Finance Project

SIKKIM MANIPAL UNIVERSITY
A Project Report on Financial Performance through Working Capital

Management at
TML Drivelines Ltd, Jamshedpur
+ =
SUBMITTED TO :
FACULTY GUIDE PROJECT GUIDE
Prof. Ritesh Kumar Mrs. Sunanya
Sikkim Manipal University Finance, TML Drivelines Ltd
Jamshedpur Jamshedpur
SUBMITTED BY :
Vineeta Agarwal (521023999)

DECLARATION

I hereby declare that project entitled A STUDY ON FINANCIAL
PERFORMANCE THROUGH WORKING CAPITAL
MANAGEMENT conducted at TML DRIVELINES LIMITED prepared
by me during the academic year 2012-2013 under the guidance of my project
mentor Mrs. Sunanya (Finance Manager) and my faculty guide Mr. Ritesh
Kumar.

I also declare that this project is result of my effort and has not been
submitted to any other Institute or University for the award of any degree or
personal favors whatsever. All the analysis and detail provided in the report
hold true to the best of my knowledge.

PLACE : Jamshedpur
DATE : VINEETA AGARWAL
ACKNOWLEDGEMENT
In the course of this project I got an insight into the automobile Industry,
came to know a lot about the basic working of an automobile Company.
Any work is not perfect and complete without the help & guidance from
other people .I hereby deeply express my gratitude to TML DRIVELINES
LIMITED for giving me an opportunity to work as a trainee at their
organization on topic A STUDY ON FINANCIAL PERFORMANCE
THROUGH WORKING CAPITAL MANAGEMENT.
I am extremely grateful to Mr. G.S.Ahuja (Chief Financial Officer, TML
Drivelines Ltd.) for granting permission to carry out the project work in his
department. My project mentor Mrs.Sunayana (Finance Manager, TML
Drivelines Ltd.) who has played a key role in completion of this project.
Without the knowledge, attention and time she has bestowed on me, this
project would have been simply impossible.
I would also like to thank Mr. Surya Mohan Sir for their immense support
and guidance which helped me in understanding various aspects of the
subject. I would also like to thank all the employees of the finance
department for their valuable support, cooperation & help.
I would fail to do my duty if I didnt take this opportunity to thank my faculty
guide Mr.Ritesh Kumar for his timely help and guidance. I would also like to
thanks Mrs.Nidhi Basu for providing their knowledge and assistance with
reference material, guidance and support for completion of the project.

Vineeta Agarwal

INDEX
Introduction
Project Title
Objectives of the project
Scope of the Study
Limitations of the Study
Methodology
Company Profile
The Automobile Industry
Tata Motors
Tata Groups
TML Drivelines Limited
Financial Highlights of the company
Ratio Analysis
Working Capital
Working Capital Management
Findings
Conclusion
Recommendations
Sources & Bibliography

PART- A

INTRODUCTION

PROJECT TITLE

A Project on Financial Performance through Working Capital Management at
TML Drivelines Ltd, Jamshedpur a 100% subsidiary of Tata Motors

OBJECTIVES OF THE PROJECT
To analyze the Financial Statement of TML drivelines Ltd. for the year
2007 -2008 to 2011-2012
To interpret the analysis and the trend of the Financial Result
To use various Activity Ratio and Liquidity Ratio to find out the
activities of Assets and Liabilities and to find out the Liquidity Position
of the Company
Standardize Financial information for Comparison
Evaluate Current Operation
Compare Performance with past performance
Compare Performance against Industry standard and other Firms
Study the Efficiency of Operation
Study the risk of Operations

SCOPE OF THE STUDY

The management of working capital helps us to maintain the working capital
at a satisfactory level by managing the current assets and current liabilities. It
also helps to maintain proper balance between profitability, risk and liquidity
of the business significantly. By managing the working capital, current
liabilities are paid in time. If the firm makes payment to it creditors for raw
material in time, it can have the availability of raw material regularly, which
doesnt cause any obstacles in production process. Adequate working capital
increases paying capacity of the business but the excess working capital
causes more inventory, increases the possibility of delay in realization of
debts. On the other hand, absence of adequate working capital leads to
decrease in return on investment. The goodwill of the firm is also adversely
affected due to the inability to pay current liabilities in time. Hence, the
management of working capital helps to manage all the factors affecting the
working capital in the most profitable manner.

LIMITATIONS OF THE STUDY
Every project has its own limitations, so as ours. But we have to work
irrespective of these limitations and find our way, so that we can achieve the
required aim.

Some of the limitations of our project are: -

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

Another limitation is the un-audited MPRM statements, which leads to
difference in the information of annual reports and monthly statements.

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

There may be limitations to this study because the study duration (summer
training) is very short and its not possible to observe every aspect of working
capital management practices.

METHODOLOGY
Research Type
Exploratory Type: - The Research is concerned with discovering the general
nature of Working Capital and the various Variables related to it.
Data Collection
Primary Sources
Annual Reports published by Company
Respondents of TML Drivelines Ltd.
Secondary Sources
Via Mail, SEC and Company Websites
Published collections of Data
Investments Site on the Web
Official Website of the Company
SAP
Data Presentation
Graphical ad Tabular representation of collected Data has been done to show
the Financial position of the TML Drivelines Firm.
Data Analysis and Interpretation
Here an analysis of the annual reports of the last Six fiscal years (2005-06 to
2010-11) has been done. Various ratios have been calculated to find out the
profitability and leverage of the firm.
Various working capital ratios has been calculated to observe the working
capital changes and comparisons have been made of the last six years. A
thorough study has been made about the Inventory management system of the
company and an effort has been made to find out how well the company
manages its inventories.
I have tried to evaluate the firms performance by using the past data of the
firm with the present data, by the time series analysis over the period of 5 to 6
years.

THE AUTOMOBILE INDUSTRY
Indian automobile industry has grown leaps and bounds since 1898, a time
when a car had touched the Indian streets for the first time. At present it holds
a promising tenth position in the entire world. The monthly sales of passenger
cars in India exceed 100,000 units . A surge in economic growth rate and
purchasing power led to growth in the Indian automobile industry, which
grew at a rate of 17% on an average. The industry provided employment to a
total of 13.1 million people as of 2006-07, which includes direct and indirect
employment. The export sector grew at a rate of 30% per year during early
21st century. India was one of the largest manufacturers of tractors in the
world in 2005-06, when it produced 2,93,000 units.

