend except in the year 20082009. It is at its highest in the year 2007-2008 (i.e. 2.13 times on 2002-03). 2. There is not much variation in the trend of total current asset. The current asset of 3103-2003 is Rs.214.88 Cr and of 2009-10 is Rs.239.00Cr. 3. The is much variation in the current liability. It was Rs.152.17 Cr for 2005-06 and Rs.275.04 for 2009-10.
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4.
Corporate Office/ Unit Account balance as on 31-03-2006 is Rs.357.07 Cr. The total net profit transferred to corporate office account amounts to Rs.68.29crores. Hence the total balance should be Rs.425.37 Cr. But the balance as on 31-03-2010 shows only
Rs.411.05Cr. It denotes that the working capital to the tune of Rs.14.31 Cr is withdrawn by Corporate Office. 5. Thus the major variation is noticed in Corporate Office/ Unit Account is the reason for considerable reduction in net current asset (working capital). 6. During the period 2007-08 to 2009-10 (3 years) the working capital shows negative figure. Hence interest allocated by Corporate Office is not in proportion. Allocation of interest for these three periods amounts to (33.00+41.38+35.16) = Rs.109.54crores.
7. The increase in loan funds is less than the increase the fixed assets. It means loan funds
have been used maximum to finance fixed assets of the company.
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CHAPTER IV FINDINGS
1. The Current Ratio for the firm is consistently showing an ascending trend from 1.37 to 2.31 in the observed years. Even though in the current year the Current Ratio is little lesser than the required, the ratio seems healthy and expected to grow in the following years. 2. The Quick Ratio shows that the liquid assets are in par with the Current Liabilities though the ratio did decline in the year 2008 but it showed a favorable increase in the following years. 3. For a healthy financial condition of a firm the Total Asset to Debt Ratio is preferably less. The results also prove that the ratio is decreasing consistently which shows a positive performance in reducing the debts of the firm. 4. Fixed Asset Ratio shows the utilization of the long term funds of the firm in investing in the Fixed Assets. The results show that the ratio is decreasing but the Fixed Assets. The results show that the ratio is decreasing but the total Fixed Asset has considerably increased in the observed years. 5. The interest Coverage Ratio shows the ability of the firm in paying the various interests for the debts too the funding agencies. In the result the beginning years of observation have positive interest coverage than the recent years. 6. The Inventory Turnover Ratio clearly shows the ability of the cost the good sold has been considerably deceased and the stock has been consistently maintained. 7. The Working Capital Turnover ratio shows the extent of utilization of the Working Capital by the firm for the production process. From the results it is inferred that the firm utilized the Working Capital better on the early years than the recent years. 8. Even though there is decrease in the net sales of the firm the company continuously invests on the Fixed Assets which help the company in the long run. 9. From the results we see that the firm is doing good as it has maintained a good Gross Profit Ratio for the years that are studied. It indicates that the firm is running efficiently and has good prospects. 10. The results of the Operating Ratio shows no greater alteration in the ratio which shows that there is no big change in the proportion of the net sales compared with the Operating Expenses.
72
73
8. In Capital Gearing Ratio, it is used to known about the Capital Structure of the company. The term Capital Gearing or Leverage refers to the proportion between Fixed Income Bearing Funds and Equity Shareholders Funds. Here it shows the increasing trend of the company. The current year shows high efficiency of capital for the company. 9. The objective of calculating Stock/ Inventory Turnover Ratio to Known how efficiently the Stock or Inventory is utilized. Generally a ratio of 8 times is considered to be satisfactory. In the year 2007-08 the ratio was highly satisfactory but from the year 2008-09 onwards the ratio shows a declining trend and fluctuating. 10. But still below the expected limit which is not good for the firm in the long run. So the firm must improve their inventory. 11. A higher turnover ratio reflects better utilization of Working Capital and lower ratio shows inefficiency. The year 2007 shows a ratio shows the utilization of the Working Capital was highly satisfactory. 12. In Fixed Asset Turnover Ratio, the net sales are continuously decreasing due to various reasons. And the Fixed Assets are raised this indicates that the firm was investing on the fixed asset irrespective of the factor of reduces sales. This results in the decrease of the ratio. So the firm must care about their fixed assets and must improve their utilization properly. 13. In Gross Profit Ratio the ideal ratio is 30% to 35%. A high Gross Profit Ratio is a sigh of efficient production or purchase management. Hence from the above computation i see that the firm is doing good as it has maintained a good gross profit ratio for the years that are studied. It indicates that the firm is running efficiently and has good prospects. But in 200910 it shows a declining and fluctuating trend so the company must careful about the profit of the company. 14. When the Operating Ratio reduces then that infers the firms profitability percentage is increasing. Here the ratio is more or less similar in all the years of evaluation. 15. The Operating Profit Ratio shows the profit for the firm though the core and basic business operation of the firm. For better financial position the Operating Profit Ratio must increase. But here more or less they are similar in all the years and this infers that the firm must concentrate more to improve the Operating Profit.
