Description
A financial statement is a formal record of the financial activities of a business, person, or other entity.
Finance Project on Financial Performance Of Kaleeswari Refinery Ltd
CHAPTER I
INTRODUCTION
I.1 COMPANY PROFILE KALEESUWARI REFINERY PRIVATE LIMITED
The success story began with the establishment of the Kaleesuwari Refinery Pvt. Ltd. in 1995. Since then, the company has made incredible strides in the edible oil market with its flagship brand "Gold Winner". Driven by the goal to provide quality sunflower oil at competitive prices, Gold Winner within a short span of time, has become the most preferred brand.
Gold Winner has proved once again that it is aptly named - according to a report published by The Economic Times Brand Equity on April 21, 2008, Gold Winner is ranked 63rd among India's hundred biggest Fast Moving Consumer Goods (FMCG) brands by A.C. Nielsen Retail Audit. This comprehensive retail audit was done based on a variety of parameters including sales, top-of-the mind recall and trust. Not long ago, 1
an ORG-MARG survey also had rated Gold Winner as number one in the FMCG (edible oils) category in South India. Gold Winner has become a member of the US based National Sunflower Association (NSA), whose aim is to promote quality sunflower products across the globe keeping the health of the people in mind.
Gold Winner finds a place in every discerning home, thanks to the highly sophisticated and rigorous processes adopted to refine crude sunflower oil. A unique distribution network ensures that the end consumer always keeps company with health and happiness. Gold Winner is now available in Sri Lanka and is all set to establish its presence in Singapore.
I.2 Manufacturing
Gold Winner's state-of-the-art production unit is situated at Vengaivasal , about 14km from Chennai, India.
The plant uses the automatic and continuous Belgian technology for processing in order to maintain the highest standards of quality and hygiene. The Desmet technology used is state of the art and ensures that the refined oil produced is of international standards.
The storage capacity at the plant is 16000 tones. This large tank space ensures that enough stocks are available to service the ever-growing demand promptly.
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The crude oil is systematically purified in well-defined stages like Neutralization, Bleaching, Dewaxing and Deodorization. All processes are monitored and controlled automatically by using PLC based systems. Untouched by hand, the oil produced here matches the exacting requirements of our customers.
To keep the processes stable and controlled, we have adopted modern plant maintenance practices including Preventive maintenance. Condition monitoring of critical equipments is resorted to periodically. In observance to stipulated standards, calibration of instruments and control devices are done routinely.
Manpower:
A high-level in-plant safety committee ensures that the prescribed safety norms are strictly adhered to. Personnel safety has the highest priority. Gold Winner has employed well qualified and experienced personnel to handle all its functions. The workforce, largely local, is inducted to work only after a rigorous training process that includes on the job training. All welfare measures are in place to ensure that the productive capacity of our people is maintained at the highest level.
We care for the environment:
Gold Winner understands its social responsibilities and the effluent treatment process is
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built on the concept of using environment friendly waste disposal practices. The green environs in and around the factory bear ample testimony to it.
I.3 Quality Assurance
To ensure the highest level of quality in the finished product , all our incoming raw and other materials are subjected to stringent tests and checks.
The raw material - crude sunflower oil - is procured from reliable sources in India and abroad and tested using the modern analytical Gas Chromatograph .The quality at various stages of the processing is also checked and is further assured by using Good Manufacturing Practices(GMP). Undesirable components are removed during the processing.
The good properties of the refined sunflower oil are maintained intact by the use of appropriate packing . This ensures that the freshness we put in at the time of manufacturing is the same freshness you get when you open your pack .Simply put this is the unique FIFO (Freshness In -Freshness Out ) benefit that Gold Winner brings to you.
This ensures that every time you buy Gold Winner, you actually carry home health and happiness.
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I.4 Marketing
Vision : We envision that Gold winner should become the most valued and preferred edible oil brand in our nation by 2007. Kaleesuwari Refinery Private Limited has dedicated itself to its mission of building a conveniently available, affordable world class brand that is trusted and preferred by the consumer for its quality & nutritional value. Today Gold winner is available in all the southern states of India and Maharastra. Gold winner is constantly consolidating and expanding its distribution reach with the single minded objective of coming closer to customer. Infact Kaleesuwari Refinery Private Limited is implementing an organization wide ERP project named c2c or closer to customer. Once completed, "This project is expected to track the buying behavior closely and help us to effectively service our customers requirements". The SAP implementation would also bring in commensurate reduction in lead time to deliver there by positively impacting our inventory levels. Gold winner is now an international brand having established its presence in Sri Lanka. Gold winner would soon be available in Singapore as well. The range of products has been enlarged to cater to the requirements of our customer comprehensively.
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I.5 ABOUT EFA The Secret of a winning formula: EFA Every glistening drop of Gold Winner comes with the promise of ample nutrition and unending good health. Just a little Gold Winner can add to your meal the innumerable benefits of pure refined sunflower oil. Thanks to the fact that it contains EFA, Gold Winner keeps the winner in you going strong at all times.
Why EFA? With the advent of calorie-conscious and healthy eating habits, low fat diets have become the order of the day. Leading to a curious dilemma - where does one draw the line between excessive fat and essential fat? This is where EFA steps in to add the needed sprinkle of health to every recipe.
What is EFA? EFA (or Essential Fatty Acids) supply the body with vital macronutrients that are not naturally produced by the human body, and it can be acquired only from external sources through the food we consume. Sunflower Oil is one such source, which is EFA rich. Gold Winner, Refined Sunflower Oil rich in EFA ensures that it turns each meal into a culinary delight.
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I.6 OBJECTIVES
? ? ?
To study the financial position of the company. To analyze and interpret the financial efficiency of the company. To identify the problem and suggest for their better financial performance.
I.7 PERIOD OF STUDY
?
A study on the over all financial performance was done in kaleesuwari refinery private limited as per the given period of time from January to March 2005.
?
The analysis was made with the help of balance sheets for a period of five years. (i.e., 1999-2008 to 2007-2008).
I.8 METHODOLOGY
Research methodology is a way to systematically solve the research problem. It is a science of studying how research is done. In research methodology we study the various steps that are generally adopted by a researcher in studying his research problem along with logic behind in using a particular method or technique for the purpose of evaluation.
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The methodology in the study involves the following:
?
TYPE OF RESEARCH : The researcher uses analytical type of research for the study. Analytical research is a type of research, where the research is to be undergone on the basis of facts or information already available, and analyze those to make a critical evaluation of the material.
?
SOURCES OF INFORMATION: ? Primary data ? Secondary data Primary data is gathered through discussions with the individuals of the company. Secondary data was the important source of information for this study that includes Annual Reports, journals and contents gathered from internet.
I.9 METHOD OF ANALYSIS To have a meaningful analysis and interpretation of various data’s collected; the following tools were made use of for this study. ? Ratio analysis ? Common size balance sheet ? Comparative balance sheet ? Trend analysis ? Fund flow analysis 8
I.10 LIMITATIONS
? ? ?
The analysis was made with the help of secondary data’s. The length and breadth of the company. Certain information’s are confidential and access limited.
I.11 SCOPE OF STUDY
The scope of study is to analyze the company’s financial performance in competitive industry. The company is engaged in refining edible oils. This industry has heavy competition. This study will help us to understand how the company has out performed other players in this field and also how the company has grown up with huge expansion.
I.12 CHAPTER ARRANGEMENTS
? First chapter contains the introduction part of the study. ? Second chapter contains the theoretical settings and particulars of company of study ? Third chapter contains the data analysis and interpretation of the study ? Finally, the fourth chapter contains the summary of findings and recommendations of the study. the
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CHAPTER II
LITERATURE REVIEW
A financial statement is an organized collection of data according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm. It may show a position at a moment of time as in the case of a balance sheet, or may reveal a series of activities over a given period of time, as in the case of an income statement. Thus, the term ‘financial statements’ generally refers to two basis statements: (1) the income statement, and (2) the balance sheet. Of course, a business may also prepare (3) a statement of retained earnings, and (4) a statement of changes in financial position in addition to the above two statements.
Financial statements
INCOME STATEMENT
BALANCE SHEET
STATEMENT OF RETAINED EARNINGS
STATEMENT OF CHANGES IN FINANCIAL POSITION
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The income statement is generally considered to be the most useful of all financial statements. It explains what has happened to a business as a result of operations between two balance sheet dates. For this purpose it matches the revenues and costs incurred in the process of earning revenues and shows the net profit earned or loss suffered during a particular period. Balance sheet is a statement of financial position of a business at a specified moment of time. It represents all assets owned by the business at a particular moment of time and the claims or equities of the owners and outsiders against those assets at that time. It is in a way a snap shot of the financial condition of the business at that time. The important distinction between an income statement and a balance sheet is that the income statement is for a period while balance sheet is on a particular date. Income statement is therefore a flow report, as contrasted with the balance sheet, whish is a static report. However, both are complementary to each other. The term retained earnings means the accumulated excess of earnings over loses and dividends. The balance shown by the income statement is transferred to the balance sheet through this statement, after making necessary appropriations. It is fundamentally a display of things that have caused the beginning of the period- retained earnings balance to be changed in to the one shown in the end of the period balance sheet. Financial analysis can be classified on the basis of materials used. Those who are outsiders for the business do the external analysis. The term outsiders include
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investors, credit agencies, government agencies and other creditors who have no access to the internal records of the company. These persons mainly depend up on the published financial statements. Their analysis servers only limited purpose. The internal analysis is done by persons who have access to the books of account and other information related to the business. Such an analysis can, therefore, be done by executives and employees of the organization or by officers appointed for this purpose by the government or the court under powers vested in them. The analysis is done depending up on the objective to be achieved through this analysis. The performance of any industry is dependent, to a large extent, on its financial performance. Financial performance becomes encouraging when a proper financial plan and execution of the plan precede it. The present day economy is dynamic and changing from time to time. The Indian economy has witnessed fast changes and transition from controlled economy in to liberalized one during past 10 to 15 years. The financial management has to be fair under such circumstances as the parameters assumed under change. This also calls for good corporate governance. Corporate governance enables and introduces an integrated approach in managing a Corporate / Industry. Corporate governance includes the polices and procedures adopted by a company in achieving its objectives in relation to shareholders, employees, customers and suppliers, regulatory authorities and community at large.
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? Approval of shareholders by postal ballot. ? Audit Committee. ? Director’s Responsibility statement. ? Remuneration and Compensation Committee.