India is :
1. The second largest Two Wheeler manufacturer.
2. The Largest Tractor Manufacturer.
3. 4th largest Passenger Vehicle market in Asia.
4. 5th largest Commercial Vehicle manufacturer in the world.
5. The largest three wheeler market .
6. India has the fourth largest car market in the world.

THE INDIAN AUTOMOBILE SECTOR
The automotive industry in India is one of the largest in the world and one of
the fastest growing globally. India's passenger car and commercial vehicle
manufacturing industry is the sixth largest in the world, with an annual
production of more than 3.7 million units in 2010. According to recent
reports, India is set to overtake Brazil to become the sixth largest passenger
vehicle producer in the world, growing 16-18 per cent to sell around three
million units in the course of 2011-12. In 2009, India emerged as Asia's
fourth largest exporter of passenger cars, behind Japan, South Korea,
and Thailand. In 2010, India reached as Asia's third largest exporter of
passenger cars, behind Japan and South Korea beating Thailand.
As of 2010, India is home to 40 million passenger vehicles. More than 3.7
million automotive vehicles were produced in India in 2010 (an increase of
33.9%), making the country the second fastest growing automobile market in
the world. According to the Society of Indian Automobile Manufacturers,
annual vehicle sales are projected to increase to 5 million by 2015 and more
than 9 million by 2020.By 2050, the country is expected to top the world in
car volumes with approximately 611 million vehicles on the nation's roads.
The majority of India's car manufacturing industry is based around three
clusters in the south, west and north. The southern cluster near Chennai is the
biggest with 40% of the revenue share. The western hub near Maharashtra is
33% of the market. The northern cluster is primarily Haryana with
32%. Chennai, is also referred to as the "Detroit of India" with the India
operations of Ford, Hyundai, Renault and Nissan headquartered in the city
and BMW having an assembly plant on the outskirts. Chennai accounts for
60% of the country's automotive
exports.Gurgaon and Manesar in Haryana form the northern cluster where the
country's largest car manufacturer, Maruti Suzuki, is
based.The Chakan corridor near Pune, Maharashtra is the western cluster
with companies like General Motors, Volkswagen, Skoda, Mahindra and
Mahindra, Tata Motors, Mercedes Benz, Land Rover, Fiat and Force
Motors having assembly plants in the
area. Aurangabad with Audi, Skoda and Volkswagen also forms part of the
western cluster. Another emerging cluster is in the state of Gujarat with
manufacturing facility of General Motors in Halol and further planned
for Tata Nano at Sanand. Ford, Maruti Suzuki and Peugeot-Citroen plants are
also set to come up in Gujarat. Kolkatta with Hindustan
Motors, Noida with Honda and Bangalore with Toyota are some of the other
automotive manufacturing regions around the country.
Key Research Highlights

- Passenger car production in India is projected to cross three million units in
2014-15.
- Sales of passenger cars during 2008-09 to 2015-16 are expected to grow at a
CAGR of around 10%.
- Export of passenger cars is anticipated to rise more than the domestic sales
during 2008-09 to
2015-16.
- Motorcycle sales will perform positively in future, exceeding 10 Million
units by 2012-13.
- Value of auto component exports is likely to attain a double digit figure in
2012-13.
- Turnover of the Indian auto component industry is forecasted to surpass
US$ 50 Billion in 2014-15.

Major Manufacturers Of Automobiles in India:-

Tata Motors
Maruti Udyog Ltd.
General Motors India
Ford India Ltd.
Eicher Motors
Bajaj Auto
Daewoo Motors India
Hero Motors
Hindustan Motors
Hyundai Motor India Ltd.
Royal Enfield Motors
TVS Motors
DC Designs
Swaraj Mazda Ltd

PART- B
COMPANY PROFILE

ORIGIN OF TATA MOTORS
TATA MOTORS, formely known as TELCO (Tata Engineering & Locomotive
Company) is a multinational corporation headquatered in Mumbai,India. It is a
largest automobile & commercial vehicle manufacturing company. The OICA
ranked it as the world 20th largest automaker, based on figures for 2006.
TATA MOTORS was established in the year 1945. It is a part of TATA
GROUP. It presence indeed cuts across the length and breadth of India. Over 3
million Tata vehicles runs on Indian roads, since the first rolled out in 1954.
Jamsetji Nusserwanji Tata starts a private trading firm, laying the foundation of
the Tata Group. The Tata Group comprises 96 operating companies in seven
business sectors: information systems and communications; engineering;
materials; services; energy; consumer products; and chemicals. The Group was
founded by Jamsetji Tata in the mid 19th century, a period when India had just
set out on the road to gaining independence from British rule. Consequently,
Jamsetji Tata and those who followed him aligned business opportunities with
the objective of nation building. This approach remains enshrined in the Group's
ethos to this day.
The Tata family of companies shares a set of five core values: integrity,
understanding, excellence, unity and responsibility. These values, which have
been part of the Group's beliefs and convictions from its earliest days, continue
to guide and drive the business decisions of Tata companies. The Group and its
enterprises have been steadfast and distinctive in their adherence to business
ethics and their commitment to corporate social responsibility.

TATA GROUP

TML Drivelines Ltd.(SUBSIDIARY OF TATA MOTORS)

