A PROJECT REPORT ON “COMPARATIVE ANALYSIS OF FINANCIAL PERFORMANCE” OF
FORCE MOTORS LTD. PUNE SUBMITTED TO UNIVERSITY OF PUNE “IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF MASTERS DEGREE COURSE IN BUSINESS ADMINISTRATION” MBA [FINANCE] 2009-2011 UNDER THE GUIDANCE OF Prof. SHAILESH RAJHANS SUBMITTED BY MR. GORAKH BABAJI BORKAR MBA II - (FINANCE) ENIAC INSTITUTE OF COMPUTER APPLICATION, WAGHOLI, PUNE.
COLLEGE CERTIFICATE Ref: EICA/
Date:
This to certify that Mr.Gorakh Babaji Borkar, student of this institute, has completed his project work in Finance specialization titled as: “Comparative Analysis of Financial Performance” for FORCE MOTORS LTD. As per the guidelines given by the University of pune for conducting Course No.308 of MBA Syllabus 2010-11; under the guidance of Mr.Shailesh Rajhans, Lecturer in Finance in this institute.
Director
prof. Shailesh Rajhans Sir
Internal guide
ACKNOWLEDGEMENT Above all, I bow my head before Almighty without whose blessing my present project would not have existed and I would like to thank GOD for giving me patience and strength to overcome the difficulties, which crossed my way in the accomplishment of this endeavor. It is a pleasant duty to acknowledge the valuable help I received from different quarters in the completion of my project work. At the very outset, I express my reverential regards and profound gratitude to Mr. A.B.Bhave, for giving me this opportunity to undergo summer training in the Finance department of FORCE MOTORS LTD. I am highly indebted and owe my deep sense of gratitude and reverential regards to Mr. A.B.Bhave(Finance Gen. Manager), Mr. Pitaliya (Account Manager) and Mr. khare without whose guidance and encouragement this project could not have been completed. I would like to show my sincere thanks to Prof. Shailesh Rajhans(HOD), Finance,
ENIAC
INSTITUTE
OF
COMPUTER
APPLICATION,PUNE
UNIVERSITY, for their valuable suggestion and guidance and making it possible for me to accomplish this project. Last but not the least; I would like to thank my parents, brother and my colleagues who instilled confidence and moral support at various stages during the course of this training.
GORAKH BABAJI BORKAR
DECLARATION
I, Mr. Gorakh Babaji Borkar, hereby declare that the dissertation work entitled “Comparative analysis of financial performance” of FORCE MOTORS LTD. (AKURDI),PUNE.” is carried out by me and submitted as under the requirement of Master of Business Administration (M.B.A) Degree from ENIAC INSTITUTE OF COMPUTER APPLICATION, WAGHOLI, PUNE UNIVERSITY for the session 2009-11. I hereby authenticate that all the information furnished by me are true to my knowledge and information and facts furnished by me are based on my own findings and as per the information furnished to me by FORCE MOTORS LTD.
(Borkar Gorakh Babaji)
PREFACE For the modern business world both success and failure are due to financial management. It has become an important and powerful discipline, as it involves crucial business decisions on which depends the success or failure of any organization. Financial analysis is the process of identifying the financial strength and weaknesses of the firm by properly establishing relationship between items of the balance sheet and the profit and loss account. As Finance managers today have to play a very vital and a responsible role, it is very essential to have adequate knowledge about every aspect of the job, so as to handle each & every situation effectively for applying theoretical knowledge in practical life. The summer training which forms a part of the course curriculum helps students to identify their capabilities & they can decide upon their future course of action. This is the first step towards the development of future managers. This summer training helps the students to identify their capabilities & thereby make needed adjustments. Although there is difference in each student level of proficiency, the real focus is on suggesting ways for students to further sharpen their strengths, competencies & other related abilities for becoming effective professionals, managers & leaders. The primary educational objective behind this project is to make the students familiar with working environment & to help to make students understand the ways in which theoretical aspects can be applied into practice. The individual object of project is to work effectively, efficiently using his creativity as well as knowledge for self development. Financial analysis can be undertaken by the management of the firm or by parties outside the firm viz. owners, creditors, investors and others. The nature of analysis differs depending on the purpose of the analyst.
The area covered in this report is Working Capital & financial ratios. It includes tools and techniques for analysis and interpretation of ratios. I have undertaken the Working Capital &Ratio Analysis because of the significance of this topic in the production oriented sector. On total 12 ratios have been taken by me and a comparative analysis of FORCE MOTORS LTD., AKURDI performance over the last three years has been done based on these ratios and changes in Working capital Statements.
INDEX Chapter No
Title
1 2 3 4 5 6 7 8 9 10 11
Executive Summary Objectives of the Study Company Profile Research Design and Methodology Conceptual Background Data Presentation, Analysis and Interpretation Findings Limitations Suggestions Conclusion Bibliography
12
Annexure
Page No
CHAPTER NO: - 1 EXECUTIVE SUMMARY
CHAPTER-1
1.1EXECUTIVE SUMMARY The project is about “COMPARATIVE ANALYSIS OF FINANCIAL PERFORMANCE OF FORCE MOTORS LTD. AKURDI.” project is an opportunity given to management student where one gets an insight in the practical aspect in the day to the theoretical knowledge that one acquire in business school. The project was undertaken to make a study on the various aspect of the “Ratio Analysis and Working capital Management”. The project highlights the main aims and object of project report. It also explains the great importance of “Ratio Analysis and Working Capital Management”. It covers specific introduction of
“Ratio Analysis and Working Capital Management”.
The period covered in project is three financial years i.e. 2007-08, 2008-09 and 2009-10. Research methodology adopted for getting data is empirical in nature and therefore release in the company’s annual report and financial statements.
1.2
INTRODUCTION OF THE STUDY
Finance is the starting point of every economic activity. It is called as “science of money”. Finance is the basic requirement for starting and running every human activity in an objective manner. Likewise finance is essential in business. It is treated as life blood of modern business. Finance denotes money which is essential to initiate and operate business enterprises. The term “finance” means provision of money at the time it is required. The basic finance functions are as follow: 1. To determine the total capital requirement. 2. To decide the source from which the required capital is to be collected; and 3. To utilize the funds collected in purposeful manner. Financial management: Management is an activity which is concerned with planning and controlling of different activities, in order to specific objective. It is also defined as an art of getting things done through and with people in formally organized groups. If we apply the concept to financial resources of a firm with a specific objective. In the present changing scenario, financial management deals with decision making on asset mix, capital mix, and profit allocation, etc. an understanding of the environment in which the firm is situated, time value of money, taxation and depreciation policy is essential for finance manager. Main scope of financial management is concerned with the following activities, viz. 1. Raising of funds 2. Investing of funds 3. Other decision like dividend decisions.
Comparative Analysis:-
Comparative Analysis is part of financial management. Through comparative analysis, we will be in position to analyze the statement of financial position of a business designed to provide time perspective to the consideration of various element of financial position embodied in such statement. Comparative analysis reveals the following: 1. Absolute data(money value or rupee amount) 2. Increase or decrease in absolute data in terms of money values. 3. Increase or decrease in absolute data in terms percentages. 4. Comparison in terms of ratios. 5. Percentage of total. Through Comparative analysis we can evaluate past performance and predict future performance and both of these are facilitated by comparisons. Comparative analysis required not only for the managements own evaluation and decision making, but also for internal control and overall performance of the firm. Comparative analysis can help in following ways:
Helps to know the exact financial position of the company.
Helps in decision making.
Helps in forecasting.