The company is committed to attain highest standard of corporate Governance. It recognizes that the board of directors is accountable to all shareholders for good governance. The philosophy of the company in relation to Corporate Governance is to ensure transparency in all its operations, make disclosures and enhance shareholders value without compromising in any way with laws and regulations.
II.1 OPERATIONAL DEFINITIONS OF THE CONCEPTS
II.1.1 RATIO ANALYSIS INTRODUCTION:
Analysis and interpretation of financial statements with the help of “ratios” is termed as “Ratio Analysis”. Ratio analysis involves the process of computing, determining and presenting the relationships of items of financial statements.
Ratio Analysis was pioneered by Alexander Wall who presented a system of ratio analysis in the year 1909.
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II.1.3 MEANING OF RATIO:
A ratio is a mathematical relationship between two items expressed in a quantitative form.
Ratio can be defined as “Relationships expressed in quantitative terms, between figures which have cause and effect relationships or which are connected with each other in some manner or the other”. An accounting ratio can be defined as “Quantitative relationships between two or more items of the financial statements connected with each other”. The essence of ratio is putting together of two figures to stud their relationships. The study is in the form of analysis, interpretation and expression of all the ramification of the relationships.
II.1.4 MODES OF EXPRESSION OF RATIOS: Ratios may be expressed in any one or more of the following ways: i. In proportion:
In this type the amount of two items are expressed in a common denominator. An example of this form of expression is the relationship between current assets and current liabilities as “2:1”.
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ii.
In rate or times or coefficient:
In this type of expression, a quotient obtained by dividing one item by another is taken as unit of expression. An example of this form of expression is cost of sales divided by average stock (say 8), thus 8 times is the ratio between cost of sales and stock.
iii.
In percentage:
In this type of expression, a quotient obtained by dividing one item by another is multiplied by one hundred to show the relationship in terms of percentage. For example, the relationship between net profit and sales may be expressed as say 25%
II.2 STEPS IN RATIO ANALYSIS:
i.
Selection of relevant information:
The first step in ratio analysis is to select relevant information from financial statements and calculate appropriate ratios required for decision under consideration.
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ii.
Comparison of calculated ratios:
In order to assess the relative meaning, the ratios calculated are compared with the past ratios and industry ratios.
iii.
Interpretation and reporting:
The third step in ratio analysis is to interpret the significance of various ratios, draw inferences and to write a report. The report may recommend specific action in the matter of the decision situation or may present alternatives with comparative merits or it may just state the facts and interpretation.
II.3 Advantages of Ratio Analysis: Forecasting: Ratios reveal the trends in costs, sales, profits and other inter-related facts, which will be helpful in forecasting future events. Managerial control: Ratios can be used as “instrument of control” regarding sales, costs and profit. Facilitates communication: Ratios facilitate the communication function of management as ratios convey the information relating to the present and future quickly, forcefully and clearly.
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Measuring efficiency:
Ratios help to know operational efficiency by comparison of Present ratios with those of the past working and also with those of other firms in the industry.
Facilitating Investment Decisions:
Ratios are helpful in computing return on investment. This helps the management in exercising effective decisions regarding profitable avenues if investment. Useful in measuring financial solvency:
The financial statements disclose the assets and liabilities in a format. But they do not convey relationships of various assets and liabilities with each other, whereas ratios indicates the liquidity position of the company and the proportion of borrowed funds to total resources which reveal the short term and long term solvency position of a firm. Inter firm comparisons The technique of inter- firm comparisons can be carried out successfully only with the help of ratio analysis. Otherwise no firm may come forward to disclose full information. Inter- firm comparisons help the management to compare its performance with an external “benchmark” or “standard”.
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II.4 LIMITATIONS OF RATIO ANALYSIS:
i.
Practical knowledge:
The analyst should have thorough knowledge and experience about the firm and industry.
ii.
Ratios are means:
Ratios are not an end in themselves bet they are means to achieve a particular purpose or end.
iii.
Inter – relationship:
Ratios are inter- related and therefore a single ratio cannot convey any meaning. It has to be interpreted with reference to other related ratios to draw meaningful conclusions.
iv.
Non availability of standards or norms:
Ratios will be meaningful if they can be compared with standards or norms. Except for a few financial ratios, other ratios lack standards which are universally recognized.
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v.
Accuracy of financial information:
The accuracy of a ratio depends on the accuracy of information derived from financial statements. If the statements are inaccurate, same will be the result with ratios.
vi.
Consistency in preparation of financial statements:
Inter – firm comparisons with the help of ratio analysis will be useful only if the firms use uniform accounting procedures consistently. Otherwise the comparison may be useless.
vii.
Detachment from financial statements:
Useful ratios are not substitutes to financial statements. they can be meaningful only if they are read along with information is detached ,ratios themselves cannot convey much message.
viii.
Time lag:
Ratio analysis will be fruitful only if the conclusions are conveyed quickly to the management. If there is a delay, the utility of the data is diminished and the purpose itself may be defeated.
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ix.
Changes in price level:
Ratio analysis becomes useless during periods of heavy price fluctuations.
II.5 COMMON SIZE FINANCIAL STATEMENTS
:
Common size financial statements are those in which figures reported are converted in to percentages to some common base. In the income statement sales figures is assumed to be 100 and all figures are expressed as percentage of sales. Similarly in the balance sheet, the total of assets or liabilities is taken as 200 and all the figures are expressed as a percentage of this total.
II.6 COMMON SIZE BALANCE SHEET ANALYSIS:
Financial statement analysis such as ratio analysis, funds flow analysis and trend analysis has a common shortcoming. They fail to focus on the changes that take place from year to year in relation to total assets and total liabilities. This limitation can be overcome by preparing the common size balance sheet. This shows the relation of each asset item to total assets and each liability item to total liabilities. As these percentages show relationships to balance sheet total, variations from tear to year do not necessarily indicate changes in money accounts.
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II.7 COMPARATIVE BALANCE SHEET:
The single balance sheet shows assets and liabilities as on a particular date. The comparative balance sheet shows the value of assets and liabilities on two different dates. It helps in comparison. A comparative balance sheet has two columns to record the figures of the current year and the previous year. A fourth column may be added to giving percentage increase or decrease. Thus, while in the balance sheet the emphasis is on status, in the comparative balance sheet it is on change. Comparative balance sheet indicates whether the business is moving in a favorable or unfavorable direction. It is very useful for studying the trends in an enterprise.
II.8 TREND PERCENTAGE ANALYSIS:
Trend percentages are immensely helpful in making a comparative study of the financial statements for several years. The method of trend percentages is a useful analytical device for the management since by substitution of percentages for large amounts; the brevity and reliability are achieved. The method of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year. Any year may be taken as the base year. It is usually the earliest year. Any intervening year may also be taken 100 and on that basis the percentages for each of the items of each of the years are calculated.
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II.9 FUND FLOW STATEMENT:
Every company prepares its balance sheet at the end of its accounting year. It is a statement of assets and liabilities of the company, as on a particular date. It reveals the financial position of the company. It does not present a detailed analysis. The balance sheet fails to account for the period increase or decrease in he working capital during a period and explain them. The statement is called fund flow statement. Meaning: The fund flow statement is a report on the movement of funds or working capital. It explains how working capital is raised and used during an accounting period. Definition: “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates”.
Objectives: ? ? ? To show how the resources have been obtained and used. To indicate the results of current financial management. To throw light upon the most important changes that have taken place during a specific period. ? To show how the general expansion of the business has been financed.
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?
To indicate the relationship between profits from operations, distribution of dividend and rising of new capital or term loans.
?
To have an assessment of the working capital position of the concern.
II.10 Advantages or significance of funds flow statement:
i.
Analysis of financial operations: The main purpose of funds flow statement is to analyze the financial operations of the business. The statement explains the causes for changes in the assets and liabilities during a period.
ii.
Evaluation of the firm’s financing: The analysis of sources of funds reveals how the firm has financed its developed projects in the past i.e. from internal sources or from external sources. It also reveals the rate of growth of the firm.
iii.
Answers to intricate questions: The funds flow statement provides answers to questions such as: ? How the loans were repaid? ? How much funds were generated from operations? ? How were the funds used? ? How was the increase in working capital financed?
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iv.
Allocation of scarce resources: A projected fund flow statement is an instrument for allocation of resources. It lays down the plan for efficient use of scarce resources in future. It enables the management to discharge its financial obligations promptly.
v.
Helps in working capital management: This statement indicates the adequacy or inadequacy of working capital. The management can take steps for effective use of surplus working capital. In case of inadequacy, arrangement can be made for improving the working capital position.
vi.
Acts as a guide to future: With the aid of projected funds flow statement, the management can plan for meeting future financial requirements.
vii.
Helps financial institutions: This statement is also useful to lending institutions like banks, IDBI, ICICI, IFCI and others. It helps them to assess the credit worthiness and repaying capacity of the borrowing company.
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II.11 LIMITATIONS OF FUNDS FLOW STATEMENT:
i.
This statement is not a substitute for an income statement or balance sheet. It provides only some additional information regarding changes in working capital.
ii.
Changes in cash are more important and relevant for financial management than the working capital.
iii.
It is not an original statement. It is only a rearrangement of data given in financial statements.
iv.
This statement is essentially historic in nature. A projected funds flow statement, on the basis of it cannot be prepared with much accuracy.
v.
It cannot reveal continuous changes.
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CHAPTER III
DATA ANALYSIS AND INTERPRETATION
III.1 PROFITABILTY RATIOS:
This ratio is an indicator of the efficiency within which the operations of the business are carried on. The lower profitability may arise due to lack of control over the expenses. Ratios also direct us while dealing with Bankers, financial Institutions and other creditors.
III.1.1 Gross profit ratio
This ratio is known as Gross margin or Trading margin ratio. Gross Profit ratio indicates the difference between sales and direct cost. Gross Profit explains the relations between Gross Profit and Net sales. A higher ratio is preferable, indicating higher profitability. Formula: Gross profit Gross profit ratio = ---------------------Sales It is expected to be adequate to cover operating expenses, fixed interest charges, dividends and increase of reserves. * 100
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Table -1: Calculation of Gross Profit Ratio
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Gross Profit (Rs) 33816 842 142918 246742 330931
Sales (Rs) 1007758 47268 2309478 3970864 3821262
Ratio (%) 3.36 1.78 6.19 6.21 8.66
Interpretation:
Overall Gross profit ratio is less than the ideal in all the years under study. But after 2005-02 it is gradually increasing from 6.19% to 8.66%
III.1.2 Operating ratio 27
Operating ratio matches cost of goods sold plus other operating expenses on one hand, with net sales on the other.The ratio is closely related to the ratio of operating profit to net sales which can be obtained by subtracting the operating ratio from 100.