TML Drivelines Limited (100% Subsidiary of Tata Motors Limited) is
predominantly in the business of manufacturing Axles & Transmissions for
Medium & Heavy Commercial Vehicles. The Company was earlier known as
HV Axles Limited (HVAL).HV Transmissions Limited (HVTL), (100%
Subsidiary of Tata Motors Limited) was amalgamated with HVAL. HVAL was
then renamed as TML Drivelines Limited w.e.f. 1st April 2011. Both the
companies has been formed a decade ago, by spun off of Axles &
Transmissions Division of Tata Motors and incorporated in March, 2000 to give
specialist focus on development and supplies of Axles and Transmissions for
Tata Motors, while Tata Motors concentrated on Vehicle Design, Integration &
Marketing. The Boards of the two Companies decided to amalgamate HVTL
into HVAL to harness synergies and graduate the two entities as a Total
Driveline Solutions Provider, backed with appropriate skills and expertise. With
the pooling and more efficient utilization of resources, the amalgamated
company, TML Drivelines Limited, has emerged as a stronger Organisation.
Presently TML Drivelines is located in Tata Motors Jamshedpur plant
complex, and has immediate plans in place to have foot prints at other customer
locations. The new entity operates with two business verticals, Axles and
Transmissions, with common corporate functions like Finance, HR and ERC.
TML Drivelines operates as a Business To Business (B2B) entity. The
amalgamation has led to the following advantages:- a) Opportunity to emerge as
a Total Driveline Solutions Provider b) Harness synergies in terms of skills and
expertise c) Optimum utilization of resources and leverage economies of scale
d) Integrated R&D base e) Synergy in Supply Chain f) Stronger Financial Base
Axles & Transmissions as aggregates are very critical for Tata Motors, and
TML Drivelines provides Tata Motors with a distinct advantage in terms of
quality, cost and new products which supports their core competence. In fact
Tata Motors enjoys an overall perpetual cost advantage from TML Drivelines to
the tune of ~ 5% to 10% over competitors. TML Drivelines has also ventured
into LCV & Construction Equipment segment apart from providing aggregates
for M&HCV segment. TML Drivelines has set-up its own Design &
Development Centre ERC, where new models of Axles and Transmissions are
being
designed jointly with Tata Motors ERC. This will help in speedy up-gradation
of products in line with ever changing customer expectations and needs.
TML's core competencies are emphasized through excellence in engineering,
manufacturing standards & ultimate utilization of human potential.
The Strength of TML lies in:-
Strong Manufacturing Base
High Cost Competitiveness in Products offered.
Professional Management
Qualified & skilled manpower
Extensive experience & expertise in Transmissions Manufacturing
acquired over the years ( Since year 1954).
Product portfolio capable of serving diverse needs (vehicles of varying
power-weight ratios) & flexible to adaptation to vehicles of diverse makes
Initiatives like TPM, KAIZEN, 5S, 6 Sigma, ISO/TS 16949 :2002 (E)

'All resulting in an environment congenial for learning, creativity and
innovation

VISION, MISSION AND CORE VALUES OF TML:
Vision :-
To be a Globally admired Driveline Solutions provided for Commercial
Vehicles
Mission:-
To continuously create value for all Stakeholders and exceed their expectations
through:
Offering & Innovating Cost effective reliable solutions
Process excellence
Sustainable profitable growth
Safe & engagaed Employees
Capable supply chain
Care for community
Core Values :-
Safety First
Integrity
Customer Centric
Innovation
Accountability J. R. D Tata
Respect
Corporate Citizenship
No success or achievement in material terms is worthwhile unless it serves the needs or interests of
the country and its people and is achieved by fair and honest means.
MARKET SHARE OF TML DRIVELINES LTD.

TML Function in a harmonious atmosphere stemming from adopting of the
basic tenets of the Tata Groups philosophy of respect for employees and a
high concern for their needs and welfare.
TMLS Culture is driven by ownership, responsibility and accountability at
different levels which had led to sure, systematic and continues improvement
and learning. This is distinctly evident form quantum and sustained
improvements. One such example is the significant improvements of product.
The Culture Of TML is characterized by:
A passion for engineering and innovation among the employees-a major
transformation of facilities in the past years has taken place with many
firsts in India such as unique high quality-low cost semi automated
assembly line, automated shim selection, conveyorised and automatic
painting, semi automated SqF line, 5-chamber shot blasting to mention
a few.
An increasing seamless work-culture through an approach of defining
accountability that ensures empowerment and calls for involvement in
various functions of the organization to deliver objectives.
46 46
54.2
51
40.7
45.3
49.1
47.4
0
10
20
30
40
50
60
2007-2008 2008-2009 2009-2010 2010-2011
%

Market Share (Domestic CV Market)
Axles Transmission
A learning and collaborative culture fostered by soliciting externally
sourced expertise which has led to setting up of modern facilities at
significantly low costs.
A team based culture with CFTs to achieve stretch targets on cost,
quality and other key objectives. This culture, while fostering high
performance also enables TML to strengthen its Coe competency of
being the lowest cost manufacturer of M&HCV transmissions. In fact
during the recent down turn TML was not only able to maintain the
profit in the third and fourth quarters but also achieved marked
improvements in areas such as variable conversion cost.

MANAGEMENT

Boards of Director TML

Name Position
Mr. R Pisharody Chairman
Mr. S B Borwankar Director
Mr. H K Sethna Director
Mr. N S Kulkarni Director
Mr. A A Gajendragadkar Director

Chief Executive Officer

Name Position
Mr. A B Lall CEO

Chief Financial Officer

Name Position
Mr. G S Ahuja CFO

Company Secretary

Name Position
Mr. Vispi S Patel Company Secretary

RELATIONSHIP WITH TATA MOTORS

The technical relationship between the Holding company TATA MOTORS
LTD. & subsidiary TML Drivelines LTD. is that of a Job worker. Job
working means performing some operations on the raw materials or
components of one organization by another organization, due to
specialization by the latter organization or outsourcing /not having required
capacity by the former organization. The latter organization is known as the
Job worker of the former one, for which the job worker gets revenue
commonly known as PROCESSING CHARGES.
The job worker gets the required material supply form the supplying
organization on which operations are performed and thereafter the output is
returned to the supplier for use in further production.
The job worker is a system where, the job worker processes the material &
components supplied to them into finished products & has to bear the
expenses of conversion, which is paid to them in the form of PROCESSING
CHARGES.

TML Drivelines supports Tata Motors by taking initiatives to reduce the
direct material cost in conjuction with Suppliers. TML Drivelines also
manages direct material inventory on behalf of Tata Motors.These are
important parameters for TML Drivelines relationship with Tata Motors.

Financial Highlights of the Company

TML Drivelines Limited has an authorized share capital of 100,000,000 equity
shares of Rs. 10 each. It has issued, subscribed and paid up capital of
77,000,000equity shares of Rs. 10 each.

From being a loss making company in its initial years, it is now in the pink of
financial health. Production numbers have steadily moved up same to the sales.
All financial results of company have improved over the years as a reflection of
overall performance improvement.

As the amalgamation has taken place from 1
st
April 2011 and the results of
2011-12 are not available so the analysis has been done on HV Transmissions &
H V Axles results from 2005-06 to 2010-11.

TURNOVER
In this encouraging scenario, the financial performance of the company has
also shown an improvement. In view of increase in demand in automobile
sector particularly in the commercial market,the companys net sales
increased by 34.9%.
After a steady year on year growth in turnover since inception, the company
has achieved the highest turnover.