CHAPTER NO:- 2 OBJECTIVE OF THE PROJECT CHAPTER- 2 2.1 OBJECTIVE OF THE PROJECT
The main objective of carrying out this project is to know & gain practical
knowledge
& to know the organization working culture. 1. To study and understand the concept of financial performance. 2. To study the various tools for performance analysis. 3. To examine the financial performance of organization by using tool Ratio analysis and working capital 4. To draw observation base on the study & suggest suitable measures to overcome problem and to improve its performance.
CHAPTER NO:- 3 COMPANY PROFILE
CHAPTER- 3 COMPANY PROFILE 3.1 COMPANY HIGHLIGHTS
FORCE MOTORS LTD. (AKURDI) PUNE COMPANY HIGHLIGHTS:1. 2. 3.
Name of company Establishment year Plant Address
FORCE MOTORS LTD. AKURDI 8 Sept 1958 Mumbai-Pune Road Akurdi , pune Maharastra- 411035 Tel: 020-776381 776382 776383 776384 / 8 Fax: 020-773017 Website: http://www.forcemotors.com Group: Firodias Group
7.
Type of Industry
Automobile Industry
\
3.2 FORCE MOTORS LTD. AKURDI BOARD OF DIRECTORS
Abhay Firodia Bharat V Patel Anita Ramachandran
Chairman / Chair Person Director Director
L Lakshman Vinay Kothari S A Gundecha
Director Director Director
S N Inamdar Pratap Pawar S Padmanabhan Sudhir Mehta
Director Director Director Director
R B Bhandari
Director
Atul Chordia
Additional Director
MANAGENING DIRECTOR Mr. Prasan Firodia FINANCE GENERAL MANAGER Mr. A.B. Bhave Registered Office FORCE MOTORS LTD. Mumbai-Pune Road Akurdi, pune. Maharastra- 411035 Tel: 020-776381 776382 776383 776384 / 8 Fax: 020-773017
3.3 COMPANY HISTORY Company History - Force Motors 1958
- The Company was incorporated on 8th September. The Company manufactured and assembled 3 & 4 wheeler light commercial vehicles and diesel engines. 1961 - The Company was converted into Public Limited Company on 12th May. - The object of the company is to Assembly and manufacture of 3 & 4 wheeler light commercial vehicles and diesel engines. 1965 - In December 1963, 48,645 Bonus shares issued (prop 1:2). 1, 85,000 Right shares offered at par (prop. 55:20). 1, 77,710 reserved for allotment to collaborators. 2, 90,000 shares offered to the public in February 1964. 400 shares allotted to collaborators. 1966 - 1, 69,078 shares allotted to the foreign collaborators. 1970 - The Company's collaborators M/s. Honomag Henschal Fahrazeuquarrke GmbH discontinued the production of the diesel engine D301-E2 in Germany and agreed to shift the entire used machinery and equipment required for the manufacture of components of the diesel engine valued at Rs 1.50 crores to the Company. 1972 - 3,500 shares forfeited. 7, 89,163 Bonus Shares issued (prop. 1:1). 1975 - Allotted 13,800 `A' Equity shares (6,495 in 1975-76 and 7,305 in1976-77) at par to permanent employees of the company. 1977 - 15, 78,326 No. of Equity and 13,800 `A' Equity shares issued as Bonus on prop. 1:1 for the respective classes.
1978 - The area vacated by body shop and part of the press shop Departments in part No. 1 was utilized for the installation of the new machinery and equipment for the manufacture of the new OM 16 engine in collaboration with Daimler-Benz of W. Germany. 1982
- The transfer line for the cylinder block of the new OM 616 engine was commissioned. - A Research & Development workshop was set up in addition to new Research & Development laboratories. 1983 - The Company entered into a technical collaboration agreement with Daimler Benz AG, West Germany, for the manufacture of light commercial vehicles such as Mercedes vans, station wagons and mini buses at Pithampur. 1984 - 1, 15,748 second `A' Equity shares allotted to permanent employees of the Company. 1987 - The licensed capacity was increased from 30,000 to 50,000 numbers Per annum including 5,000 three-wheelers. 1989 - The production facility for manufacture of various rear axles and and 5-speed Mercedes gear box was fully established. Latest machinery were installed with a view to expand the production facility for manufacture of axles and Mercedes gear boxes. - The Company acquired technology from M/s. Flakt Industrial AB, Sweden for FP coating of the primer paint. 1990 - During the year, rear wheel driven Matador Max R 307 vehicle was introduced along with the rear wheel driven bus platform R-407W. - A new model of a 3-wheeler was developed and test marketed. - A new commercial tool room was established at the Akurdi, equipped with the latest CNC 3 dimension die sinking equipment and capable of manufacturing large panel dies for bodies. - Also, a modern CAD/CAM facility was established to support the tool room activity.
1991 - New models of Tempo Trax called Challenger and Town & Country, were introduced in market. Direct injection version of OM 616 engine offering substantial improvement in fuel economy was expected to be introduced shortly. - The Company obtained the technical services of Mercedes-Benz A.G., Germany for panel dies making.
- The total sales of the light commercial vehicles declined due to recession in the automobile industry. 1992 - In order to enhance the export sales, a new division `Tempo International' was created. - The Company proposed to undertake modernization of various important facilities such as engine manufacturing shop, transmission manufacturing shop as also founder paint shop, etc. - A new model of a `Pick-up-truck' version of the temptress was developed. Also, a new TX-17 gearbox and matching hypoid axle were introduced on the tempo trax range of vehicles. - The metador range was further extended with the addition of `RA307' model, a further upgraded puck-up truck with an I-Beam rigid front axle. 1993 - A separate cell was created for `Tractor' development. - The Company issued 33, 00,000 Rights equity shares of Rs 10 each at a premium of Rs 90 per share in proportion 1:2. (only 32, 52,850 shares were allotted 47,725 shares were kept in abeyance. (Of these 175 shares were allotted by the Board.) 1995 - The licensed capacity increased from 50,000 to 60,000 number of automobiles per annum. - 31,100 No. of Equity shares kept in abeyance issued. 1996 - During the year fully indigenously designed, developed and manufactured Tempo `OX45' Tractor was successfully launched. - The Company made a Rights issue of 32, 96,446 No. of equity shares of Rs 10 each at a premium of Rs 90 per share in proportion 1:3 of which, on 27th January 1997, the Company allotted only 32, 37, 038 shares. Balance 59,408 shares were kept in abeyance. Only 32, 34,451 shares were taken up. - Another 13, 75,722 No. of equity shares were to be issued to Jaya Hind Investments Pvt. Ltd. and Daimler Benz AG, Germany to maintain their holding at 41.69%. - Sales suffered due to shifting and relocation of various production activities at Akurdi, labour unrest at Pithampur and softening of demand for company's vehicles. 1997 - Production of vehicle at Pithampur was affected due to a protracted industrial relation problem resulting in no production from 2nd June to 19th July. - The Company has launched new products in all four segments in LCV -`Tempo Excel', utility vehicle-`Trax', Minidor-Auto Rickshaw and pick-up, Tractors, the `Tempoox' range of tractors.
- The company has entered into an agreement with M/s. Zahnradfabrik parsoan GmbH, Germany for providing technology for the manufacture of Agricultural Tractors. - 46,412 shares kept in abeyance issued. - Bajaj Tempo Ltd. (BTL) the flagship of the Rs.1, 350 crore Firodia group started operations in 1959 in technical and financial collaboration with Daimler Benz, the latter owning 26% of the equity. - Bajaj Tempo Ltd. (BTL) plans to set up a third and possibly a fourth manufacturing facility. 1998 - Bajaj Tempo will introduce a new generation family of light commercial vehicles (LCV) in the next few months and phase out the popular Matador model over a period of time. - Bajaj Tempo Ltd, the third largest automobile manufacturer in the HCV/LCV segment has attributed the on-going sluggishness in the domestic markets to the excise duty. - The company's proposed four wheel military vehicle will be christened as `Gorkha'. - The company is also launching a second range of Tempo Trax utility vehicles including the new 4X4 military and cross country vehicle Trax Gurkha. - The situation improved from third quarter, mainly due to improved sales of 3-Wheeler `Minidor' vehicle. 1999 - Bajaj Tempo Ltd, Pune-based light commercial vehicle (LCV) Manufacturer, which launched its new model, the Excel-4, will launc its variants in June. - The company, under technical collaboration with Mercedes Benz of Germany. - The first time in the industry, Bajaj Tempo has introduced mobile service training van equipped with audio visual aids, special tools, cut section models, to train not only dealers but also the public.