FORMULA: Cost of goods sold + Operating expenses Operating ratio = ------------------------------------------------------ *100 Net sales
Table -2: Calculation of Operating Ratio
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Operating cost 1005050 48693 2273857 3907857 3733629
Net sales (Rs) 1007758 47268 2309478 3970864 3821262
Ratio (%) 99.73 103.01 98.43 98.41 97.71
Interpretation: 28
Operating ratio is the highest in all the years under study. In 2008-01 the factory is leased out and hence the operating cost is more than 100%.
III.1.3 Net profit ratio:
This is the ratio of net income or profit after taxes to net sales. It indicates with portion of sales is left to the proprietors after all costs, charges and expenses have been deducted. The ratio is widely used as a measure of overall profitability and is very useful to the proprietors.
FORMULA:
Net profit after tax
Net profit ratio = -------------------------------- *100 Net sales
Table -3: Calculation of Net Profit Ratio
Year
Net Profit after tax
Sales (Rs)
Ratio (%)
1999-00
11363
1007758
1.13
2008-01
11377
47268
24.07
2005-02
29054
2309478
1.26
29
2006-03
50208
3970864
1.26
2007-08
73480
3821262
1.92
Interpretation:
As the operating ratio is highest the net profit ratio is very less in all the year under study. It is more in 2008-01 as it includes lease rentals.
III.1.4 Operating profit ratio
It is the ratio of profit made from operating sources to the sales, usually shown as a percentage. It shows the operational efficiency of the firm is a measure of the management’s efficiency in running the routine operations of the firm. Operating expenses include administration, selling and distribution expenses.
FORMULA: Operating Profit Operating profit ratio = ------------------------Sales * 100
Table -5: Calculation of Operating Profit Ratio
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Year 1999-00 2008-01 2005-02 2006-03 2007-08
Operating Profit 2708 -1425 36180 63007 87633
Sales (Rs) 1007758 47268 2309478 3970864 3821262
Ratio (%) 0.27 -3.01 1.57 1.59 2.29
Interpretation:
Steady increase in operating profit except in the year 2008- 01.
III.1.5 Return on capital employed:
The return on capital employed can be used to show the efficiency of the business as a whole. It is used as a basis for various managerial decisions. Thus it can become an integral part of the budgetary control system in order that the management may be able to follow the progress being made and to take corrective action, if necessary.
FORMULA: 31
Return on capital employed = Net profit after tax ------------------------------- * 100 Capital employed
Table -6: Calculation of Return on Capital Employed
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Net Profit after Capital tax 11363 11377 29054 50208 73480 75060 90271 290346 384462 666499
Ratio (%) 15.14 12.60 10.01 13.06 11.02
Interpretation:
The return on capital employed is fluctuating in the years under study.
III.1.6 Return on proprietors funds:
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It is the ratio of net profit to proprietor’s funds as shown by the balance sheet, which are the same as total assets less liabilities. It is another effective measure of the profitableness of an enterprise. This ratio is one of the most important relationships in financial statement analysis. The realization of a satisfactory net income is the major objective of a business and the ratio of net profit to shareholders funds shows the extent to which this objective to being achieved.
FORMULA: Net profit after tax Return on proprietors funds = ---------------------------------- *100 Proprietor’s funds Table -7 Calculation of Return on Proprietors Funds
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Net
Profit
after Proprietors funds 30679 55530 111009 199350 272832
Ratio (%) 37 20.49 26.17 25.18 26.93
tax 11363 11377 29054 50208 73480
Interpretation: 33
During the period of five years under study there is a decline in return on proprietors fund from 37 % to 26.93 %. This is due to increase in proprietary fund during the period for major expansion. III.1.7 Return on equity capital
Return on equity capital relates the net profits available to equity share holders to the amount of capital invested by them. This rate of return is designed to show what percentage, the earned profit of the period bears to the amount of capital invested by equity share holders
FORMULA: Net profit after tax Return on equity capital = ---------------------------- *100 Equity capital
Table -8: Calculation of Return on Equity Capital
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Year
Net tax
Profit
after Equity capital
Ratio (%)
1999-00
11363
2200
516.5
2008-01
11377
9900
114.92
2005-02
29054
36325
79.98
2006-03
50208
75000
66.94
2007-08
73480
75000
97.97
Interpretation:
Return on equity capital is decreasing because of increase in equity capital.
III.2 Short Term Solvency Ratios III.2.1 Current ratio:
Current ratio also called working capital ratio, is the most widely used of all analytical devices based on the balance sheet. It matches the total current assets of the firm to its current liabilities. Current ratio indicates, in rough, the liquidity of current assets or the ability of a business to meet its maturing current obligations.
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current assets normally include cash in hand or at bank, marketable securities, other short term high quality investments, bills receivables, prepaid expenses, work in progress, sundry debtors and inventories while current liabilities are composed of sundry creditors, bills payable, outstanding and accrued expenses, income tax payable. FORMULA: Current assets Current ratio = ------------------------- * 100 Current liabilities Table -10: Calculation of Current Ratio Year 1999-00 2008-01 2005-02 2006-03 2007-08 Current assets 29063 15626 325296 6264282 971629 Current liabilities 7481 12239 196676 507244 658814 Ratio (%) 3.88 1.28 1.65 1.23 1.47
Interpretation:
In all the years under study except 1999-2008 the ratio is less than ideal and fluctuating.
III.2.2 Liquid Ratio:
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This ratio is also called quick ratio or acid test ratio. It is calculated by comparing the quick assets with current liabilities.
Formula: Liquid ratio = Quick assets or Liquid assets -----------------------------------------Current Liabilities Where, Liquid assets = Current assets – Inventory The ideal Liquid ratio or generally accepted norm for liquid ratio is 1. comparison of Quick ratio with current ratio indicates the inventory hold ups. Table -11: Calculation of Liquid Ratio Year 1999-00 Liquid assets 29063 Liquid liabilities 7481 Ratio (%) 3.88
2008-01 2005-02 2006-03
11674 163459 321037
12239 196676 507244
0.95 0.83 0.63
2007-08
356606
658814
0.54
Interpretation:
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The quick ratio is less than ideal and decreasing except in the year 1999-2008.
III.2.3 Stock Turn over ratio : It reveals the number of times the stock has been rotated in a year. The purpose of computing this ratio is to find out to what extant the inventory has been efficiently used and control.
Formula: Stock turn over ratio = Net sales --------------------------------Avg. inventory @ Cost
Average inventory =
Opening stock + Closing stock -------------------------------------2
Table -12: Calculation of Stock Turn Over Ratio
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Year
Net sales
Average inventory at cost
Ratio
1999-00 2008-01 2005-02 2006-03 2007-08
1007758 47268 2309478 3970864 3821262
11534 1976 82894.5 233614 460207
87.37 23.92 27.86 16.99 8.30
Interpretation: In the year 1999 – 00 the stock turnover ratio was 87.37, whereas in the year 2007 – 08 it is 8.30. As apparent it shows sign of improvement and it has to be managed to achieve normal industry average of 5 to 8 times.
III.3. Turn over Ratio
III.3.1 Debtor Turn over Ratio: It indicates the velocity of the dept collection of the firm. In simple terms it indicates the number of times the avg. debtors are turned over during the year.
Formula: Debtor Turn over Ratio = Trade debtors --------------------39
Sales per day Sales per day = Net sales --------------------------No. of working days Table -13: Calculation of Debtor Turn Over Ratio
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Trade debtors 18353 2402 128009 215205 212695
Sales per day 2799 131 6415 11030 10614
Days 6.5 18 20 20 20
Interpretation:
Credit period allowed for debtors has increased from 7 days in 1999- 00 to 20 days in 2007-08 over the period of five years. The normal industry average is 1 month to 2 months. The study shows good strength of the company in collections.
III.3.2 Creditor Turn over Ratio: It is similar to debtors turn over ratio. It indicates the speed with which the payments of credit purchase are made to the creditors. 40
Formula: Creditor Turn over Ratio = Trade creditors -----------------------Purchases per day
Purchase per day =
Net purchase -------------------No. of working days
Table -14: Calculation of Creditor Turn Over Ratio Year 1999-00 2008-01 Trade creditors 2922 7817 Purchases day 2357 115.27 per Days 1.24 67.18
2005-02 2006-03 2007-08
186163 469681 627460
5440 9430 8660
34.22 49.81 72.45
Interpretation: Creditor turnover ratio is fluctuating and more than ideal in the year 2007-2008.it is more than the industry norms of 1 to 2 months. 41
IV.1. Long Term Solvency Ratio
IV.1.1. Proprietary ratio: This ratio compares the share holders funds or owners funds and total tangible assets. This ratio shows the general soundness of the company. It is of particular interest to the creditors of the company as it helps them to ascertain the share holder funds in the total assets of the business. A ratio below 0.5 is alarming for the creditors since they have to lose heavily in the event of the company liquidation as it indicates more of creditors funds and lesser of shareholders funds in the total assets of the company.
Formula: Proprietary Ratio = Proprietary fund ----------------------Total assets
Table -15: Calculation of Propriety Ratio
Year
Proprietary funds
Total assets
Ratio
42
1999-00 2008-01 2005-02 2006-03 2007-08
30679 55530 111009 199350 272832
82540 102510 487022 891112 1324701
0.37 0.54 0.23 0.22 0.20
Interpretation: The above table shows that proprietary funds to total assets declined from 0.37 times to 0.20 times. Contribution by proprietors towards total assets are fluctuating and decreasing.
IV.1.2. Debt Equity Ratio: this ratio is ascertained to determine long-term solvency postion of a company. Debt equity ratio is also called as ‘External – Internal’ Equity ratio. An ideal debt equity ratio is 0.5:1. Formula: Debt Equity ratio = Debt ---------Equity
Table 16: Calculation of Debt Equity Ratio
43
Year 1999-00 2008-01
Debt 44382 34741
Equity 30679 55530
Ratio (%) 1.45 .63
2005-02 2006-03 2007-08
179337 165680 346803
111009 199350 272832
1.62 0.83 1.27
Interpretation: Debt-equity ratio is fluctuating and less than ideal. The management seems to be more conservative in making use of cheaper sources of funds. This is evident in interest coverage ratio also.
IV.1.3 Interest Coverage Ratio : it indicates the number of times the interest is covered by the profits available to pay the interest charges.