144
197
203
160
240
313
128
176
192
143
210
294
0
50
100
150
200
250
300
350
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

R
s
.

i
n

C
r
o
r
e
s

Turnover
Axles Transmission
Earnings before Interest, Taxes, Depreciation &
Amortization (EBIDTA)

EBIDTA margin has gone up to 59.6% from 50.4% in case of Transmission
and 59.2% from 57.0% in case of Axle business during the last five years.
Increased revenue along with control over costs is the reason for the same.

56.80% 57.00% 56.60%
49.90%
57.70%
59.20%
44.80%
50.40%
51.30%
42.30%
55.20%
59.60%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
%

EBIDTA Margin
Axles Transmission
82
112
115
80
139
185
57
88
99
60
116
175
0
50
100
150
200
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
R
s
.

i
n

C
r
o
r
e
s

EBIDTA
Axles Transmission
Profit before Tax

Increase in revenue and reduction in operating costs also resulted in an all
time high profit before and after tax and earnings per Share.

Profit after Tax

69
96
86
41
95
140
46
74
72
26
77
135
0
20
40
60
80
100
120
140
160
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
R
s
.

i
n

C
r
o
r
e
s

Profit Before Tax
Axles Transmission
46
58
63
28
64
94
30
45
47
19
53
91
0
20
40
60
80
100
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
R
s
.

i
n

C
r
o
r
e
s

Profit After Tax
Axles Transmission

Earnings per Share

12.9
14.1
6.2
14.2
20.9
11.2
11.9
4.9
13.2
22.7
0
5
10
15
20
25
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Earnings Per Share
Axles Transmission
Products of TML Drivelines

RATIO ANALYSIS

Financial ratio analysis is the calculation and comparison of ratios which are
derived from the information in a company's financial statements. The level
and historical trends of these ratios can be used to make inferences about a
company's financial condition, its operations and attractiveness as an
investment.
This is the measure of inter relationship between different sections of the
financial statements which then is compared with the budgeted or forecasted
results, prior year results and or the Industrial results. To be most important
ratios must include a study of underlying data. Ratios should be taken as
guides that are useful in evaluating a companys financial position and
operations and making comparisons with results in previous years or with
other companies. The primary purpose of ratios is to point out areas needing
further investigations. Ratios will not carry meaningful business reasoning if
there is no supporting quantitative and financial information.
When it comes to investing, analyzing financial statement information (also
known as quantitative analysis), is one of, if not the most important element
in the fundamental analysis process.

Its a tool which enables the banker or lender to arrive at the following factors
:
Liquidity position
Profitability
Solvency
Financial Stability
Quality of the Management
Safety & Security of the loans & advances to be or already been
provided

How a Ratio Is Expressed

As Percentage - such as 25% or 50% . For example if net profit is
Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said
to be 25% of the sales.
As Proportion - The above figures may be expressed in terms of the
relationship between net profit to sales as 1 : 4.
As Pure Number /Times - The same can also be expressed in an
alternatively way such as the sale is 4 times of the net profit or profit is
1/4
th
of the sales.

The Use Of Financial Ratios

Financial Ratio are used as a relative measure that facilitates the
evaluation of efficiency or condition of a particular aspect of a firm's
operations and status.
Ratio Analysis involves methods of calculating and interpreting
financial ratios in order to assess a firm's performance and status.
Assessment of the firms past, present and future financial conditions.
Done to find firms financial strengths and weaknesses.
Primary Tools.
Financial Statements.
Comparison of financial ratios to past, industry, sector and all firms

Significance of Using Ratios

The significance of a ratio can only truly be appreciated when:
It is compared with other ratios in the same set of financial statements.
It is compared with the same ratio in previous financial statements
(trend analysis).
It is compared with a standard of performance (industry average). Such
a standard may be either the ratio which represents the typical
performance of the trade or industry, or the ratio which represents the
target set by management as desirable for the business.
Users of Ratio Analysis

The ratio analysis is on of the most powerful tools of financial Analysis. It is
used as a device to analysis and inter-prate the financial health of an enterprise.

Managers
These are the persons who among the business. Financial ratios areimportant
to managers for evaluating the results of their decisions.Financial
ratio also helps the managers in decision forecasting andplanning co-
ordination and control of business activities.
Shareholders / Investors
Those who are interested in buying and selling the shares of acompany are
naturally interested in the financial ratios. These ratios are helps in knowing the
safety of their investment. This ratios tells that the position of the firm
whether it is good or not.
Creditors
The creditors are interested to know whether their loan principal andinterest will
be paid when due suppliers and other creditors are alsointerested to know their
dues in time.
Workers
Gener al l y t he wor ker s ar e ent i t l ed t o payment of bonus i n whi
chdepends on the size of profit earned. The knowledge also helps themin
conducting negotiations for wages and bonus.
Government
T h e r a t i o a n a l y s i s o f a c o m p a n y o r i n d u s t r y i
s u s e f u l t o t h e management in framing the policies and then the
financial ratios areuseful to the government in taking decision relating to taxes.
Researchers
The f i nanci al r at i os bei ng a mi r r or of bus i ness condi t i on of gr
eat interest to undertaking in accounting theory as well as business affairs and
practices.

Managerial Uses of Ratio Analysis

The following are the important managerial uses of ratio analysis helps in
financial forecasting : Ratio analysis is very helpful in financial forecasting.
Ratios relating to past sales, profits and financial positions from the basis for
setting future trends.

Helps in Comparison: With the help of ratio analysis, ideal ratios can be
composed and they can be used for comparing a firms progress and
performance. Inter firm comparison or comparison with industry averages
is made possible by ratio analysis.

Financial Solvency of the Firm: Ratio analysis indicates the trends in
financial solvency of the firm. Solvency has two dimensions long term
solvency and short term solvency. Long term solvency refers to the
financial viability of a firm and it is closely related with the existing
financial structure. On the other hand, short term solvency is the liquidity
position of the firm. With the help of ratio analysis conclusion can be
drawn regarding the firms liquidity and long term solvency position.

Evaluation of Operating Efficiency : Ratio analysis throws light on the
degree of efficiency in the management and utilization of its assets and
resources. Various activity ratios measure this kind of operational
efficiency and indicate the guidelines for economy in costs, operations
and time.

Communication Value : Different financial ratios communicate the
strength and financial standing of the firms to the internal and external
parties. They indicate the over all profitability and capital gearing etc. of
the firm.

Other Uses : Financial ratios are very helpful in the diagnosis of financial
health of a firm. They highlight liquidity the, solvency, profitability and
capital gearing etc. of the firm.