2000 - The Workers will go on strike from May 26th. Work at the factory has been affected following a tool down strike by the union which is affiliated to the Bharatiya Kamgaar Sena. 2001 - The Company will be launching its Minidor three-wheelers running on CNG during next month. 2003 -Board allots 33% equity shares of Rs.10 each for cash at a premium of Rs.90 per share.
-Agrees to procure technology from MAN Nutzfahrzeuge AG, Germany for 4 and 6 cylinder Diesel Engines of higher capacities. -Signs MoU with Punjab Tractors Ltd and Corporation Bank for financing Tractors. 2004 -Automobile manufacturer, Bajaj Tempo Ltd, on January 16, 2004 announced that it would enter the heavy commercial vehicles (HCV) segment in the next 12 months following its technology tie-up with MAN of Germany. -Bajaj Tempo inks pact with Andhra Bank 2005 - The Registrar of Companies (RoCs), Maharashtra, issued the certificate for name change from Bajaj Tempo Ltd to Force Motors on May 12th and the new name came into effect immediately. -Force Motors unveils Minidor CB. 2006 -Force Motors signs MoU with Man to set up unit in MP. 2007 - Force Motors Ltd has informed that Mr. R B Bhandari is appointed as an Additional Director of the Company w.e.f. June 29, 2007. -Force Motors Ltd has informed that Mr. L Lakshman is appointed as an Additional Director of the Company w.e.f. September 29, 2007. 2008 -Force Motors Ltd has appointed Mr. Dinesh Chhabra, as an Additional Director. -Force Motors Ltd has informed that the Board of Directors of the Company at its meeting held on June 25, 2008, inter alia, have appointed Mr. Dinesh Chhabra, as an Additional Director. 2010 - Force Motors Ltd has appointed Mr. Atul Chordia of Pune as an Additional Director of the Company.
3.4 ORGANIZATION CHART ORGANIZATION CHART OF FORCE MOTORS LTD.
Chairman/Chair Person
Managing Director
Director of HR
Director of Operation
Director of Finance
Director of System
Director of Marketing
General Manager (Finance)
HR Manager
Operation Manager
Assist. HR Manager
Assist. Operation Manager
Finance Manager
Assist. Finance Manager
System Manager
Assist. System Manager
3.5 PRODUCT OF FORCE MOTORS LTD.
1.
Marketing Manager
Assist. Marketing Manager
CHAPTER NO:-4 RESEARCH METHODOLOGY
Chapter 4
RESEARCH METHODOLOGY
4.1 CONCEPT OF RESEARCH METHODOLY 4.2 STAGES OF RESEARCH METHODOLOGY 4.3 SCOPE OF THE STUDY
4.1 RESEARCH METHODOLOGY
Concept of Research: Research concerns itself with obtaining information through empirical observation that can be used to systematically develop logically related prepositions so as to attempt to establish casual relationships among variables. Research may mean the first small in an Endeavor to better understand the change occurring and at times forced upon us as individuals or as a society. Research as a process involves defining & redefining problems, hypothesis formulation, organizing & evaluating data, deriving deductions, inferences & conclusions, after careful testing.
4.2 STAGES OF RESEARCH METHODOLOGY Research Methodology is a process of collecting the information & helps to find out the solutions to the topic selected by the researcher. It is a systematic way of presenting information. Once the research problem is formulated and the research design is determined, the next task is data collection. Data are facts, figures and other relevant materials past & present serving as basis for study & analysis. Research Methodology includes Four Stages. They are as follows:a) Collection of data. b) Analysis of data. c) Interpretation of data. d) Presentation of data.
Collection of data:
The data is collected on the basis of pre-determined set up objectives, scope & purpose for getting direction. The data is collected in various types as stated below. Types of data collected: The different types of data collected are Primary data & Secondary data. The sources or methods of collecting both the types of data are different. The various methods of such data collections are as below. Primary Data: Data that is collected by the researchers first hand is known as Primary Data. It can be collected through observational studies, market surveys or experiments. The provider or the source is termed as ‘Respondent’. A respondent may give information passively i.e. through mere observation of respondent behavior or actively i.e. through written or spoken response. Basic methods / sources of collecting Primary data:
Questionnaire Method.
Observation Method,
Interviewing Method,
Experimentation Method, etc.
Secondary Data: Data that has been collected earlier for some purpose other than the purpose of the present study is called as Secondary Data. Secondary sources of data provide a wealth of information to the researcher. Data can be internal or external. Basic methods/sources of collecting Secondary Data: Published Sources: o Books & magazines. o Company records. Unpublished Sources: o Internet, o Supplier o Customer etc. Analysis of data: After the data being collected it is very carefully analyzed in order to sort out the required data & delete the irrelevant data. This gives various parameters on which evaluation of the research can be done. Interpretation & presentation of data: The carefully analyzed and short listed data is then interpreted in the forms of pie charts and graphs for absolute clarity. This interpretation of data helps in doing the SWOT analysis of the research topic.
4.3 SCOPE OF THE STUDY
Finance is the life line of every business organization. The title of project is “COMPARATIVE ANALYSIS OF FINANCIAL PERFORMANCE OF FORCE MOTORS LIMITED, AKURDI. The financial performance of FORCE MOTORS LTD is being reviewed for the financial year 2005-2006,2006-07, 2007-08, and 2008-09. After taken in to consideration each and every financial statement of FORCE MOTORS, COMPARATIVE ANALYSIS OF FINANCIAL PERFORMANCE OF FORCE MOTORS LTD. The review states us various sources of income to various ways of out flow of cash, types of transaction, how they manage and control their fund and financial performance of company over last 3 years. This analysis will help management in making comparison between last 3 years. This will also helps management to focus on what to do to increase profit and to undertake any new project.
CHAPTER NO:-5 THEROTICAL BACKGROUND
CHAPTER NO 5 THEORITICAL BACKGROUND
5.1 WORKING CAPITAL
Meaning of working capital
Definition of working capital
Types of working capital
Importance of working capital management
Operating cycle
5.2 RATIO ANALYSIS
Meaning of ratio
Objectives of ratio analysis
Significance of ratio analysis
Classification of ratios
5.1 WORKING CAPITAL (A)
MEANING OF WORKING CAPITAL
One of the most important areas in the day-to-day management of the firm is the management of working capital. Working capital refers to the funds invested in current assets, i.e. investment in stock, sundry debtors, cash and others current assets. Current assets are essential to use fixed assets profitability. However, the requirements for current assets are usually greater than the amount of funds available through current liability .In other words, the current assets are to be kept at a higher level then the current liabilities.