Formula: Interest Coverage Ratio = Net profit before interest & taxes -----------------------------------------44
Interest charges
Table -17: Calculation of Interest Coverage Ratio
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Net profit before Interest charges interest & taxes 18645 15963 42666 92388 129548 3612 1081 5784 12940 15634
Times 5.16 15.33 7.38 7.14 8.29
Interpretation:
It is fluctuating and more than ideal as the management is conservative in not using the cheaper source of debt capital.
V.1 COMMON SIZE BALANCE SHEET
Year Shareholders funds
2008 2005 Source of Funds 40.87 61.51 45
2006 38.23
2007 51.85
2008 40.94
Loan funds Deferred tax liability Total Fixed assets Net current assets Miscellaneous expenses Total
59.13 38.49 100 100 Application of funds 71.17 96.23 28.75 3.75 0.07 0.02 100 100
61.77 100 55.70 44.30 100
43.09 5.05 100 68.85 30.99 100
52.03 7.03 100 52.97 46.93 100
? From the above, over the period of five years the shareholders funds have been kept intact.
? Loan funds decreased from 59.13% in 2008 to 52.03 % in 2008.
? The fixed assets from its 71.17 % of total assets in 2008 decreased to 52.97 % in 2008. ? The current assets from 28.75 % of total assets in 2008 increased to 46.93 in 2008.
VI. TREND PERCENTAGE ANALYSIS
Year CAPITAL Reserves Secured loans Unsecured loans
2008 2200
%
2005
%
2006
% 165 1 262 265 683
2007 75000 12434 9 10778 4 57896
% 340 9 437 364 391
2008 75000 19783 2 17149 2 17531 1
% 3409 695 580 1185
Sources of Funds 100 9900 450 36325
28479 100 45630 160 74684 29588 100 7385 25 78301
14794 100 27356 185 10103 6 46
Deferred liability Total
tax -
-
-
-
-
387
19432 38446 1 26468 4 11918 3 594 38446 1 512 495 552 512
46864 66649 9 35307 3 31281 5 611 66649 9 888 661 1449 888
75061 100 90271 120 29034
6 Application of funds Fixed assets Current assets Miscellaneou s expenses Investments Total 53423 100 86869 163 16172 21583 100 3387 55 100 15 16 27 5 12862 1 303 596 387
75061 100 90271 120 29034 6
?
The performance of the company is satisfactory since the trend is positive. Every year the percentage has increased substantially.
?
The capital has increased by 3409 % and reserves by 695 % shows good sign for the company’s performance.
?
Fixed assets increased by 661 % shows the company’s interest in expansion.
?
Secured loans increased by 1185 % is a worrying factor, but even on the unsecured loans, the loans is mainly taken from shareholders/ relatives of the shareholders/ directors, which shows their high growth interest in the company.
47
VII. COMPARATIVE BALANCE SHEET
VII.1 Comparative statement for 2008:
Particulars Capital Reserves Secured Unsecured Deferred Total Applications Fixed assets Current assets Miscellaneou
1999 2200 17115 17675 7902 44892 32353 12436 1023
2008 2200 28479 29588 14794 75061 53423 21583 55
Absolute decrease 11364 11913 6892 30169 21070 9147 -48
increase/ % increase/decrease 66.39 67.40 87.22 167.20 65.12 73.55 -44.60
48
s Investments Total
44892
75061
30169
167.20
VII.2 Comparative statement for 2005:
Particulars Capital Reserves Secured Unsecured Deferred Total Applications Fixed assets Current assets Miscellaneou s Investments Total
2008 2200 28479 29588 14794 75061 53423 21583 55 75061
2005 9900 45630 7385 27356 90271 86869 3387 15 90271
Absolute decrease 7700 17151 -22203 12562 15210 33446 -18196 -40 15210
increase/ % increase/decrease 350 66.22 -75 84.91 20.26 62.61 -84.31 -72.73 20.26
49
VII.3 Comparative statement for 2006:
Particulars Capital Reserves Secured Unsecured Deferred Total Applications Fixed assets Current assets Miscellaneous Investments Total
2005 9900 45630 7385 27356 90271 86869 3387 15 90271
2006 36325 74684 78301 101036 290346 161725 128621 290346
Absolute decrease 26425 29054 70916 73680 200875 74856 125234 -15 200875
increase/ % increase/decrease 266.91 63.67 960.27 269.34 221.64 86.17 3697.49 221.64
VII.4 Comparative statement for 2007:
Particulars Capital Reserves Secured Unsecured Deferred Total
2006 36325 74684 78301 101036 290346
2007 75000 124349 107784 57896 19433 384462
Absolute decrease 38675 49665 29483 -43140 19433 94116 50
increase/ % increase/decrease 106.47 66.5 37.65 42.69 32.41
Applications Fixed assets Current
161725 128621
264684 119183 594 384462
102959 -9483 594 94116
63.66 7.34 32.41.
assets Miscellaneous Investments Total 290346
VII.1 Comparative statement for 2008:
Particulars Capital Reserves Secured Unsecured Deferred Total Applications Fixed assets Current
2007 75000 124349 107784 57896 19433 384462 264684 119183
2008 75000 197832 171492 175311 46864 666499 353073 312815 611 666499
Absolute decrease 73483 63708 117415 27431 282037 88388 193632 17 282037
increase/ % increase/decrease 59.09 59.11 202.80 141.16 73.36 33.39 162.47 2.86 73.36
assets Miscellaneous Investments 594 Total 384462
51
From the comparative balance sheet, the following are evident:
? Steady increase in profit.
? Steady outflow for purchase of fixed assets.
? In 2006, the company has borrowed heavily from bank to increase its current Assets (i.e. mainly stock).
? Capital infusion is steady over the period of five years.
Due to the above said reasons the company is able to perform above the Industry average.
52
VIII. FUND FLOW STATEMENT
Particulars/years Sources of funds Secured loans Unsecured loans Share capital Funds from operation Decrease in working capital
2008 11914 6892 14795 -
2005 12562 7700 16642 18196 5775
2006 70916 73680 26425 36964 2263 210248 85014 125234 210248
2007 29483 38675 69257 9438 50 11325 158228 114495 43140 594 158229
2008 63708 117415 122823 360
Sale of fixed assets Share premium Total Application of Funds Purchases of fixed assets Unsecured loans Secured loans Increase in working capital Increase in investment Total 33601 24454 9145 33599
60876 38673 22203 60876
308306 110657 193632 17 308306
From the above fund flow statement, it is seen that
53
?
Long term assets are purchased from funds from operations and short term sources. From the year 2008-2008 funds are used drastically without a financial discipline.
?
In the year 2007 unsecured loans are paid probably from secured loans which are not expected of. In the year 2008 unsecured loans are utilized for purchase of part of fixed assets and an abnormal increase in working capital is also seen.
CHAPTER IV
54
FINDINGS
? Overall Gross profit ratio is less than the ideal in all the years under study. But after 2005-02 it is gradually increasing from 6.19% to 8.66% Operating ratio is the highest in all the years under study. In 2008-01 the factory is leased out and hence the operating cost is more than 100%. ? As the operating ratio is highest the net profit ratio is very less in all the year under study. It is more in 2008-01 as it includes lease rentals. ? Steady increase in operating profit except in the year 2008- 01. ? The return on capital employed is fluctuating in the years under study. ? During the period of five years under study there is a decline in return on proprietors fund from 37 % to 26.93 %. This is due to increase in proprietary fund during the period for major expansion. ? Return on equity capital is decreasing because of increase in equity capital. In all the years under study except 2007-2008 the Current ratio is less than ideal and fluctuating. The quick ratio is less than ideal and decreasing except in the year 2007-2008. ? In the year 2007 – 08 the stock turnover ratio was 87.37, whereas in the year 2007 – 08 it is 8.30. As apparent it shows sign of improvement and it has to be managed to achieve normal industry average of 5 to 8 times.
55
? Credit period allowed for debtors has increased from 7 days in 2007- 08 to 20 days in 2007-08 over the period of five years. The normal industry average is 1 month to 2 months. The study shows good strength of the company in collections. Creditor turnover ratio is fluctuating and more than ideal in the year 2007-2008.it is more than the industry norms of 1 to 2 months. Proprietary funds to total assets declined from 0.37 times to 0.20 times. Contribution by proprietors towards total assets are fluctuating and decreasing. ? Debt-equity ratio is fluctuating and less than ideal. The management seems to be more conservative in making use of cheaper sources of funds. This is evident in interest coverage ratio also. ? Interest coverage ratio is fluctuating and more than ideal as the management is conservative in not using the cheaper source of debt capital.
56
RECOMMENDATIONS
1. The operating cost is exorbitant. The company should try to reduce the operating cost to improve the profitability. 2.The company should follow a good financial discipline of using the long term funds for long term purpose and short term funds for short term purpose. 3.To avoid or to maintain financial integrity in the market the company should pay the short term liabilities at the earliest or at least maintain the industry norms. 4.The company should make an in-depth study of cost involved to increase the profitability.
CONCLUSION
From the overall study it is clear that the company has potential to improve up on. At least after completion of major expansion programme the company should concentrate in cost reduction technique to improve profitability.
When the company is in expansion programme the company can make use of cheaper sources of debt capital rather than own capital.
57
References
S.No Author
Title
Year
Publisher
1
Dr.S.N. MAHESWARI
Principles accounting
of
management 200 4 200 5
Sultan chands & sons Vikas Publishing
2
I.M.Pandey
Financial Management
3
PRASANNA CHANDRA
Fundamentals of Financial Management Financial Management
200 6 200 7
Tata McGraw Hill
4
Khan N.K & Jain P.K
Tata McGraw Hill
CHART # 1
58
Common Size Balance Sheet
120 100 Percentage 80 60 40 20 0 2000 2002 2007 2003 2004 2004 2001 2005 2006 2008 Year Share Holders Funds Loan Funds Deferred Taxes Liability Fixed Assets Net Current Assets Miscellaneous Expenses
Chart II
59
Profit after Tax 80000 60000 40000 20000 1136311377 0
2004 2001 2005 2002 2006 2003 2007 2004 2008 2000
73480 50204 29054 Profit after Tax
Year
Chart III
60
Income 5000000 4000000 3000000 2000000 1000000 0
2004 2005 2000 2001 2006 2007 2004 2008 2002 2003
Income
Year
Appendix: Available on request.
END
61
doc_649552888.doc
A financial statement is a formal record of the financial activities of a business, person, or other entity.