Interpretation Of Ratios

The interpretation of ratios is an important factor. Through calculation is also
important but it is only a clerical task whereas interpretation needs skills,
intelligence and foresightedness. The interpretation of the ratios can be done
in the following ways.
Single Absolute Ratio : Generally speaking one cannot draw
meaningful conclusions when a single ratio is considered in isolation.
But single ratios may be studied in relation to certain rules of thumb
which are based upon well proven contentions.
Groups of Ratio : Ratios may be interpreted by calculating a group of
related ratios. A single ratio supported by related additional ratios
becomes more understandable and meaningful.
Historical Comparisons: One of the easiest and most popular ways of
evaluating the performance of the firm is to compare its present ratios
with the past ratios called comparison over time.
Projected Ratios : Ratios can also be calculated for future standard
based upon the projected financial statements. Ratio calculation on
actual financial statements can be used for comparison with the
standard ratios to find out variance, if any. Such variance helps in
interpreting and taking corrective action for improvement in future.
I nter firm Comparison: Ratios of one firm can also be compared with
the ratios of some other selected firms in the same industry at the same
industry at the same point of time.

Limitations Of Ratio Analysis

Ratio analysis is used by almost all the accounts managers for strategic
planning and decision making. It also very helpful tool to know the effect of
each item of financial statements by creating relationship with other items.
There is big list of benefits of ratio analysis but it has also some limitations.
So, account managers and other parties who use ratio and its analysis should
remember these limitations when they take any decision.

Following are main limitations of ratio analysis:

Limited Use of Single Ratio
Sometime, we can not compare our ratios with others. For example, we have
started new business and our financial results are not still normal. At that
time, our profitability ratio will have limited use because there is not any past
data of profitability ratios.

Lack of Adequate Standards
We could not make standards of all ratios. For example, we can not tell what
is rule of them of our net profit ratio because there are lots of factors affect it.
In the lack of adequate standards of ratios, we can not give exact comment on
the basis of ratio analysis.
Inherent Limitation of Financial Accounting

Ratio analysis is just like simplification of financial accounting data. But
there are lots of limitations of financial accounting which you can read
at here. All these limitation will be absorbed by ratios. This is the one of the
important limitation of ratio. I can say if base is not good, everything will be
wrong. If there is small portion of poison in milk, its effect will be in
everything what you will make.

Changes of Accounting Procedures
If accounting procedures will change, our accounting ratio will be changed.
At that time, we can not compare our current year ratios with our past year
ratios. For example, in past year, we had used LIFO but current year, we are
using FIFO for inventory valuation. Due to this, figures of closing stock will
be different. On this basis, if we have calculated current ratio, it will not be
comparable with past current ratio.

Window Dressing

Because we have shown our financial data through window dressing. Our
ratios will also be affected from it.

Personal Bias

This is reality, I saw many CAs who waste their time to optimize different
ratios by changing the project financial statements figures for making
attractive projects. All these activities are done for getting loan. So, this will
make the drawback of ratio analysis.
Matchless

Different companies uses different accounting policies, so, we cannot
compare their ratios.

Price Level Changes

Inflation effect is ignored in calculation of ratios. So, ratio will not give
perfect answer in changing of price level.

Ratios are not Substitute of Financial Statements

Ratio analysis is important part of financial statements analysis. It can never
become a substitute of financial statements. We just use it with cash flow
analysis, fund flow analysis and other analysis.

Wrong Interpretation

We can interpretate wrongly. For explaining the effect on company's position
with ratios, there is big need of experience. Wrong interpretation will be
helpful for wrong decisions. So, it is limitation of ratio analysis that it does
not explain all the facts, it has to explain. For a new accounts manager, it may
be difficult.

Classification of Ratios

Balance
Sheet
Ratio
P&L Ratio or
Income/Revenue
Statement Ratio
Balance Sheet
and Profit &
Loss Ratio
Financial
Ratio
Operating Ratio Composite Ratio
Current
Ratio
Quick Asset
Ratio
Proprietary
Ratio
Debt Equity
Ratio
Gross Profit Ratio
Operating Ratio
Expense Ratio
Net profit Ratio
Stock Turnover Ratio
Fixed Asset
Turnover Ratio,
Return on Total
Resources
Ratio,
Return on Own
Funds Ratio,
Earning per
Share Ratio,
Debtors
Turnover Ratio,

FINANCIAL STATISTICS OF HVTL

2000-01
2001-
02
2002-
03
2003
-04
2004-
05
2005
-06
2006-
07
2007-
08
2008-
09
2009-
10
2010
-11
CAPITAL
ACCOUNTS(Rs.
Crores)

(a) Capital 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0
(b) Reserves&
Surplus
17.96 6.19 10.84 28.15 41.49 55.60 77.95
100.6
0
110.6
9
140.0
1
202.8
7
(c) Borrowings 82.50 80.38 63.92 47.85 2.87 0.45 5.13 85.27 91.86 51.67 -
(d) Gross Fixed
Assets
154.75 157.87
157.9
1
159.3
2
161.0
9
173.1
8
236.1
7
385.8
1
411.9
0
436.3
5
444.2
7
(e) Depreciation 9.68 18.91 27.77 37.53 47.98 59.41 73.90 95.91
118.8
7
148.7
0
185.7
9
(f) Net Fixed
Assets
145.07 138.96
130.1
4
121.7
9
113.1
1
113.7
7
162.2
7
289.9
0
293.0
3
287.6
5
258.4
9
(g) Investments - - - - - 14.89 2.50 - - 11.00 5.00
(h) Net Working
Capital
(13.35) (20.99)
(21.7
8)
(7.75
)
(14.9
3)
(9.46
)
(14.7
4)
(29.7
5)
(14.2
9)
(29.3
6)
13.02
(i) Misc.Expendit
ure
8.74 8.59 6.40
REVENUE ACCOUNTS
(Rs. Crores)