DEFINITION: Working capital is defined as, ”the excess of current asset over current liabilities and provision” “Working capital is the amount of funds necessary to cover the cost of operating the enterprise. Working capital in going concern is revolving fund, it consist receipt from sales which are used to cover the cost of current operation”. – SHUIBN “Working capital is in descriptive of that capital which not fixed but the more common use of the working capital is to consider it as the difference between the book value of current assets and current liabilities”. – HOGLAND
TYPES OF WORKING CAPITAL GROSS WORKING CAPITAL
It refers to the firms investments in current assets i.e. mainly stock & cash. NET WORKING CAPITAL It is difference between current assets & current liabilities it the current assets exceeds the current liabilities it is a positive one. PERMANENT WORKING CAPITAL Every firm is require to maintain minimum balance of cash inventory etc. in order to meet the business requirement even in the slack season this part of the current assets is called as permanent working capital it will be around policy if this is finance by long term sources of finance TEMPORARY WORKING CAPITAL Net working capital minus fix working capital will be variable working capital it is also called fluctuating working capital it varies with seasonal requirement & scale of operation in a business. POSITIVE WORKING CAPITAL The positive net working capital represents the excess of current assets over current liabilities. NEGATIVE WORKING CAPITAL This situation occurs when the current liabilities exceeds the current assets. It is an indication of crisis to the firm.
IMPORTANCE OF WORKING CAPITAL MANAGEMENT
Objectives of the management of working capital can be the Maintenance of working capital at appropriate level and Availability of ample funds as and when they are needed. Importance of working capital management can be explain as follow: There is a positive correlation between the sale of product and current assets. An increase in the sale of the product requires a corresponding increase in current asset. It is therefore indispensable to manage assets properly and efficiently. 1.
More than half of the capital of the firm is generally invested in current assets. Therefore, management of working capital attracts the attention of the management.
2.
In emergency fixed asset can be acquired on lease but there is no alternative for current.
3.
Working capital needs are more often financed through outside source so it is necessary to utilize them in best way.
4.
In the modern system approach to management, the operations of the firm are viewed as total is an integrated system. In this sense it is not possible to study one segment of the firm individually or leave it out completely. Hence overall look on the management of working capital is necessary.
OPERATING CYCLE CONCEPT Working capital is the life blood of any business, without which the fixed assets are inoperative. Working capital circulates in the business, and the current assets changes
from one form to other. Cash is used for procurement of raw material and stores items and for payment of operating expenses, and then converted in to working in progress, then to finished goods. When the finished goods are sold on credit terms receivables balances will be formed. When the receivable are collected, it is again converted in to cash. The need for working capital arises because of time gap between production of goods and their actual realization after sales. This time gap is called technically called as “OPERATING CYCLE” or “WORKING CAPITAL CYCLE”.
1.
Raw material purchased
2.
Raw material holding period
3.
Raw material introduce into process
4.
Working in process period
5.
Finished goods completed
6.
Finished goods holding period
7.
Sale of goods on credit
8.
Receivable collection period
9.
Cash received from debtors.
OPERATING CYCLE
ROW MATERIAL PURCHASED
CASH RECEIVED FROM DEBTORS
RECEIVABLE COLLECTION PERIOD
OPERATING CYCLE
ROW MATERIAL HOLDING PERIOD
ROW MATERIAL INTRODUCE INTO PROSESS
RAW MATERIAL PURCHASED SALE OF GOODS ON WORKING IN PROCESS RAW MATERIAL HOLDING PERIOD CREDIT PERIOD
RAW MATERIAL INTRODUCE INTO PROCESS
FINISH GOODS HOLDING PERIOD
FINISHED GOODS COMPLETED
3.2 RATIO ANALYSIS DEFINITIONS: “A ratio is an expression of the quantitative relationship between two numbers”
-Wixon, Beoford
kell
&
“Accounting ratio is used to describe significant relationship which exit between figures shown on a balance sheet, P&L a/c or in a budgetary control system”. - J. Batty “Ratio analysis is a study of relationship among the various financial factors in a business”. - John.N.Myer MEANING OF RATIO: A financial ratio is the relationship between two accounting figure expressed as a proportion. Ratio provides clues to the financial position of a concern. These are the pointers or indicators of financial strength, soundness, position or weakness of an enterprise. Ratio analysis is one of the methods of analyzing financial statements. It is an attempt to present the information of the financial statements in simplified, systematized and summarized form. It measures the profitability, efficiency and financial soundness of the business. Ratio analysis is therefore, a tool to present the figures of financial statements in simple, concise and intelligible form. There are a number of ratios, which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same.
SIGNIFICANCE OF THE RATIO ANALYSIS Ratios as a tool of financial analysis provide symptoms with the help of which an analyst is in a position to diagnose the financial health of the unit. Financial analysis can
be compared with biopsy conducted by the doctor on the patient in order to diagnose the cases of illness so that treatment may be prescribed to the patient to help in recover. As there are different groups of interested parties so significance to them are different. Management Management needs information regarding the profitability, operational efficiency and financial soundness of the business, so that weakness of the business may be identified and effective business plans may be formulated. Ratio analysis helps the management in decision making, financial forecasting and planning. It helps in communicating the desired information to the relevant parties and facilitates coordination. Ratios provide actual basis, which can be compared with the standards, thus helps in effective control. Shareholders The shareholders, the virtual owners of business corporate units have an interest in the welfare and progress of business. They want to know about the profitability and future prospects of the enterprise. The requisite information is available from the analysis of financial statements. Workers Employees of the business are interested in the profit of business. Workers in the business are paid bonus on the basis of productivity unprofitability, so they have an interest in the financial analysis of the business. Creditors Creditors of the enterprise are interested in the short term and long term financial soundness of the business. They want to ensure themselves, whether their funds are safe and secure and the business is capable of making payment of interest regularly and also refund of funds as per agreements.
Government Financial analysis helps government in determining tax liability. The government is also capable of ascertaining the economic development of the country through the financial analysis. The government requires the information for formulating effective economic
CLASSIFICATION OF RATIOS
plans and balanced growth of different sectors and region of the economy. Potential investor The potential investors of the business have an interest in the operational efficiency and profit earning capacity of the business unit. They would like to know how far their previous investment has been safe and how much the new investment will be safer and secured. On the basis of liquidity
On the basis of turnover
Economist and researchers
On the basis of Solvency
On the basis of profitability
These parties are interested in the financial activities of the business, so that they may study the financial health of the economic structure of the business, study the rate of economic growth, compare it with other economies and suggest effective measure to
Current ratio Inventory accelerate the pace of growth. turnover ratio
Quick ratio
Debtor’s turnover ratio
Creditor turnover ratio
Debt equity ratio
Interest coverage ratio Proprietary ratio
CLASSIFICATION OF RATIOS
Working capital turnover ratio Fixed asset turnover ratio
Net worth to total assets ratio
Gross profit ratio
Net profit ratio
Return on capital employed Return on equity
Earning per share
A. LIQUIDITY RATIO
The importance of adequate liquidity in the sense of the ability of a firm to meet current/short-term obligations when they become due for payment can hardly be overstressed. Liquidity implies, from the point of view of utilization of the funds of the firm, that funds are idle or they earn very little. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required for the efficient financial management. Liquidity ratios are calculated to measure the short term financial soundness of the business Liquidity is the basis of survival of any unit and the creditors are more interested in Liquidity of the business. The ratio assesses the capacity of the company to repay its short-term liability. Banks and other moneylenders for short period are interested in the current assets of the company i.e. short-term financial position of the business. The ratio is also an effective source to ascertain whether the working capital has been effectively utilized. Liquidity in the ratio means ability to repay loans. Shortterm financial position is calculated to adjudge, whether the current assets of the company are sufficient to meet its short-term liabilities.