Finance Project on Financial Performance Of Kaleeswari Refinery Ltd
CHAPTER I
INTRODUCTION
I.1 COMPANY PROFILE KALEESUWARI REFINERY PRIVATE LIMITED
The success story began with the establishment of the Kaleesuwari Refinery Pvt. Ltd. in 1995. Since then, the company has made incredible strides in the edible oil market with its flagship brand "Gold Winner". Driven by the goal to provide quality sunflower oil at competitive prices, Gold Winner within a short span of time, has become the most preferred brand.
Gold Winner has proved once again that it is aptly named - according to a report published by The Economic Times Brand Equity on April 21, 2008, Gold Winner is ranked 63rd among India's hundred biggest Fast Moving Consumer Goods (FMCG) brands by A.C. Nielsen Retail Audit. This comprehensive retail audit was done based on a variety of parameters including sales, top-of-the mind recall and trust. Not long ago, 1
an ORG-MARG survey also had rated Gold Winner as number one in the FMCG (edible oils) category in South India. Gold Winner has become a member of the US based National Sunflower Association (NSA), whose aim is to promote quality sunflower products across the globe keeping the health of the people in mind.
Gold Winner finds a place in every discerning home, thanks to the highly sophisticated and rigorous processes adopted to refine crude sunflower oil. A unique distribution network ensures that the end consumer always keeps company with health and happiness. Gold Winner is now available in Sri Lanka and is all set to establish its presence in Singapore.
I.2 Manufacturing
Gold Winner's state-of-the-art production unit is situated at Vengaivasal , about 14km from Chennai, India.
The plant uses the automatic and continuous Belgian technology for processing in order to maintain the highest standards of quality and hygiene. The Desmet technology used is state of the art and ensures that the refined oil produced is of international standards.
The storage capacity at the plant is 16000 tones. This large tank space ensures that enough stocks are available to service the ever-growing demand promptly.
2
The crude oil is systematically purified in well-defined stages like Neutralization, Bleaching, Dewaxing and Deodorization. All processes are monitored and controlled automatically by using PLC based systems. Untouched by hand, the oil produced here matches the exacting requirements of our customers.
To keep the processes stable and controlled, we have adopted modern plant maintenance practices including Preventive maintenance. Condition monitoring of critical equipments is resorted to periodically. In observance to stipulated standards, calibration of instruments and control devices are done routinely.
Manpower:
A high-level in-plant safety committee ensures that the prescribed safety norms are strictly adhered to. Personnel safety has the highest priority. Gold Winner has employed well qualified and experienced personnel to handle all its functions. The workforce, largely local, is inducted to work only after a rigorous training process that includes on the job training. All welfare measures are in place to ensure that the productive capacity of our people is maintained at the highest level.
We care for the environment:
Gold Winner understands its social responsibilities and the effluent treatment process is
3
built on the concept of using environment friendly waste disposal practices. The green environs in and around the factory bear ample testimony to it.
I.3 Quality Assurance
To ensure the highest level of quality in the finished product , all our incoming raw and other materials are subjected to stringent tests and checks.
The raw material - crude sunflower oil - is procured from reliable sources in India and abroad and tested using the modern analytical Gas Chromatograph .The quality at various stages of the processing is also checked and is further assured by using Good Manufacturing Practices(GMP). Undesirable components are removed during the processing.
The good properties of the refined sunflower oil are maintained intact by the use of appropriate packing . This ensures that the freshness we put in at the time of manufacturing is the same freshness you get when you open your pack .Simply put this is the unique FIFO (Freshness In -Freshness Out ) benefit that Gold Winner brings to you.
This ensures that every time you buy Gold Winner, you actually carry home health and happiness.
4
I.4 Marketing
Vision : We envision that Gold winner should become the most valued and preferred edible oil brand in our nation by 2007. Kaleesuwari Refinery Private Limited has dedicated itself to its mission of building a conveniently available, affordable world class brand that is trusted and preferred by the consumer for its quality & nutritional value. Today Gold winner is available in all the southern states of India and Maharastra. Gold winner is constantly consolidating and expanding its distribution reach with the single minded objective of coming closer to customer. Infact Kaleesuwari Refinery Private Limited is implementing an organization wide ERP project named c2c or closer to customer. Once completed, "This project is expected to track the buying behavior closely and help us to effectively service our customers requirements". The SAP implementation would also bring in commensurate reduction in lead time to deliver there by positively impacting our inventory levels. Gold winner is now an international brand having established its presence in Sri Lanka. Gold winner would soon be available in Singapore as well. The range of products has been enlarged to cater to the requirements of our customer comprehensively.
5
I.5 ABOUT EFA The Secret of a winning formula: EFA Every glistening drop of Gold Winner comes with the promise of ample nutrition and unending good health. Just a little Gold Winner can add to your meal the innumerable benefits of pure refined sunflower oil. Thanks to the fact that it contains EFA, Gold Winner keeps the winner in you going strong at all times.
Why EFA? With the advent of calorie-conscious and healthy eating habits, low fat diets have become the order of the day. Leading to a curious dilemma - where does one draw the line between excessive fat and essential fat? This is where EFA steps in to add the needed sprinkle of health to every recipe.
What is EFA? EFA (or Essential Fatty Acids) supply the body with vital macronutrients that are not naturally produced by the human body, and it can be acquired only from external sources through the food we consume. Sunflower Oil is one such source, which is EFA rich. Gold Winner, Refined Sunflower Oil rich in EFA ensures that it turns each meal into a culinary delight.
6
I.6 OBJECTIVES
? ? ?
To study the financial position of the company. To analyze and interpret the financial efficiency of the company. To identify the problem and suggest for their better financial performance.
I.7 PERIOD OF STUDY
?
A study on the over all financial performance was done in kaleesuwari refinery private limited as per the given period of time from January to March 2005.
?
The analysis was made with the help of balance sheets for a period of five years. (i.e., 1999-2008 to 2007-2008).
I.8 METHODOLOGY
Research methodology is a way to systematically solve the research problem. It is a science of studying how research is done. In research methodology we study the various steps that are generally adopted by a researcher in studying his research problem along with logic behind in using a particular method or technique for the purpose of evaluation.
7
The methodology in the study involves the following:
?
TYPE OF RESEARCH : The researcher uses analytical type of research for the study. Analytical research is a type of research, where the research is to be undergone on the basis of facts or information already available, and analyze those to make a critical evaluation of the material.
?
SOURCES OF INFORMATION: ? Primary data ? Secondary data Primary data is gathered through discussions with the individuals of the company. Secondary data was the important source of information for this study that includes Annual Reports, journals and contents gathered from internet.
I.9 METHOD OF ANALYSIS To have a meaningful analysis and interpretation of various data’s collected; the following tools were made use of for this study. ? Ratio analysis ? Common size balance sheet ? Comparative balance sheet ? Trend analysis ? Fund flow analysis 8
I.10 LIMITATIONS
? ? ?
The analysis was made with the help of secondary data’s. The length and breadth of the company. Certain information’s are confidential and access limited.
I.11 SCOPE OF STUDY
The scope of study is to analyze the company’s financial performance in competitive industry. The company is engaged in refining edible oils. This industry has heavy competition. This study will help us to understand how the company has out performed other players in this field and also how the company has grown up with huge expansion.
I.12 CHAPTER ARRANGEMENTS
? First chapter contains the introduction part of the study. ? Second chapter contains the theoretical settings and particulars of company of study ? Third chapter contains the data analysis and interpretation of the study ? Finally, the fourth chapter contains the summary of findings and recommendations of the study. the
9
CHAPTER II
LITERATURE REVIEW
A financial statement is an organized collection of data according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm. It may show a position at a moment of time as in the case of a balance sheet, or may reveal a series of activities over a given period of time, as in the case of an income statement. Thus, the term ‘financial statements’ generally refers to two basis statements: (1) the income statement, and (2) the balance sheet. Of course, a business may also prepare (3) a statement of retained earnings, and (4) a statement of changes in financial position in addition to the above two statements.
Financial statements
INCOME STATEMENT
BALANCE SHEET
STATEMENT OF RETAINED EARNINGS
STATEMENT OF CHANGES IN FINANCIAL POSITION
10
The income statement is generally considered to be the most useful of all financial statements. It explains what has happened to a business as a result of operations between two balance sheet dates. For this purpose it matches the revenues and costs incurred in the process of earning revenues and shows the net profit earned or loss suffered during a particular period. Balance sheet is a statement of financial position of a business at a specified moment of time. It represents all assets owned by the business at a particular moment of time and the claims or equities of the owners and outsiders against those assets at that time. It is in a way a snap shot of the financial condition of the business at that time. The important distinction between an income statement and a balance sheet is that the income statement is for a period while balance sheet is on a particular date. Income statement is therefore a flow report, as contrasted with the balance sheet, whish is a static report. However, both are complementary to each other. The term retained earnings means the accumulated excess of earnings over loses and dividends. The balance shown by the income statement is transferred to the balance sheet through this statement, after making necessary appropriations. It is fundamentally a display of things that have caused the beginning of the period- retained earnings balance to be changed in to the one shown in the end of the period balance sheet. Financial analysis can be classified on the basis of materials used. Those who are outsiders for the business do the external analysis. The term outsiders include
11
investors, credit agencies, government agencies and other creditors who have no access to the internal records of the company. These persons mainly depend up on the published financial statements. Their analysis servers only limited purpose. The internal analysis is done by persons who have access to the books of account and other information related to the business. Such an analysis can, therefore, be done by executives and employees of the organization or by officers appointed for this purpose by the government or the court under powers vested in them. The analysis is done depending up on the objective to be achieved through this analysis. The performance of any industry is dependent, to a large extent, on its financial performance. Financial performance becomes encouraging when a proper financial plan and execution of the plan precede it. The present day economy is dynamic and changing from time to time. The Indian economy has witnessed fast changes and transition from controlled economy in to liberalized one during past 10 to 15 years. The financial management has to be fair under such circumstances as the parameters assumed under change. This also calls for good corporate governance. Corporate governance enables and introduces an integrated approach in managing a Corporate / Industry. Corporate governance includes the polices and procedures adopted by a company in achieving its objectives in relation to shareholders, employees, customers and suppliers, regulatory authorities and community at large.
12
? Approval of shareholders by postal ballot. ? Audit Committee. ? Director’s Responsibility statement. ? Remuneration and Compensation Committee.