(a) Net Revenue 139.16 91.34 88.64
106.6
2
125.3
1
126.7
9
173.8
7
190.9
3
141.8
4
205.2
5
287.9
7
(b) Other Income 0.08 1.06 2.29 0.11 1.29 0.83 1.63 1.05 0.75 4.53 6.41
(c) Manufacturing
&other Expenses
139.21 81.50 67.67 60.46 67.02 70.49 87.13 93.50 82.89 95.40
119.8
9
(d)Interest&Depre
ciation
22.07 22.67 18.61 16.16 13.13 11.60 14.79 26.02 33.87 36.91 39.43
(e) Profit/(Loss) before
Taxes
(22.04) (11.77) 4.65 17.33 27.02 30.07 44.96 47.44 19.45 52.64 90.76
(f) Taxes - - - 12.78 19.43 15.46 28.62 25.02 6.38 24.83 44.31
(g) Profit/(Loss)after
Taxes
(22.04) (11.77) 4.65 17.33 27.02 30.07 44.96 47.44 19.45 52.64 90.76
(h) Dividend& tax
thereon
- - - 6.77 13.68 15.96 22.98 23.40 9.36 23.32 27.89
RATIOS
(a) Profit after tax
to sales(%)
(15.84) (12.89) 5.25 16.25 21.56 23.72 25.86 24.85 13.71 25.65 31.52
(b) Earnings per
share(Rs.)
- - 1.16 4.33 6.76 7.52 11.24 11.86 4.86 13.16 22.69
(c) Net Worth per
share(Rs.)
14.49 11.55 12.71 17.04 20.37 23.90 29.49 35.15 37.67 45.00 60.72
FINANCIAL STATISTICS OF HVAL

2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
2009-
10
2010-
11
CAPITAL
ACCOUNTS(Rs. Crores)

(a)Capital 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0
(b)Reserves& Surplus 44.99 44.99 44.99 45.90 73.24
101.5
5
133.7
9
168.9
3
186.2
3
223.8
4
286.6
7
(c)Borrowings 93.83 102.92 68.00 37.87 0.00 11.13 9.68 94.47 70.00 30.00 -
(d)Gross Fixed Assets 164.68 161.97
152.8
3
153.5
3
150.3
6
177.4
8
222.6
4
369.7
7
440.1
9
458.0
7
467.4
2
(e)Depreciation 10.38 20.77 31.05 42.90 54.02 66.42 78.47
101.3
7
131.3
8
170.6
1
216.0
0
(f)Net Fixed
Assets(without
CWIP)
154.31 141.20
121.7
8
110.6
2
96.34
111.0
6
144.1
7
268.4
0
308.8
2
287.4
6
251.4
2
(g)Investments - - - 33.01 39.92 66.40 32.39 26.09 6.09 52.76 91.89
(h)Net Working
Capital
6.05 16.67 8.75
(7.37
)
(1.48
)
(6.78
)
(1.37
)
(17.1
0)
9.42
(11.0
1)
11.12
REVENUE ACCOUNTS
(Rs. Crores)

(a) Revenue
367.81
*
149.42
*
98.93
116.5
3
141.8
6
139.4
5
190.7
1
199.5
7
154.6
2
235.9
3
303.6
9
(b)Other Income 0.06 0.17 0.16 3.90 2.10 4.44 5.96 3.68 5.62 3.61 9.33
(c) Manufacturing &other
Expenses
359.20 13.60 70.52 55.29 65.62 62.05 84.56 88.12 80.23
101.4
7
127.6
2
(d)Interest&Deprecia
tion
22.81 22.36 21.15 15.89 13.33 12.48 15.79 28.97 39.09 42.78 45.59
(e) Profit/(Loss) before
Taxes
(14.14
)
(10.27
)
4.75 47.96 64.96 69.29 96.32 86.15 40.93 95.29
139.8
0
(f) Taxes - - 4.89 18.26 22.22 23.02 38.43 22.74 13.09 31.44 45.59
(g) Profit/(Loss)after
Taxes
(15.21
)
(10.27
)
(0.14
)
29.69 42.74 46.27 57.90 63.41 27.84 63.85 94.21
(h) Dividend& tax
thereon
- - - 7.61 15.39 17.96 25.86 26.33 10.53 26.24 31.38
*2000-01 includes full material value and for 2001-02,the same is upto May01. From June01,the company switched over
to Job working Scenario
RATIOS
(a)Profit after tax to
sales(%)
(0.04) (6.86) 4.79 40.16 45.12 48.15 48.98 42.38 25.54 39.78 44.66
(b)Earnings per share(Rs.) - (2.55)
(3.77
)
6.60 9.50 10.28 12.87 14.09 6.19 14.19 20.93
(C)Net Worth per
share(Rs.)
19.99 19.99 19.99 20.20 26.28 32.56 39.73 47.54 51.38 59.74 73.70
(d)Fixed Assets turnover
(times)(Excl.IR)
2.38 1.05 0.81 1.09 1.49 1.28 1.36 1.15 0.72 1.12 1.16
(e)Current Ratio 1.05 1.46 1.66 0.72 0.95 0.91 0.98 0.74 1.26 0.83 1.16
(f)Return on Capital
employed(%)
(7.69) (5.45) 2.71 33.45 52.60 50.22 55.65 34.68 13.43 31.76 44.35
NET SALES
Gross sales for a period after cash discounts, returns, and freight expenses
have been deducted.
The sales figures are encouraging
YEAR NET SALES(Rs. In Lakhs)
HVAL HVTL
2005-06 14389.66 12,762.43
2006-07 19667.29 17,550.09
2007-08 20324.31 19,197.82
2008-09 16024.04 14259.23
2009-2010 23873.38 20983.71
2010-2011 31208.46 29437.15

14389.66
19667.29
20324.31
16024.04
23873.38
31208.46
12,762.43
17,550.09
19,197.82
14259.23
20983.71
29437.15
0
5000
10000
15000
20000
25000
30000
35000
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
R
s
.
i
n

L
a
k
h
s

Net sales (Rs.in Lakhs)
Axles Transmission
Interpretation :
The sales figures are encouraging as there is a positive trend and the rate of
increase is considerably high. However considering the fact that it has only one
customer in the form of Tata Motors Limited the figures infers an increase in
sales of TML. So in order to increase sales in a higher rate TML should
diversify its market. The net sales went up from Rs 14389.66 lakhs in year
2005-06 to Rs.20324.31 lakhs in year 2007-08 of HVAL but decreased to
16024.04 lakhs in the year 2008-09 due to after effects of recession but again
increased to Rs.31208.46 lakhs in 2010-11.Same is with HVTL also it sales
figure decreased in the year 2008-09 due to recession but again increased in
the year 2010-11.