(I) CURRENT RATIO
The Current Ratio of a company shows the ability to pay Short Term creditors from Current Assets. It represents the margin of safety; higher the ratio higher is the margin of safety. But higher ratio show the unnecessarily blockage of funds in assets. Thus ratio of 2:1 is considered satisfactory. This ratio indicates the short-term financial position of the company. It judges whether current assets are sufficient to meet the current liabilities. The company must be able to meet its current obligation out of the current assets. It should not depend upon its long-term sources to pay its short-term liabilities. The ratio is calculated on the basis of the following formula: Current assets Current ratio = ----------------Current liabilities This is expressed as the current assets divided by the current liabilities. Current assets are those assets, which are convertible into cash within a year. It includes cash in hand, cash at bank, bills receivables, sundry debtors, and inventory etc. The current liabilities are payable within a year. It includes creditors, bills payable, outstanding expenses, short-term loans and bank overdraft etc. The higher the current ratio the higher is the ability of the business to pay its current obligation but such higher current Ratio indicates assets are kept and profitability of the company becomes low.
(II) QUICK RATIO Quick Ratio involves only those current assets, which liquidate immediately. Ratio of 1:1 is ideal but 0.7 to 1 is considered satisfactory. This indicates the extent to which current liabilities can be paid without relying on the sale of inventory. Quick ratio is also known as acid test ratio or liquid ratio. Quick ratio is the ready means of assessing a firm’s liquidity position in the real sense. It shows very shortterm liquidity or capacity of the business to meet its obligation at short notice. Liquid assets are current assets less stock and prepaid expenses. These assets are called liquid because they can be converted into cash very shortly. The ratio is calculated by the following formula: Liquid assets Quick ratio = Current liabilities It is expressed as the liquid assets divided by the current liabilities. The ideal liquid ratio is 1:1 i.e. liquid assets should be equal to current liabilities. Quick ratio assess the ability of the business to meet the current liabilities without having wait for the manufacturing cycle to be completed and sale to take place for inflow of cash.
B. TURNOVER RATIO Turnover ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. They indicate the speed with which assets are converted into sales. A measure of the number of times a company's inventory is replaced during a given time period. Turnover ratio is calculated as cost of goods sold/turnover divided by average inventory during the time period. A high turnover ratio is a sign that the company is producing and selling its goods or services very quickly. This ratio tells how often a business' inventory turns over during the course of the year. Because inventories are the least liquid form of asset, a high inventory turnover ratio is generally positive. On the other hand, an unusually high ratio compared to the average for your industry could mean a business is losing sales because of inadequate stock on hand. When to use it: If your business has significant assets tied up in inventory, tracking your turnover is critical to successful financial planning. If inventory is turning too slowly, it could indicate that it may be hampering your cash flow. Because this ratio judges annual inventory turns, it is usually conducted once a year.
(I) INVENTORY TURNOVER RATIO
The turnover shows the efficiency of the firm in selling the product. It indicates the speed with which the stock is rotated into sales or the number of times the stock is turn into sales during the year. The higher the ratio, the better it is, since it indicates that stock is selling quickly. In a business where stock turnover ratio is high, goods can be sold at a long margin of profit and even then the profitability may be quite high. This ratio indicates the efficiency of the firm in selling its product, i.e. it indicates the number of times the inventory has been given the shape of final sales during the year. It is calculated by dividing the cost of goods by the average inventory. Net sales Inventory turnover ratio = Average inventory
(II) DEBTORS TURNOVER RATIO The Debtors Turnover measures the number of times Accounts Receivable was collected during the year. This is also a measure of how well the company collects sales on credit from its customers, just as Average Collection Period measures this in days. This ratio is calculated by dividing sales by average debtors. Credit sales Debtors turnover ratio = --------------------------------Average debtors + bills receivable
Importance of Debtors Turnover: A high debtor turnover ratio indicates a tight credit policy. Showing the company is successfully executing its credit policies and quickly turning its Accounts Receivables into cash. A low or declining debtor turnover ratio indicates a collection problem, part of which may be due to bad debts. A possible negative aspect to an increasing Accounts Receivable Turnover is the company may be too strict in its credit policies and missing out on potential sales.
Average Debt collection period:
The Average Collection Period measures the average number of days it takes for the company to collect revenue from its credit sales. Importance of Average Collection Period This ratio reflects how easily the company can collect on its customers. It also can be used as a gauge of how loose or tight the company maintains its credit policies. A particular thing to watch out for is if the Average Collection Period is rising over time. This could be an indicator that the company's customers are in trouble, which could spell trouble ahead. This could also indicate the company has loosened its credit policies with customers, meaning that they may have been extending credit to companies where they normally would not have. This could temporarily boost sales, but could also result in an increase in sales revenue that cannot be recovered, as shown in the Allowance for Doubtful Accounts.
Average Collection Period =
360 Debtors Turnover Ratio
(III)CREDITORS TURNOVER RATIO
This indicates the payment to the creditor by the company. The ideal value depends on the terms and credit period provided by the creditors. But the higher the ratio, the better it is, since it indicates that the creditors are being paid more quickly which increases the credit worthiness of the firm.
Net credit Purchases Creditor turnover ratio = Average creditor + Bills payable
Average Payment Period Ratio:
The average payment period ratio represents the average number of days taken by the firm to pay its creditors.
Importance Of Average Payment Period
This ratio reflects how easily the company can pay of its creditors. Lower the ratio, the better is the liquidity position of the company and higher the ratio, less liquid is the position of the firm. But higher payment period may also imply greater credit period enjoyed by the firm & consequently larger the benefit prepaid from credit supplies. Also a higher ratio may imply lesser discount facilities available or higher prices paid for the goods purchased on credit. 360 Average Payment Period = Accounts Payable Turnover Ratio (IV) WORKING CAPITAL TURNOVER RATIO
Company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales. This ratio is helpful where current assets play a major role in generating sales. This ratio reveals how efficiently working capital has been utilized in making sales. Net sales Working capital turnover ratio = Working capital
A high or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. Efforts to streamline the operations of the company will often show favorably in this ratio.
D. PROFITABILITY RATIO
Profitability ratios measure the operating efficiency of the company. These ratios are calculated in relation to sales or investment. These ratios are designed to provide answers to questions such as
Is the profit earned by the firm is adequate?
What rate of return it represents?
What is the rate of profit for various divisions and segments of the firm?
What are the earnings per share?
What was the amount paid in dividends?
What is the rate of return to equity-holders and so on?
(I) GROSS PROFIT RATIO The Gross Profit to Net Sales ratio measures how well revenue generated from Net Sales can cover expenses while gaining a profit. Importance of Gross Profit to Net Sales: A decreasing Gross Profit to Net Sales ratio is a negative sign, indicating the company is becoming less profitable. The company may even have an increasing Net Sales, but the cost to the company to generate those extra sales may be degrading profits. This ratio varies wildly between companies and industries, so the best knowledge from this ratio can be gained by measuring it over several periods.
Gross profit Gross Profit ratio =
* 100. Sales
(II) NET PROFIT RATIO
The Net Profit Margin measures the Net Earnings in relation to the Net Sales. After all the bills are paid and expenses covered, this ratio measures how much net profit remains out of total sales. This ratio is important to calculate, but you need to look at Gross Profit Margin and Operating Profit Margin as well as Net Profit Margin provides you with the big picture of how well the company is doing. It indicates management efficiency in manufacturing, administering and selling. It reflects the overhead expenses of a firm. Net profit Net Profit ratio = -----------------* 100 Net sales
Importance of Net Profit Margin: As with the other margin ratios, the higher the Net Profit Margin, the better. Taxes, Interest, and expenses not associated with operations will lower this ratio compared to the other margin ratios.