The company is committed to attain highest standard of corporate Governance. It recognizes that the board of directors is accountable to all shareholders for good governance. The philosophy of the company in relation to Corporate Governance is to ensure transparency in all its operations, make disclosures and enhance shareholders value without compromising in any way with laws and regulations.
II.1 OPERATIONAL DEFINITIONS OF THE CONCEPTS
II.1.1 RATIO ANALYSIS INTRODUCTION:
Analysis and interpretation of financial statements with the help of “ratios” is termed as “Ratio Analysis”. Ratio analysis involves the process of computing, determining and presenting the relationships of items of financial statements.
Ratio Analysis was pioneered by Alexander Wall who presented a system of ratio analysis in the year 1909.
13
II.1.3 MEANING OF RATIO:
A ratio is a mathematical relationship between two items expressed in a quantitative form.
Ratio can be defined as “Relationships expressed in quantitative terms, between figures which have cause and effect relationships or which are connected with each other in some manner or the other”. An accounting ratio can be defined as “Quantitative relationships between two or more items of the financial statements connected with each other”. The essence of ratio is putting together of two figures to stud their relationships. The study is in the form of analysis, interpretation and expression of all the ramification of the relationships.
II.1.4 MODES OF EXPRESSION OF RATIOS: Ratios may be expressed in any one or more of the following ways: i. In proportion:
In this type the amount of two items are expressed in a common denominator. An example of this form of expression is the relationship between current assets and current liabilities as “2:1”.
14
ii.
In rate or times or coefficient:
In this type of expression, a quotient obtained by dividing one item by another is taken as unit of expression. An example of this form of expression is cost of sales divided by average stock (say 8), thus 8 times is the ratio between cost of sales and stock.
iii.
In percentage:
In this type of expression, a quotient obtained by dividing one item by another is multiplied by one hundred to show the relationship in terms of percentage. For example, the relationship between net profit and sales may be expressed as say 25%
II.2 STEPS IN RATIO ANALYSIS:
i.
Selection of relevant information:
The first step in ratio analysis is to select relevant information from financial statements and calculate appropriate ratios required for decision under consideration.
15
ii.
Comparison of calculated ratios:
In order to assess the relative meaning, the ratios calculated are compared with the past ratios and industry ratios.
iii.
Interpretation and reporting:
The third step in ratio analysis is to interpret the significance of various ratios, draw inferences and to write a report. The report may recommend specific action in the matter of the decision situation or may present alternatives with comparative merits or it may just state the facts and interpretation.
II.3 Advantages of Ratio Analysis: Forecasting: Ratios reveal the trends in costs, sales, profits and other inter-related facts, which will be helpful in forecasting future events. Managerial control: Ratios can be used as “instrument of control” regarding sales, costs and profit. Facilitates communication: Ratios facilitate the communication function of management as ratios convey the information relating to the present and future quickly, forcefully and clearly.
16
Measuring efficiency:
Ratios help to know operational efficiency by comparison of Present ratios with those of the past working and also with those of other firms in the industry.
Facilitating Investment Decisions:
Ratios are helpful in computing return on investment. This helps the management in exercising effective decisions regarding profitable avenues if investment. Useful in measuring financial solvency:
The financial statements disclose the assets and liabilities in a format. But they do not convey relationships of various assets and liabilities with each other, whereas ratios indicates the liquidity position of the company and the proportion of borrowed funds to total resources which reveal the short term and long term solvency position of a firm. Inter firm comparisons The technique of inter- firm comparisons can be carried out successfully only with the help of ratio analysis. Otherwise no firm may come forward to disclose full information. Inter- firm comparisons help the management to compare its performance with an external “benchmark” or “standard”.
17
II.4 LIMITATIONS OF RATIO ANALYSIS:
i.
Practical knowledge:
The analyst should have thorough knowledge and experience about the firm and industry.
ii.
Ratios are means:
Ratios are not an end in themselves bet they are means to achieve a particular purpose or end.
iii.
Inter – relationship:
Ratios are inter- related and therefore a single ratio cannot convey any meaning. It has to be interpreted with reference to other related ratios to draw meaningful conclusions.
iv.
Non availability of standards or norms:
Ratios will be meaningful if they can be compared with standards or norms. Except for a few financial ratios, other ratios lack standards which are universally recognized.
18
v.
Accuracy of financial information:
The accuracy of a ratio depends on the accuracy of information derived from financial statements. If the statements are inaccurate, same will be the result with ratios.
vi.
Consistency in preparation of financial statements:
Inter – firm comparisons with the help of ratio analysis will be useful only if the firms use uniform accounting procedures consistently. Otherwise the comparison may be useless.
vii.
Detachment from financial statements:
Useful ratios are not substitutes to financial statements. they can be meaningful only if they are read along with information is detached ,ratios themselves cannot convey much message.
viii.
Time lag:
Ratio analysis will be fruitful only if the conclusions are conveyed quickly to the management. If there is a delay, the utility of the data is diminished and the purpose itself may be defeated.
19
ix.
Changes in price level:
Ratio analysis becomes useless during periods of heavy price fluctuations.
II.5 COMMON SIZE FINANCIAL STATEMENTS
:
Common size financial statements are those in which figures reported are converted in to percentages to some common base. In the income statement sales figures is assumed to be 100 and all figures are expressed as percentage of sales. Similarly in the balance sheet, the total of assets or liabilities is taken as 200 and all the figures are expressed as a percentage of this total.
II.6 COMMON SIZE BALANCE SHEET ANALYSIS:
Financial statement analysis such as ratio analysis, funds flow analysis and trend analysis has a common shortcoming. They fail to focus on the changes that take place from year to year in relation to total assets and total liabilities. This limitation can be overcome by preparing the common size balance sheet. This shows the relation of each asset item to total assets and each liability item to total liabilities. As these percentages show relationships to balance sheet total, variations from tear to year do not necessarily indicate changes in money accounts.
20
II.7 COMPARATIVE BALANCE SHEET:
The single balance sheet shows assets and liabilities as on a particular date. The comparative balance sheet shows the value of assets and liabilities on two different dates. It helps in comparison. A comparative balance sheet has two columns to record the figures of the current year and the previous year. A fourth column may be added to giving percentage increase or decrease. Thus, while in the balance sheet the emphasis is on status, in the comparative balance sheet it is on change. Comparative balance sheet indicates whether the business is moving in a favorable or unfavorable direction. It is very useful for studying the trends in an enterprise.
II.8 TREND PERCENTAGE ANALYSIS:
Trend percentages are immensely helpful in making a comparative study of the financial statements for several years. The method of trend percentages is a useful analytical device for the management since by substitution of percentages for large amounts; the brevity and reliability are achieved. The method of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year. Any year may be taken as the base year. It is usually the earliest year. Any intervening year may also be taken 100 and on that basis the percentages for each of the items of each of the years are calculated.
21
II.9 FUND FLOW STATEMENT:
Every company prepares its balance sheet at the end of its accounting year. It is a statement of assets and liabilities of the company, as on a particular date. It reveals the financial position of the company. It does not present a detailed analysis. The balance sheet fails to account for the period increase or decrease in he working capital during a period and explain them. The statement is called fund flow statement. Meaning: The fund flow statement is a report on the movement of funds or working capital. It explains how working capital is raised and used during an accounting period. Definition: “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates”.
Objectives: ? ? ? To show how the resources have been obtained and used. To indicate the results of current financial management. To throw light upon the most important changes that have taken place during a specific period. ? To show how the general expansion of the business has been financed.
22
?
To indicate the relationship between profits from operations, distribution of dividend and rising of new capital or term loans.
?
To have an assessment of the working capital position of the concern.
II.10 Advantages or significance of funds flow statement:
i.
Analysis of financial operations: The main purpose of funds flow statement is to analyze the financial operations of the business. The statement explains the causes for changes in the assets and liabilities during a period.
ii.
Evaluation of the firm’s financing: The analysis of sources of funds reveals how the firm has financed its developed projects in the past i.e. from internal sources or from external sources. It also reveals the rate of growth of the firm.
iii.
Answers to intricate questions: The funds flow statement provides answers to questions such as: ? How the loans were repaid? ? How much funds were generated from operations? ? How were the funds used? ? How was the increase in working capital financed?
23
iv.
Allocation of scarce resources: A projected fund flow statement is an instrument for allocation of resources. It lays down the plan for efficient use of scarce resources in future. It enables the management to discharge its financial obligations promptly.
v.
Helps in working capital management: This statement indicates the adequacy or inadequacy of working capital. The management can take steps for effective use of surplus working capital. In case of inadequacy, arrangement can be made for improving the working capital position.
vi.
Acts as a guide to future: With the aid of projected funds flow statement, the management can plan for meeting future financial requirements.
vii.
Helps financial institutions: This statement is also useful to lending institutions like banks, IDBI, ICICI, IFCI and others. It helps them to assess the credit worthiness and repaying capacity of the borrowing company.
24
II.11 LIMITATIONS OF FUNDS FLOW STATEMENT:
i.
This statement is not a substitute for an income statement or balance sheet. It provides only some additional information regarding changes in working capital.
ii.
Changes in cash are more important and relevant for financial management than the working capital.
iii.
It is not an original statement. It is only a rearrangement of data given in financial statements.
iv.
This statement is essentially historic in nature. A projected funds flow statement, on the basis of it cannot be prepared with much accuracy.
v.
It cannot reveal continuous changes.
25
CHAPTER III
DATA ANALYSIS AND INTERPRETATION
III.1 PROFITABILTY RATIOS:
This ratio is an indicator of the efficiency within which the operations of the business are carried on. The lower profitability may arise due to lack of control over the expenses. Ratios also direct us while dealing with Bankers, financial Institutions and other creditors.
III.1.1 Gross profit ratio
This ratio is known as Gross margin or Trading margin ratio. Gross Profit ratio indicates the difference between sales and direct cost. Gross Profit explains the relations between Gross Profit and Net sales. A higher ratio is preferable, indicating higher profitability. Formula: Gross profit Gross profit ratio = ---------------------Sales It is expected to be adequate to cover operating expenses, fixed interest charges, dividends and increase of reserves. * 100
26
Table -1: Calculation of Gross Profit Ratio
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Gross Profit (Rs) 33816 842 142918 246742 330931
Sales (Rs) 1007758 47268 2309478 3970864 3821262
Ratio (%) 3.36 1.78 6.19 6.21 8.66
Interpretation:
Overall Gross profit ratio is less than the ideal in all the years under study. But after 2005-02 it is gradually increasing from 6.19% to 8.66%
III.1.2 Operating ratio 27
Operating ratio matches cost of goods sold plus other operating expenses on one hand, with net sales on the other.The ratio is closely related to the ratio of operating profit to net sales which can be obtained by subtracting the operating ratio from 100.