DATA PROCESSING,
ANALYSIS
AND
INTERPRETATION

Working capital is said to be the life blood of a business.
Working capital signifies funds required for day-to-day operation
of the firm. In financial literature, there exist two concepts of
working capital namely: gross and net. Accordingly, gross
concept working capital refers to current assets viz: cash,
marketable securities, inventories of raw materials, work-in process,
finished goods and receivables. According to net
concept, working capital refers to the difference between current
assets and current liabilities. Ordinarily, working capital can be
classified into fixed or permanent and variable or fluctuating parts.
The minimum level of investment in current assets regularly
employed in business is called fixed or permanent working capital
and the extra working capital needed to support the changing
business activities is called variable or fluctuating working capital.

Flow of Working Capital

One of the distinguishing features of the fund employed as working
capital is that it constantly changes its form to drive the business wheel.
It is also known as circulating capital means current assets of a
company, which are changed in the ordinary course of business from form to
another, as for example, from cash to inventories, inventories to
receivables, receivables to cash.
In case of a manufacturing concern, the flow:
(A) In the case of a purely financial enterprise.

DE
Earning Increment

CASH DEBTORS

CASH

(B) In the case of a manufacturing enterprise, the cycle is even wider,
e.g.
Earnings Increment

Figure :- Working Capital Cycle.
Working capital may be explained as follows. In the first instance, the
original funds invested used to meet expenses and wages. Raw materials
are received on credit from the suppliers. Credit received on account of
supply of materials, payment of wages, etc. serves the purpose
additional fund till payment is made. The materials are then processed
into finished goods, we are sold to the customers on credit. Ultimately
credit sales are converted into cash. The cash will arises by means of
these sales transactions flows into the enterprise and is used for various
purposes, including the provision of funds to recommence the cycle.
Working Capital-Various Concepts
There are two possible interpretations of working capital
Balance sheet concept
Operating cycle concept
Balance sheet concept
There are two interpretations of working capital under the conventional
balance sheet concept
Gross concept
Net concept
According to the gross concept, working capital is used as a synonym
for gross or total current assets. Current assets are considered as working
capital as all of its helps to earn profits, and the management is more
concerned with the total current assets as they constitute the total funds
CASH
MATERIAL,
LABOUR&
EXPENSES
SALES DEBTORS FINISHED
GOODS
W.I.P
available for operational purposes. For determining the rate of return on
investments in current assets like fixed assets, the gross working capital
concept is more useful. It takes care of the fact that other things
remaining constant, an increase in fund will increase working capital
and vice versa. But where short-term debts are due to outsiders, it is
advisable to deduct these from the gross current asset values to reveal
the net effective working capital value.

Thus, according to the net concept; working capital is represented by the
excess of current assets over current liabilities, and is the amount normally
available to fianc current operations. It is argued that (a) in the long run,
what matters is the surplus of current assets over current liabilities, (b) it is
this concept which helps creditors and investors to judge the financial
soundness of an enterprise (c) what can always be relied upon to meet the
contingencies, is the excess of current assets over the current liabilities since
this amount is not to be returned; and (d) this definition helps to find out the
correct financial position of companies having the same amount of current
assets. The Institute of Chartered Accountants of India, while suggesting a
vertical form of balance sheet, also endorsed the former view of working
capital when it described 'net current assets' as the difference between current
assets and current liabilities.There is yet another view according to which the
net working capital may be referred I to as the 'qualitative' and the total
current assets
concept as the quantitative' aspect of the idea. Since both the categories,
'gross' and 'net' or 'quantitative', depend on Balance Sheet items for there
contents, these two concepts of working capital are generally known as
the Balance sheet concepts.

Composition of working capital
The constituent parts normally making up the figure of working capital, or, as
otherwise called, the 'net current assets, will most frequently be items such as
are given below:

Current assets :- This includes assets which can be converted, in the
ordinary course of business, into cash within one accounting year, such as:
Stocks (including raw materials and spares, work-in-progress and
finished goods)
Sundry debtors (net of provisions) Bills receivables
Advances/inter-company loan (short-term)
Temporary investments of surplus funds
Prepayments
Accrued incomes
Cash at bank
Cash in hand.
Current assets components have one characteristic in common, that is,
each component swiftly transformed into other asset forms. As for
example, cash is utilized to replenish inventories are diminished when
sales are effected that augment either accounts receivable (in of credit
sales) or cash (in case of cash sales}; collection of accounts receivable
increases the balance and so on. Current assets are, therefore, shortlived.
As stated earlier, their life span not normally exceed one year. But
in practice, some assets that violate this criterion may be classified as
current assets. For example, tobacco companies keep their raw materials
in storage more than a year, but nevertheless report these inventories as
current assets.

Current Liabilities:- This includes liabilities which are to be liquidated,
in the course of business, within one accounting year normally out of
current assets or funds for operations, such as:
Trade creditors
Bills payables
Outstanding or accrued expenses
Short-term loans
Taxation
Dividends
Bank overdraft (of temporary nature)
Outstanding liabilities currently payable (e.g. settlement of an
action, amount payable respect of compensation. etc.)

In order to get the true picture regarding the volume of working capital
required to sustain given activity level, adjustments should be made with
respect to items which are not considered normal in terms of the
ordinary course of operations of a firm. For example, in computing
working capital, the following figures should be deducted from the
respective figures of current assets:
i. Obsolete stock items, if any
ii. Debts not expected to be received within a reasonably current period
iii. Investments of long-term nature
iv. Cash earmarked for the purchase of fixed assets or for liquidation
of a long-term liability (e.g. redemption of debentures).

LIQUIDITY RATIOS
This is a tool generally used to express the extent to which a business
can meet its short-term obligations as at when due. When an enterprise
owes short-term debts (bills water electricity etc.) the liquidity is the
loop to show the capability.

Types of Liquidity Ratio
Liquidity position is assessed with the following:
1. Current ratio
2. Quick (Acid-test) ratio

Current Ratio
The current ratio is a popular financial ratio used to test a company's liquidity
(also referred to as its current or working capital position) by deriving the
proportion of current assets available to cover current liabilities.
The concept behind this ratio is to ascertain whether a company's short-term
assets (cash, cash equivalents, marketable securities, receivables and
inventory) are readily available to pay off its short-term liabilities (notes
payable, current portion of term debt, payables, accrued expenses and taxes).
In theory, the higher the current ratio, the better.
The current ratio is a measure of the firms short term solvency. It indicates
the availability of current assets in rupees for every one rupee of current
liability. A ratio of greater than one means that the firm has more current
assets than current claims against them.
If the current ratio is greater than one, the business is liquid.
If the current ratio is less than one, the business is illiquid.
Relatively high ratio value means that the business is liquid, but cash is
not working.