CHAPTER NO:-6 DATA PRESENTATION ANALYSIS & INTERPRETATION
Chapter 7
DATA PRESENTATION ANALYSIS & INTERPRETATION
7.1 Working Capital Management STATEMENT OF WORKING CAPITAL OF FORCE MOTORS, PUNE. ON 31ST MARCH 2008, 2009, 2010. PARTICULARS Current Assets: Sundry Debtors
2007-08 1,199,040,359
2008-09 1,251,881,270
2009-10 1,228,929,055
Cash& Bank stock (r/m,wip&f.g) (A)Total
179,820,994 2,039,226,649 3,418,088,002
Current liabilities: Creditors (B)Total Working capital (A-B)
171,100,395 2,406,705,717 3,829,687,382
163,621,566 1,960,316,668 3,352,867,289
2,655,304,527
2,906,789,347
2,576,470,253
2,655,304,527 762,783,475
2,906,789,347 922,898,035
2,576,470,253 776,397,036
EXPLANATION WITH COMPARISION: Working capital means capital required to carry on the business on day to day basis smoothly. Current asset is also called as gross working capital. So current asset less current liabilities we get working capital, which can also be seen in above table. From above table it shows that, in 2007-08, total current asset are Rs. 3,418,088,002 and current liabilities are Rs. 2,655,304,527. So working capital available for business is Rs. 762,783,475. In 2008-09, as business turnover increases working capital also increase by 20.99 % as compared to last year which is Rs. 922,898,035. In 2009-10, as turnover of business decrease working capital also decrease by 18.87% as compared to last year which is Rs. 776,397,036. The better a company manages its working capital, the less the company needs to borrow. Without adequate working capital there can be no progress. A business must expand and assert itself in a competitive world.
Statement showing changes in working capital for the year 2008-2009 Particulars
2008
2009
Increase
Decrease
Current Assets:Stock
2,039,226,649
2,406,705,717
367,479,068
Debtors
1,199,040,359
1,251,881,270
52,840,911
179,820,994
171,100,395
3,418,088,002
3,829,687,382
2,655,304,527
2,906,789,347
Cash Total Current
8,720,599
Liabilities:Creditors
251,484,820
Bank loan Total 2,655,304,527 2,906,789,347 Total 671,804,799 Changes in net working capital: - 671804799 - 8,720,599 Increase in working capital: - 663,084,200.
EXPLANATION:
8,720,599
The statement of change in working capital shows how the working capital has been change as compare to last year’s working capital. From above statement it shows that there is net increase in working capital by Rs. 663, 084,200.
Total current asset was Rs. 3,418,088,002 in 2008 which increase in to Rs. 3,829,687,382 in 2009.
Total current liabilities were Rs. 2,655,304,527 in 2008 which increase to Rs. 2,906,789,347 in 2009.
Gross increase in working capital was Rs. 671,804,799 and decrease in working capital was Rs. 8,720,599. Therefore net increase in working capital was Rs. 663, 084,200. It shows that due to increase in turnover of the company, working capital requirement of the company also increase over the period of time as compare to last year.
Statement showing changes in working capital for the year 2009-2010 Particulars
2009
2010
Increase
Decrease
Current Assets:Stock
2,406,705,717 1,960,316,668
446,389,049
Debtors
1,251,881,270 1,228,929,055
22,952,215
171,100,395 163,621,566
7,478,829
Cash
Total Current
3,829,687,382 3,352,867,289
Liabilities:-
Creditors
2,906,789,347
2,576,470,253
Total
2,906,789,347
2,576,470,253
Total
330,319,094
807,139,187
Changes in working capital: 807, 139, 18 Decrease in working capital: - 807,139,18
EXPLANATION: The statement of change in working capital shows how the working capital has been change as compare to last year’s working capital.
From above statement it shows that there is net decrease in working capital by Rs. 807,139,18
Total current asset was Rs. 3,829,687,382 in 2009 which decrease to Rs. 3,352,867,289. in 2010.
Total current liabilities were Rs. 2,906,789,347 in 2008 which decrease Rs. 2,576,470,253 in 2010.
Gross decrease in working capital was Rs. 807,139,187. Therefore net decrease in working capital was Rs. 807,139,187.
It shows that due to decrease in turnover of the company and recession period the working capital requirement of the company also decrease over the period of time as compare to last year.
5.2 RATIO ANALYSIS (1) CURRENT RATIO Current assets
Current ratio = ----------------Current liabilities (In Rs.) YEARS
CURRENT ASSETS
2007-08 2008-09 2009-10
3,418,088,002 3,829,687,382 3,352,867,289
CURRENT LIABILITIES 2,655,304,527 2,906,789,347 2,576,470,253
RATIOS 1.29 1.32 1.30
Interpretation: As stated before the ideal current ratio is 2:1 .If we see the last 3 year figures we would notice that in the year 2007-08 the current ratio was 1.29:1 as compared to 2008-09 (1.32:1) and 2009-10 (1.30:1). If we compare 2007-08 and 2008-09 with 2009-10, we can see that current ratio has been increased drastically. It represents the margin of safety. Higher the ratio, higher is the margin of safety. But higher ratio show the unnecessarily blockage of funds in assets. This is same in case we are referring. So there is need to manage working capital properly. Thus ratio of 2:1 is considered satisfactory. we would see that the there is a excess working capital which is against the health of the company. (B) QUICK RATIO Current assets - Stock Quick ratio =
---------------------------Current liabilities- bank o/d
(In Rs.) YEARS 2007-08 2008-09 2009-10
QUICK ASSETS 1,378,861,353 1,422,981,665 1,392,550,621
QUICK LIABILITIES 1,209,527,502 1,293,619,695 1,243,348,768
RATIOS 1.14 1.10 1.12
Interpretation: This ratio basically aims at to meet its current obligations. The ideal quick ratio is considered to be 1:1. From the above data table we could see that in the year 2007-08 the quick ratio was1.14:1 as compared to 1.10:1 in 2008-09 and 1.12:1 in 2009-10. The same scenario is seen here too as in case of current ratio. It depicts that the company’s liquidity position has deterioted as compared to the financial year 200708. It shows that company has unnecessary liquidity which is not utilized properly. The company needs to revise its policies so as to reach the desired state of 1:1. (B) PROFITABLITY RATIOS (I) NET PROFIT RATIO Net profit Net Profit ratio = -----------------* 100 Net sales
(In Rupees)
YEARS 2007-08 2008-09 2009-10
NET PROFIT 1,191,941,303 582,836,940 2,754,693,923
NET SALES 9,811,450,013 9,305,432,768 7,744,836,790
RATIOS 12.15% 6.26% 35.57%
Interpretation: This ratio indicates the firm’s capacity to face adverse economic conditions such as price competition, low demand etc. a constant rise in above ratio year after year is a definite sign of improving condition of the business . From the above chart we could see that the ratio has decrease from 12.15% in 2007-08 to 6.26% in the year 2008-09 and increase to 35.57%. Percentage of net profit is quite good. Although the increase percentage is not too appreciable but still an improvement is seen and the company should try to bring some major changes to increase.
(II) GROSS PROFIT RATIO Gross profit Gross Profit ratio = -----------------* 100 Net sales (In Rupees)
YEARS 2007-08 2008-09 2009-10
GROSS PROFIT 1,735,202,263 707,120,996 4,036,464,371
NET SALES 9,811,450,013 9,305,432,768 7,744,836,790
RATIOS 17.69% 7.60% 52.12%
Interpretation: Higher ratio indicates higher efficiency of production activities & lower ratio indicates lower efficiency of production activities. As seen in the above graph it indicates that the gross profit ratio is Fluctuating. it indicate Fluctuating efficiency of production activities. From the above chart we could see that the ratio has increased considerably from 17.69 % in 2007-08 to 7.60% in the year 2008-09 and decrease to 52.12%. . Although the increase % is not too appreciable but still an improvement is seen and the company should try to bring some major changes to increase this ratio. (C) TURNOVER RATIOS (a) WORKING CAPITAL TURNOVER RATIO Net sales Working capital turnover ratio = ------------------------------Working capital (Amount in Rupees) YEARS
SALES
WORKING
RATIO
2007-08 2008-09 2009-10
CAPITAL 762,783,475 922,898,035 776,397,036
9,811,450,013 9,305,432,768 7,744,836,790
12.86 times 10.08 times 9.98 times
INTERPRETATION: This is calculated to see how efficiently the working capital is being used to improve the turnover. The higher the working capital turnover, the better the position of company. In the above chart we could see that the scenario was quite decrease in 2007-08 with 12.86:1 as compared to 10.08:1 that of 2008-09 and 2009-10 with 9.98:1. . This shows that the working capital has been used in the most optimized way which is expected to be continued in future too.