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CONCLUSION
The study on the Financial Performance of MANNARKKAD STEEL Pvt. Ltd. Help me to understand the various ratios and other methodologies that are used to evaluate the performance of a firm in the financial perspective. Even though there are various ratios available, for measuring the financial performance of a firm it is very important to choose the relevant ratios and other techniques of evaluation. The various analyses that are done on the financial performance of MANNARKKAD STEEL Pvt. Ltd shows the firm has done reasonably good on the earlier years. In the later years the firm has faced a greater decline in the performance. This is due to increase in department for the company and to lacks of utilizing the capital to the maximum. Concentrating more of generating profit through operating profit and also increase the shareholders fund will guide the firm to a better financial position.
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BIBLIOGRAPHY
1. Dr. S.N. Maheshwari, Principles of Management Accounting , Sultan chand & Sons, New Delhi, 1996. 2. S.P. Gupta, Statistical Methods, Sultan Chand & Sons publications, New Delhi, 2004. 3. S.P. Jain, K.L Narang, Financial Management and Accounting, Kalyani Publishers, New Delhi, 1999 4. Prasanna Chandra, Financial Management, Tata McGraw Hill publishing company Ltd, New Delhi. 2001. 5. I.M. Pandey, Financial Management , Vikas publishing House Private Ltd, New Delhi, 1999 Website: En.wikipedia.org www.pazheri.com
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APPENDIX MANNARKKAD STEEL PVT LTD :KANJIKKODE PALAKKAD BALANCE SHEET (Rs. In Lakhs) 31.03.2008 31.03.2007 31.03.2006
Particulars SOURCE OF FUNDS Share Capital Reserve & Surplus Grant - In - Aid LOAN FUNDS Secured Loans Corp./Unit account(Credit) Profit of the year
31.3.2010
31.3.2009
6,474.68 1,012.28
6,584.76 1,178.97
6,718.48 1,344.13
6,969.51 1,509.29
Nil 1,642.89
1,234.25 41,105.39 -
49,826.60
42,349.00
36,686.11
49,041.98
39,560.54
17,990.95 8,782.63
17,901.27 8,281.18
18,085.90 8,022.49
17,440.93 7,313.26
9,401.36 6,903.97
9,208.32 -
9,620.09 1.47
10,063.41 17.45
10,127.67 252.31
2,497.39 283.76
9,208.32
9,621.56
10,080.86
10,379.98
2,781.15
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INVESTEMENTS CURRENT ASSETS , LOANS & ADVANCES Inventories Sundry Debtors Cash & Bank Balances Loans & Advances 1,578.67 20,647.60 239.37 1,434.48 1,432.50 22,012.91 3.19 1,224.43 2,720.90 35,108.12 75.55 1,969.52 2,402.26 27,141.28 127.24 1,791.96 2,631.35 20,547.63 852.94 1,521.01
26,470.33 1,034.66
29,751.00 678.64
48,686.04 576.46
24,879.45 368.63
15,186.17 31.65
27,504.99
30,429.64
49,262.50
25,248.08
15,217.82
NET CURRENT ASSETS Corp. Office/ unit account( debit) Loss for the year
(3,604.87)
(5,756.61)
(9,388.41)
6,214.66
10,335.11
41,606.20 2,616.95
38,484.05
35,993.66
32,447.35
26,444.28
TOTAL
44,223.15
38,484.05
35,993.66
32,447.35
26,444.28
78
79