FORMULA: Cost of goods sold + Operating expenses Operating ratio = ------------------------------------------------------ *100 Net sales
Table -2: Calculation of Operating Ratio
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Operating cost 1005050 48693 2273857 3907857 3733629
Net sales (Rs) 1007758 47268 2309478 3970864 3821262
Ratio (%) 99.73 103.01 98.43 98.41 97.71
Interpretation: 28
Operating ratio is the highest in all the years under study. In 2008-01 the factory is leased out and hence the operating cost is more than 100%.
III.1.3 Net profit ratio:
This is the ratio of net income or profit after taxes to net sales. It indicates with portion of sales is left to the proprietors after all costs, charges and expenses have been deducted. The ratio is widely used as a measure of overall profitability and is very useful to the proprietors.
FORMULA:
Net profit after tax
Net profit ratio = -------------------------------- *100 Net sales
Table -3: Calculation of Net Profit Ratio
Year
Net Profit after tax
Sales (Rs)
Ratio (%)
1999-00
11363
1007758
1.13
2008-01
11377
47268
24.07
2005-02
29054
2309478
1.26
29
2006-03
50208
3970864
1.26
2007-08
73480
3821262
1.92
Interpretation:
As the operating ratio is highest the net profit ratio is very less in all the year under study. It is more in 2008-01 as it includes lease rentals.
III.1.4 Operating profit ratio
It is the ratio of profit made from operating sources to the sales, usually shown as a percentage. It shows the operational efficiency of the firm is a measure of the management’s efficiency in running the routine operations of the firm. Operating expenses include administration, selling and distribution expenses.
FORMULA: Operating Profit Operating profit ratio = ------------------------Sales * 100
Table -5: Calculation of Operating Profit Ratio
30
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Operating Profit 2708 -1425 36180 63007 87633
Sales (Rs) 1007758 47268 2309478 3970864 3821262
Ratio (%) 0.27 -3.01 1.57 1.59 2.29
Interpretation:
Steady increase in operating profit except in the year 2008- 01.
III.1.5 Return on capital employed:
The return on capital employed can be used to show the efficiency of the business as a whole. It is used as a basis for various managerial decisions. Thus it can become an integral part of the budgetary control system in order that the management may be able to follow the progress being made and to take corrective action, if necessary.
FORMULA: 31
Return on capital employed = Net profit after tax ------------------------------- * 100 Capital employed
Table -6: Calculation of Return on Capital Employed
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Net Profit after Capital tax 11363 11377 29054 50208 73480 75060 90271 290346 384462 666499
Ratio (%) 15.14 12.60 10.01 13.06 11.02
Interpretation:
The return on capital employed is fluctuating in the years under study.
III.1.6 Return on proprietors funds:
32
It is the ratio of net profit to proprietor’s funds as shown by the balance sheet, which are the same as total assets less liabilities. It is another effective measure of the profitableness of an enterprise. This ratio is one of the most important relationships in financial statement analysis. The realization of a satisfactory net income is the major objective of a business and the ratio of net profit to shareholders funds shows the extent to which this objective to being achieved.
FORMULA: Net profit after tax Return on proprietors funds = ---------------------------------- *100 Proprietor’s funds Table -7 Calculation of Return on Proprietors Funds
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Net
Profit
after Proprietors funds 30679 55530 111009 199350 272832
Ratio (%) 37 20.49 26.17 25.18 26.93
tax 11363 11377 29054 50208 73480
Interpretation: 33
During the period of five years under study there is a decline in return on proprietors fund from 37 % to 26.93 %. This is due to increase in proprietary fund during the period for major expansion. III.1.7 Return on equity capital
Return on equity capital relates the net profits available to equity share holders to the amount of capital invested by them. This rate of return is designed to show what percentage, the earned profit of the period bears to the amount of capital invested by equity share holders
FORMULA: Net profit after tax Return on equity capital = ---------------------------- *100 Equity capital
Table -8: Calculation of Return on Equity Capital
34
Year
Net tax
Profit
after Equity capital
Ratio (%)
1999-00
11363
2200
516.5
2008-01
11377
9900
114.92
2005-02
29054
36325
79.98
2006-03
50208
75000
66.94
2007-08
73480
75000
97.97
Interpretation:
Return on equity capital is decreasing because of increase in equity capital.
III.2 Short Term Solvency Ratios III.2.1 Current ratio:
Current ratio also called working capital ratio, is the most widely used of all analytical devices based on the balance sheet. It matches the total current assets of the firm to its current liabilities. Current ratio indicates, in rough, the liquidity of current assets or the ability of a business to meet its maturing current obligations.
35
current assets normally include cash in hand or at bank, marketable securities, other short term high quality investments, bills receivables, prepaid expenses, work in progress, sundry debtors and inventories while current liabilities are composed of sundry creditors, bills payable, outstanding and accrued expenses, income tax payable. FORMULA: Current assets Current ratio = ------------------------- * 100 Current liabilities Table -10: Calculation of Current Ratio Year 1999-00 2008-01 2005-02 2006-03 2007-08 Current assets 29063 15626 325296 6264282 971629 Current liabilities 7481 12239 196676 507244 658814 Ratio (%) 3.88 1.28 1.65 1.23 1.47
Interpretation:
In all the years under study except 1999-2008 the ratio is less than ideal and fluctuating.
III.2.2 Liquid Ratio:
36
This ratio is also called quick ratio or acid test ratio. It is calculated by comparing the quick assets with current liabilities.
Formula: Liquid ratio = Quick assets or Liquid assets -----------------------------------------Current Liabilities Where, Liquid assets = Current assets – Inventory The ideal Liquid ratio or generally accepted norm for liquid ratio is 1. comparison of Quick ratio with current ratio indicates the inventory hold ups. Table -11: Calculation of Liquid Ratio Year 1999-00 Liquid assets 29063 Liquid liabilities 7481 Ratio (%) 3.88
2008-01 2005-02 2006-03
11674 163459 321037
12239 196676 507244
0.95 0.83 0.63
2007-08
356606
658814
0.54
Interpretation:
37
The quick ratio is less than ideal and decreasing except in the year 1999-2008.
III.2.3 Stock Turn over ratio : It reveals the number of times the stock has been rotated in a year. The purpose of computing this ratio is to find out to what extant the inventory has been efficiently used and control.
Formula: Stock turn over ratio = Net sales --------------------------------Avg. inventory @ Cost
Average inventory =
Opening stock + Closing stock -------------------------------------2
Table -12: Calculation of Stock Turn Over Ratio
38
Year
Net sales
Average inventory at cost
Ratio
1999-00 2008-01 2005-02 2006-03 2007-08
1007758 47268 2309478 3970864 3821262
11534 1976 82894.5 233614 460207
87.37 23.92 27.86 16.99 8.30
Interpretation: In the year 1999 – 00 the stock turnover ratio was 87.37, whereas in the year 2007 – 08 it is 8.30. As apparent it shows sign of improvement and it has to be managed to achieve normal industry average of 5 to 8 times.
III.3. Turn over Ratio
III.3.1 Debtor Turn over Ratio: It indicates the velocity of the dept collection of the firm. In simple terms it indicates the number of times the avg. debtors are turned over during the year.
Formula: Debtor Turn over Ratio = Trade debtors --------------------39
Sales per day Sales per day = Net sales --------------------------No. of working days Table -13: Calculation of Debtor Turn Over Ratio
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Trade debtors 18353 2402 128009 215205 212695
Sales per day 2799 131 6415 11030 10614
Days 6.5 18 20 20 20
Interpretation:
Credit period allowed for debtors has increased from 7 days in 1999- 00 to 20 days in 2007-08 over the period of five years. The normal industry average is 1 month to 2 months. The study shows good strength of the company in collections.
III.3.2 Creditor Turn over Ratio: It is similar to debtors turn over ratio. It indicates the speed with which the payments of credit purchase are made to the creditors. 40
Formula: Creditor Turn over Ratio = Trade creditors -----------------------Purchases per day
Purchase per day =
Net purchase -------------------No. of working days
Table -14: Calculation of Creditor Turn Over Ratio Year 1999-00 2008-01 Trade creditors 2922 7817 Purchases day 2357 115.27 per Days 1.24 67.18
2005-02 2006-03 2007-08
186163 469681 627460
5440 9430 8660
34.22 49.81 72.45
Interpretation: Creditor turnover ratio is fluctuating and more than ideal in the year 2007-2008.it is more than the industry norms of 1 to 2 months. 41
IV.1. Long Term Solvency Ratio
IV.1.1. Proprietary ratio: This ratio compares the share holders funds or owners funds and total tangible assets. This ratio shows the general soundness of the company. It is of particular interest to the creditors of the company as it helps them to ascertain the share holder funds in the total assets of the business. A ratio below 0.5 is alarming for the creditors since they have to lose heavily in the event of the company liquidation as it indicates more of creditors funds and lesser of shareholders funds in the total assets of the company.
Formula: Proprietary Ratio = Proprietary fund ----------------------Total assets
Table -15: Calculation of Propriety Ratio
Year
Proprietary funds
Total assets
Ratio
42
1999-00 2008-01 2005-02 2006-03 2007-08
30679 55530 111009 199350 272832
82540 102510 487022 891112 1324701
0.37 0.54 0.23 0.22 0.20
Interpretation: The above table shows that proprietary funds to total assets declined from 0.37 times to 0.20 times. Contribution by proprietors towards total assets are fluctuating and decreasing.
IV.1.2. Debt Equity Ratio: this ratio is ascertained to determine long-term solvency postion of a company. Debt equity ratio is also called as ‘External – Internal’ Equity ratio. An ideal debt equity ratio is 0.5:1. Formula: Debt Equity ratio = Debt ---------Equity
Table 16: Calculation of Debt Equity Ratio
43
Year 1999-00 2008-01
Debt 44382 34741
Equity 30679 55530
Ratio (%) 1.45 .63
2005-02 2006-03 2007-08
179337 165680 346803
111009 199350 272832
1.62 0.83 1.27
Interpretation: Debt-equity ratio is fluctuating and less than ideal. The management seems to be more conservative in making use of cheaper sources of funds. This is evident in interest coverage ratio also.
IV.1.3 Interest Coverage Ratio : it indicates the number of times the interest is covered by the profits available to pay the interest charges.