(b) DEBTORS TURNOVER RATIO Credit sales Debtors turnover ratio = --------------------------------Average debtors + bills receivable YEARS
SALES
(In Rs.) Average Debtors +B/R
RATIO
2007-08 2008-09 2009-10
9,811,450,013 9,305,432,768 7,744,836,790
498,043,148 429,019,491 372,527,022
19.70 times 21.69 times 20.79 times
INTERPRETATION: Generally the higher the value of debtor turnover the more efficient is the management of the debtors or more liquid is the debtors. In the above scenario it shows that in the year 2007-08 the ratio was 19.70 which increased to 21.69 in the year 2008-09 also again declined to the level of 20.79 in the year 2009-10. (c)AVERAGE COLLECTION PERIOD 365 Average Collection Period = ---------------------------Debtors Turnover Ratio YEARS
Days in a year
Debtor turnover ratio
2007-08 2008-09 2009-10
365 365 365
19.70 21.69 20.79
Average collection period(D.C.P.) 19 Days 17 Days 18 Days
INTERPRETATION: From above table and scheduled it shows that company was giving average credit period of 18 days to their customers. In course for the purpose of facing high competition in industry credit period. This ratio reflects how easily the company can collect on its customers. It also can be used as a gauge of how loose or tight the company maintains its credit policies. A particular thing to watch out for is if the Average Collection Period is rising over time. (d)CREDITORS TURNOVER RATIO Net credit purchases Creditor turnover ratio = ---------------------------Average creditor + Bills payable YEARS
PURCHASES
2007-08 2008-09 2009-10
26,048,537,410 37,003,428,387 39,162,347,846
( in Rupees) Average Creditors RATIO +B/P 2,655,304,527 9.81 times 2,906,789,347 12.73 times 2,576,470,253 15.20 times
INTERPRETATION:From the above diagram and scheduled we can analyze that creditors turnover in 200708 is 9.81, which Increases to 12.73 in 2008-09 And 15.20 in 2009-10. Higher the ratio, the better it is, since it indicates that the creditors are being paid more quickly which increases the credit worthiness of the firm. But in the year 2007-08. Creditor’s turnover ratio was less which increases in subsequent year, which is matter of discuss.
(e) AVERAGE PAYMENT PERIOD Average Payment Period =
365 -------------------------Creditors Turnover Ratio
YEARS
Days in a year
Creditors turnover ratio
2007-08 2008-09 2009-10
365 365 365
9.81 12.73 15.20
Average payment period(A.P.P.) 37 Days 29 Days 24 Days
INTERPRETATION: From above table and scheduled it shows that company is making payment to creditors within 30 days (1 Month) which create good creditworthiness. It plays vital role for the purpose of facing high competition in industry. Average payment period is increasing over the period of time which is profitable for the company.
(f) STOCK TURNOVER RATIO Cost of good sold (sales) Stock turnover ratio = -----------------------------------Average stock
YEARS 2007-08 2008-09 2009-10
SALES 9,811,450,013 9,305,432,768 7,744,836,790
Average stock 282,343,885 231,651,301 205,106,907
(In Rs.) RATIO 34.75 times 40.17 times 37.76 times
INTERPRETATION: This ratio measures the number of time stock is replace during the year. From the above diagram and schedule we can analyze that Stock turnover in 2007-08 is 34.75, which increases to 40.77 in 2008-09 and Decreases again to 37.76in 2009-10.
(g) STOCK HOLDING PERIOD 360 Stock holding Period = ---------------------------Stock Turnover Ratio YEARS
No. of months in year
Stock turnover ratio
2007-08 2008-09 2009-10
12 12 12
34.75 40.77 37.76
Stock holding period(S.H.P.) 11 Days 9 Days 10 Days
INTERPRETATION Stock holding period shows whether the inventory is moving fast or not. In 2007-08 Force motors had hold stock more time because of it starting year but in 2008-09 not holding stock for 9 days & also in each year there is a decrease in the stock holding period. Which show that inventory is moving fast.
(h) FIXED ASSET TURNOVER RATIO Net sales Fixed Asset turnover ratio = --------------------------------Net Fixed asset
YEARS 2007-08 2008-09 2009-10
SALES 9,811,450,013 9,305,432,768 7,744,836,790
Net Fixed Asset 2,547,203,997 2,856,216,828 2,892,541,740
(In Rupees) RATIO 3.85 times 3.26 times 2.68 times
INTERPRETATION: This ratio indicates the amount of sales realized per rupee of investment in fixed assets. In above graph shows that fixed asset turnover ratio is 3.85 times in year 2007-08 it decrease to 3.26 times and 2.68 times in 2008-09 and 2009-10 respectively
6.2 STATEMENT SHOWING ALL THE RATIOS SR.NO. A 1 2 B I II C
PARTICULARS LIQUIDITY RATIO CURRENT RATIO QUICK RATIO PROFITABLITY RATIO
2007-08
2008-09
2009-10
1.29 1.14
1.32 1.10
1.30 1.12
NET PROFIT RATIO GROSS PROFIT RATIO
12.15% 17.69%
6.26% 7.60%
35.57% 52.15%
TURNOVER RATIOS
A
W.C.TURNOVER RATIO
12.86 times
10.08 times
9.98 times
B
DEBTORS TURN .RATIO
19.70 times
21.69 times
20.79 times
C
AVE. PERIOD
19 days
17 days
18 days
12.73 times
15.20 times
37 days 34.75 times
29 days 40.17 times
24 days 37.76 times
11 days
9 days
10 days
3.85 times
3.26 times
2.68 times
D 9
COLLECTION
CREDITORS TURN. RATIO AVE.PAYMENT PERIOD
10
STOCK TURN. RATIO.
11
STOCK HOLDING PERIOD F.ASSET TURN. RATIO
D
9.81 times
CHAPTER NO:-7 FINDINGS
CHAPTER NO 7 FINDINGS After proper analysis, it has been observed that if we compare increase in sales in the year 2007-08 as compare to 2006-07. It means growth in sales is nearly increase by Few times as compare to last year. And the sales are also increased in 2008-09. Here increase in sales is better but growth proportion is not good comparatively. Current asset are higher than standard ratio which is 2:1. It represents the margin of safety. Higher the ratio, higher is the margin of safety. But higher ratio show the unnecessarily blockage of funds in assets. In the year 2006-07 the quick ratio was 1.44:1 as compared to 1.40:1 in 2007-08 and 1.42:1 in 2008-09. It shows that company has unnecessary liquidity which is not utilized properly. The company needs to revise its policies so as to reach the desired state of 1:1.
It has been observed that the Average Collection Period is rising over time. It is also observed that the average payment period is very lengthy. It shows that company is utilizing its credit period clearly. Company’s net profit ratio is 1.03 to 3.13% which needs to increase over period of time.
CHAPTER NO:-8 LIMITATIONS
CHAPTER NO 8 LIMITATON OF THE STUDY The time allotted to complete the project was restricted to 60 day only. But time required for completing the project of comparative analysis with respect to ratio analysis and working capital is large as compared to the analysis of any other project. The director has informed to sit with chartered accountant of the company, but chartered accountant was not comfortable with researcher in sharing the information.