Formula: Interest Coverage Ratio = Net profit before interest & taxes -----------------------------------------44
Interest charges
Table -17: Calculation of Interest Coverage Ratio
Year 1999-00 2008-01 2005-02 2006-03 2007-08
Net profit before Interest charges interest & taxes 18645 15963 42666 92388 129548 3612 1081 5784 12940 15634
Times 5.16 15.33 7.38 7.14 8.29
Interpretation:
It is fluctuating and more than ideal as the management is conservative in not using the cheaper source of debt capital.
V.1 COMMON SIZE BALANCE SHEET
Year Shareholders funds
2008 2005 Source of Funds 40.87 61.51 45
2006 38.23
2007 51.85
2008 40.94
Loan funds Deferred tax liability Total Fixed assets Net current assets Miscellaneous expenses Total
59.13 38.49 100 100 Application of funds 71.17 96.23 28.75 3.75 0.07 0.02 100 100
61.77 100 55.70 44.30 100
43.09 5.05 100 68.85 30.99 100
52.03 7.03 100 52.97 46.93 100
? From the above, over the period of five years the shareholders funds have been kept intact.
? Loan funds decreased from 59.13% in 2008 to 52.03 % in 2008.
? The fixed assets from its 71.17 % of total assets in 2008 decreased to 52.97 % in 2008. ? The current assets from 28.75 % of total assets in 2008 increased to 46.93 in 2008.
VI. TREND PERCENTAGE ANALYSIS
Year CAPITAL Reserves Secured loans Unsecured loans
2008 2200
%
2005
%
2006
% 165 1 262 265 683
2007 75000 12434 9 10778 4 57896
% 340 9 437 364 391
2008 75000 19783 2 17149 2 17531 1
% 3409 695 580 1185
Sources of Funds 100 9900 450 36325
28479 100 45630 160 74684 29588 100 7385 25 78301
14794 100 27356 185 10103 6 46
Deferred liability Total
tax -
-
-
-
-
387
19432 38446 1 26468 4 11918 3 594 38446 1 512 495 552 512
46864 66649 9 35307 3 31281 5 611 66649 9 888 661 1449 888
75061 100 90271 120 29034
6 Application of funds Fixed assets Current assets Miscellaneou s expenses Investments Total 53423 100 86869 163 16172 21583 100 3387 55 100 15 16 27 5 12862 1 303 596 387
75061 100 90271 120 29034 6
?
The performance of the company is satisfactory since the trend is positive. Every year the percentage has increased substantially.
?
The capital has increased by 3409 % and reserves by 695 % shows good sign for the company’s performance.
?
Fixed assets increased by 661 % shows the company’s interest in expansion.
?
Secured loans increased by 1185 % is a worrying factor, but even on the unsecured loans, the loans is mainly taken from shareholders/ relatives of the shareholders/ directors, which shows their high growth interest in the company.
47
VII. COMPARATIVE BALANCE SHEET
VII.1 Comparative statement for 2008:
Particulars Capital Reserves Secured Unsecured Deferred Total Applications Fixed assets Current assets Miscellaneou
1999 2200 17115 17675 7902 44892 32353 12436 1023
2008 2200 28479 29588 14794 75061 53423 21583 55
Absolute decrease 11364 11913 6892 30169 21070 9147 -48
increase/ % increase/decrease 66.39 67.40 87.22 167.20 65.12 73.55 -44.60
48
s Investments Total
44892
75061
30169
167.20
VII.2 Comparative statement for 2005:
Particulars Capital Reserves Secured Unsecured Deferred Total Applications Fixed assets Current assets Miscellaneou s Investments Total
2008 2200 28479 29588 14794 75061 53423 21583 55 75061
2005 9900 45630 7385 27356 90271 86869 3387 15 90271
Absolute decrease 7700 17151 -22203 12562 15210 33446 -18196 -40 15210
increase/ % increase/decrease 350 66.22 -75 84.91 20.26 62.61 -84.31 -72.73 20.26
49
VII.3 Comparative statement for 2006:
Particulars Capital Reserves Secured Unsecured Deferred Total Applications Fixed assets Current assets Miscellaneous Investments Total
2005 9900 45630 7385 27356 90271 86869 3387 15 90271
2006 36325 74684 78301 101036 290346 161725 128621 290346
Absolute decrease 26425 29054 70916 73680 200875 74856 125234 -15 200875
increase/ % increase/decrease 266.91 63.67 960.27 269.34 221.64 86.17 3697.49 221.64
VII.4 Comparative statement for 2007:
Particulars Capital Reserves Secured Unsecured Deferred Total
2006 36325 74684 78301 101036 290346
2007 75000 124349 107784 57896 19433 384462
Absolute decrease 38675 49665 29483 -43140 19433 94116 50
increase/ % increase/decrease 106.47 66.5 37.65 42.69 32.41
Applications Fixed assets Current
161725 128621
264684 119183 594 384462
102959 -9483 594 94116
63.66 7.34 32.41.
assets Miscellaneous Investments Total 290346
VII.1 Comparative statement for 2008:
Particulars Capital Reserves Secured Unsecured Deferred Total Applications Fixed assets Current
2007 75000 124349 107784 57896 19433 384462 264684 119183
2008 75000 197832 171492 175311 46864 666499 353073 312815 611 666499
Absolute decrease 73483 63708 117415 27431 282037 88388 193632 17 282037
increase/ % increase/decrease 59.09 59.11 202.80 141.16 73.36 33.39 162.47 2.86 73.36
assets Miscellaneous Investments 594 Total 384462
51
From the comparative balance sheet, the following are evident:
? Steady increase in profit.
? Steady outflow for purchase of fixed assets.
? In 2006, the company has borrowed heavily from bank to increase its current Assets (i.e. mainly stock).
? Capital infusion is steady over the period of five years.
Due to the above said reasons the company is able to perform above the Industry average.
52
VIII. FUND FLOW STATEMENT
Particulars/years Sources of funds Secured loans Unsecured loans Share capital Funds from operation Decrease in working capital
2008 11914 6892 14795 -
2005 12562 7700 16642 18196 5775
2006 70916 73680 26425 36964 2263 210248 85014 125234 210248
2007 29483 38675 69257 9438 50 11325 158228 114495 43140 594 158229
2008 63708 117415 122823 360
Sale of fixed assets Share premium Total Application of Funds Purchases of fixed assets Unsecured loans Secured loans Increase in working capital Increase in investment Total 33601 24454 9145 33599
60876 38673 22203 60876
308306 110657 193632 17 308306
From the above fund flow statement, it is seen that
53
?
Long term assets are purchased from funds from operations and short term sources. From the year 2008-2008 funds are used drastically without a financial discipline.
?
In the year 2007 unsecured loans are paid probably from secured loans which are not expected of. In the year 2008 unsecured loans are utilized for purchase of part of fixed assets and an abnormal increase in working capital is also seen.
CHAPTER IV
54
FINDINGS
? Overall Gross profit ratio is less than the ideal in all the years under study. But after 2005-02 it is gradually increasing from 6.19% to 8.66% Operating ratio is the highest in all the years under study. In 2008-01 the factory is leased out and hence the operating cost is more than 100%. ? As the operating ratio is highest the net profit ratio is very less in all the year under study. It is more in 2008-01 as it includes lease rentals. ? Steady increase in operating profit except in the year 2008- 01. ? The return on capital employed is fluctuating in the years under study. ? During the period of five years under study there is a decline in return on proprietors fund from 37 % to 26.93 %. This is due to increase in proprietary fund during the period for major expansion. ? Return on equity capital is decreasing because of increase in equity capital. In all the years under study except 2007-2008 the Current ratio is less than ideal and fluctuating. The quick ratio is less than ideal and decreasing except in the year 2007-2008. ? In the year 2007 – 08 the stock turnover ratio was 87.37, whereas in the year 2007 – 08 it is 8.30. As apparent it shows sign of improvement and it has to be managed to achieve normal industry average of 5 to 8 times.
55
? Credit period allowed for debtors has increased from 7 days in 2007- 08 to 20 days in 2007-08 over the period of five years. The normal industry average is 1 month to 2 months. The study shows good strength of the company in collections. Creditor turnover ratio is fluctuating and more than ideal in the year 2007-2008.it is more than the industry norms of 1 to 2 months. Proprietary funds to total assets declined from 0.37 times to 0.20 times. Contribution by proprietors towards total assets are fluctuating and decreasing. ? Debt-equity ratio is fluctuating and less than ideal. The management seems to be more conservative in making use of cheaper sources of funds. This is evident in interest coverage ratio also. ? Interest coverage ratio is fluctuating and more than ideal as the management is conservative in not using the cheaper source of debt capital.
56
RECOMMENDATIONS
1. The operating cost is exorbitant. The company should try to reduce the operating cost to improve the profitability. 2.The company should follow a good financial discipline of using the long term funds for long term purpose and short term funds for short term purpose. 3.To avoid or to maintain financial integrity in the market the company should pay the short term liabilities at the earliest or at least maintain the industry norms. 4.The company should make an in-depth study of cost involved to increase the profitability.
CONCLUSION
From the overall study it is clear that the company has potential to improve up on. At least after completion of major expansion programme the company should concentrate in cost reduction technique to improve profitability.
When the company is in expansion programme the company can make use of cheaper sources of debt capital rather than own capital.
57
References
S.No Author
Title
Year
Publisher
1
Dr.S.N. MAHESWARI
Principles accounting
of
management 200 4 200 5
Sultan chands & sons Vikas Publishing
2
I.M.Pandey
Financial Management
3
PRASANNA CHANDRA
Fundamentals of Financial Management Financial Management
200 6 200 7
Tata McGraw Hill
4
Khan N.K & Jain P.K
Tata McGraw Hill
CHART # 1
58
Common Size Balance Sheet
120 100 Percentage 80 60 40 20 0 2000 2002 2007 2003 2004 2004 2001 2005 2006 2008 Year Share Holders Funds Loan Funds Deferred Taxes Liability Fixed Assets Net Current Assets Miscellaneous Expenses
Chart II
59
Profit after Tax 80000 60000 40000 20000 1136311377 0
2004 2001 2005 2002 2006 2003 2007 2004 2008 2000
73480 50204 29054 Profit after Tax
Year
Chart III
60
Income 5000000 4000000 3000000 2000000 1000000 0
2004 2005 2000 2001 2006 2007 2004 2008 2002 2003
Income
Year
Appendix: Available on request.
END
61
doc_649552888.doc