To maintain the secrecy of the organization many statements were not available to the researcher at time of research.
CHAPTER NO:-9 SUGGESTIONS
CHAPTER NO 9 SUGGESTIONS Finance is life blood of every business organization. There should well qualified and expert people in finance department which is to be guided by director or next senior. There should be regular maintenance and disclosure of every book of accounts. The standard current ratio is 2:1. There is need to manage current asset to avoid unnecessary blockage of fund, which may profitability of company.
Company’s average collection period is very high. It shows that company has loose credit collection policy to face market competition but it will affect financial condition of company. Company has to take action for collection of receivable. Company has to try to minimize the duration of operating cycle. This will help to minimize the working capital need of company.
CHAPTER NO:-10 CONCLUSIONS
CHAPTER NO:-10 CONCLUSIONS Because of increasing volume of Business and increasing turnover the current asset, current liabilities and working capital also increases. They are increases in proportion of turnover of company. Increases in current asset means increases in investment in current asset. The company’s current ratio is above the standard ratio which is 2:1. Company has ability to meet the current liabilities. Ratio is going on increasing which is good, which represent Margin of safety. Higher the ratio, higher is the Margin of safety. But higher ratio shows unnecessarily blockage of fund which not healthy for profitability.
Increase in average collection period and other factor affects operating cycle. Company’s average collection period is very high. It shows that company has loose credit collection policy to face market competition but it will affect financial condition of company. Company has to take action for collection of receivable. As per the ratio’s of company it seen and concluded that the year 2008-09 was better than the year 2009-10. During the year 2009-10 company had reduced expenses which shown the increment in net profit.
CHAPTER NO:-11
BIBILOGRAPHY
CHAPTER NO 11 BIBLIOGRAPHY
WEBSITES:
www.google.com www.forcemotors.com www.bseindia.com www.nseindia.com http://en.wikipedia.org/wiki/Financial_statement
BOOKS:
Principles of Financial Management - Satish M. Inamdar Fundamentals of Financial Management – Prof. A.P.Rao Introduction to Financial Accounting- Horngren Introduction to Management Accounting- Grey Sundem
CHAPTER NO:- 12 ANNEXURE
CHAPTER NO 12 ANNEXURE
ANNUAL REPORT BALANCE SHEET OF FORCE MOTORS LIMITED, AKURDI AS ON 31st MACH 2008,2009,2010 PARTICULARS Schedule Amount as at Amount as at no. 31-03-2008 31-03-2009 A. Sources of fund: 1) Shareholders funds: a)Share capital b)Reserves & surplus 2)Loan funds: a)Secured loans b)unsecured loans 3)Deferred Tax Adjustment a)Deferred Tax Liabilities
Amount as at 31-03-2010
1 2
131,790,000 1,734,307,277
131,790,000 897,800,000
131,790,000 2,143,401,245
3 4
1,747,234,634 745,972,516
1874,700,650 1,784,421,907
940,443,126 668,412,577
168,651,998
200,655,610
259,261,303
b)Less Deferred Tax Asset TOTAL
48,436,098
57,139,973
53,138,257
4,479,520,327
4,832,228,194
4,090,169,994
7,874,638,620 5,327,434,623 2,547,203,997 719,806,986 725,923,654
8,560,517,127 5,704,300,299 2,856,216,828 534,403,241 726,001,564
9,012,008,935 6,119,467,195 2,892,541,740 528,041,714 571,598,632
2,039,226,649 1,199,040,359 179,820,994 90,629,905 942,731,122 4,451,449,029
2,406,705,717 1,251,881,270 171,100,395 83,285,474 1,061,892,743 4,974,865,599
1,960,316,668 1,228,929,055 163,621,566 74,680,357 1,635,913,988 5,063,461,634
3,540,406,037 456,843,648 3,997,249,685 454,199,344
3,875,719,130 445,513,680 4,321,232,810 653,632,789
3,435,293,671 663,784,423 4,099,078,094 964,383,540
4,479,520,327
4,832,228,194
4,090,169,994
B.Aplication of funds 1)Fixed assets a)Gross block b)Less: Depreciation c)Net Block d)Capital Work in progress 2)Investments 3)Current assets, Loans & Advances a)Inventories b)Sundry debtors c)cash &Bank balance d)Other Current Assets e)Loans& Advances Total of CA, Loans &Advances Less: Current Liabilities & Provisions a) Current Liabilities b)Provisions Total of CL & Provisions Net Current Assets Total
5
6 7
8
PROFIT & LOSS A/C OF FORCE MOTORS LIMITED, AKURDI FOR THE YEAR ENDED 31st MARCH 2008,2009,2010 PARTICULAR For the year For the year ended 31’st ended 31’st march 2008 march 2009 INCOME Sales(gross) Less: excise duty Net Sales Sales Of Shares ,Units Of Mutual Funds Operating Income Other Income EXPENDITURE Material Consumed, Purchase Of Shares, Units Of Mutual Funds & Manufacturing Expenses
For the year ended 31’st march 2010
11,438,443,102 1,626,993,089 9,811,450,013 158,554,835 9,970,004,848 618,170,366 10,588,175,214 806,271,222 11,394,446,436
10,927,172,097 1,621,739,329 9,305,432,768 180,750,415 9,486,183,183 537,087,816 10,023,270,999 395,809,978 10,419,080,977
8,907,105,151 1,162,268,361 7,744,836,790 214,100,083 7,958,936,873 987,825,527 8,946,762,400 3,410,646,669 12,357,409,069
7,452,037,567
7,351,173,217
6,257,969,825
Employees Remuneration & Benefits Other Expenses Interest &Finance Charges Depreciation PROFIT BEFORE TAXATION Provision For Taxation Current TaxIncome Tax / MAT Wealth Tax Fringe Benefits Tax Deferred Tax PROFIT AFTER TAXATION
ADJUSTMENTS IN RESPECT OF EARLIER YEARS: Taxation , net Profit After Taxation Prior Period Adjustments Balance brought forward from previous year PROFIT AVAILABLE FOR APPROPRIATION Transferred to General Reserve Proposed Dividend Tax On Above Dividend BALANCE CARRIED TO BALANCE SHEET EARNINGS PER SHARE OF RS 10/EACH: Net Profit (after tax &adjustment in respect of earlier years) Number of shares issued & subscribed Basic & diluted Earnings per share Notes forming part of the financial statements
1,348,908,727 244,446,822 199,017,853 414,833,204 9,659,244,173 1,735,202,263
1,430,488,396 194,859,805 345,276,398 390,162,165 9,711,959,981 707,120,996
1,205,577,841 85,263,460 353,817,085 418,316,307 8,320,944,698 4,036,464,371
532,100,000 751,100 9,037,740 7,496,355 549,385,195 1,185,817,068
112,231,000 447,600 6,250,000 8,311,384 127,239,984 579,881,012
1,273,500,000 933,100 9,575,860 6,700,263 1,290,709,223 2,745,755,148
6,124,235 1,191,941,303
2,955,928 582,836,940
8,938,775 2,754,693,923
2,938,627,082
2,711,866,099
2,074,995,505
4,130,568,385
3,294,703,039
4,829,689,428
212,500,000 98,003,600 8,360,212 318,863,812 3,811,704,573
122,500,000 74,365,600 6,741,934 203,607,534 3,091,095,505
366,000,000 116,548,400 9,112,900 491,661,300 4,338,028,128
1,191,941,303
582,836,940
2,754,693,923
13,176,000 90.46
13,176,000 44.23
13,176,000 209.07