YEAR CURRENT ASSETS
(Rs. In lakhs)
CURRENT LIABILITIES
(Rs. In lakhs)
CURRENT RATIO
Axles Transmission Axles Transmission Axles Transmission
2005-06 6705.67 2427.47 7383.98 3373.54 0.91 .72
2006-07 10767.89 3150.06 10905.18 4624.05 0.99 .68
2007-08 4962.15 3272.34 6672.33 6247.15 0.74 .52
2008-09 4583.62 3620.46 3641.77 5049.50 1.26 .72
2009-10 5329.21 3604.72 6429.75 6540.85 1.48 .55
2010-11 8131.28 8049.03 7019.26 6747.42 1.01 1.19

0.91
0.99
0.74
1.26
1.48
1.01
0.72
0.68
0.52
0.72
0.53
1.19
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
N
o
.

o
f

t
i
m
e
s

Current Ratio
Axles Transmission
Interpretation :
TML has a current ratio ranging between 0.52 to 1.48. These indicates that
the Current Assets of the firm are less than current Liabilites. This is because
the firm has always maintained a negative net working capital. Its current
liabilities have always been greater than current assets. Current liabilities is
greater than current assets which shows that the company is able to recover
its debtors faster and has a good bargaining facility with its suppliers.
Quick Ratio
This ratio expresses the relative amount of cash and other assets that can
be easily converted to cash that are available to meet current liabilities.
This is a more conservative measure of liquidity as only liquid assets are
considered. It excludes stocks (inventory) from current assts. The ratio
emphasizes more on assets easily converted into cash (or to a reasonable
period without loss of value.
Therefore, stocks are deducted from current assets used in the current
ratio above. (In practice, an analysis of debtors is performed to enable
debtors balances which are doubtful of recovery will be deducted from
the current assets for examination purposes this is avoided).

Quick (Acid Test) ratio = Current Assets Stock (inventory)
Current Liabilities

As a general rule quick ratio is 1:1 is accepted as ideal.
YEAR CURRENT ASSETS
(Rs. In lakhs)
CURRENT LIABILITIES
(Rs. In lakhs)
QUICK RATIO
2005-06 5846.3 1173.57 7383.98 3373.54 0.79 0.15
2006-07 9295.82 1422.04 10905.18 4624.05 0.85 0.31
2007-08 3642.04 1691.41 6672.33 6247.15 2.15 0.27
2008-09 3345.51 1942.06 3641.77 5049.50 1.72 1.72
2009-10 4381.13 2271.99 6429.75 6540.85 1.93 1.93
2010-11 7327.6 6303.9 7019.26 6747.42 1.16 0.93

0.79
0.85
2.15
1.72
1.93
1.16
0.15
0.31
0.27
1.72
1.93
0.93
0
0.5
1
1.5
2
2.5
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
N
o
.

o
f

T
i
m
e
s

Quick Ratio
Axles Transmission
Interpretation :
A high ratio is an indication that the firm is liquid and has the ability to meet
its current liabilities in time and on the other hand, a low quick ratio
represents that the firms liquidity position is not good.
As a rule of thumb a ratio of 1:1 is considered as satisfactory. It is generally
considered that if the quick assets are equal to the current liabilities then the
concern is able to meet its short term obligations. However, a firm having a
high quick ratio may not have a satisfactory liquidity position if it has slow
paying debtors and if the firm has a low liquidity position if it has fast
moving inventories.

LEVERAGE RATIOS
This ratios measure the relationship between the funds provided by the
owners (shareholders) of an enterprise and funds provided by creditors
(non-shareholders) of the business enterprise. The funds provided by
the owners (Equity shareholders) are known internally generated and
when funds are contributed by non-shareholders, this source is known as
externally generated funds. Every business uses both sources for
funding but the ratio the leverage which measures the ability of the
business enterprise service (operate) the charges accruing from the use
of outsiders funds (creditors). Borrowing capacity (leverage) ratios
measure the degree of protection of suppliers of longterm funds.
Short-term creditors, like bankers and suppliers of material are
concerned with the enterprises current debt-paying ability. The longterm
creditors, like debenture holders and financial intermediaries
considered the enterprises long-term financial strength.
Every business have to assess the financial leverage or capital structure
ratios to ascertain the funds mix provided by the equity owners and
creditors (lenders).
Types of Leverage Ratios
Debt Ratio
Debt Equity Ratio
Interest Coverage Ratio

Debt Ratio
The debt ratio compares a company's total debt to its total assets, which is used
to gain a general idea as to the amount of leverage being used by a company. A
low percentage means that the company is less dependent on leverage, i.e.,
money borrowed from and/or owed to others. The lower the percentage, the less
leverage a company is using and the stronger its equity position. In general, the
higher the ratio, the more risk that company is considered to have taken on.
A debt ratio of greater than 1 indicates that a company has more debt than
assets, meanwhile, a debt ratio of less than 1 indicates that a company has more
assets than debt. Used in conjunction with other measures of financial health,
the debt ratio can help investors determine a company's level of risk.

YEAR TOTAL DEBTS (Rs. In
lakhs)
CAPITAL EMPLOYED
(Rs. In lakhs)
DEBT RATIO
2005-06 1113.34 44.61 17510.37 11920.70 0.06 0.00
2006-07 967.71 513.16 21203.27 15002.65 0.04 0.03
2007-08 9446.68 8527.19 33306.58 26015.07 1.11 0.33
2008-09 7000 9186.08 33462.84 27873.74 0.76 0.33
2009-10 3000 5167.29 33156.59 26929.10 0.09 0.19
2010-11 ____ ____ 35939.32 27650.31 ____ ____

0.06
0.04
1.11
0.76
0.09
0 0
0.03
0.33 0.33
0.19
0
0
0.2
0.4
0.6
0.8
1
1.2
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Debt Ratio
Axles Transmission
Interpretation :
This ratio compares the total debt (long term as well as short term) with total
assets. Up to the financial year 2007-08 total debts were a small proportion of
total assets. However in the year 2008-09, total debts have become almost
equal to total assets the reason being the term loan raised in the year 2008-
09.In year 2010-11 there are no Debts.
Debt Equity Ratio
The debt-equity ratio is another leverage ratio that compares a company's
total liabilities to its total shareholders' equity. This is a measurement of how
much suppliers, lenders, creditors and obligors have committed to the
company versus what the shareholders have committed.
To a large degree, the debt equity ratio provides another vantage point on a
company's leverage position, in this case, comparing total liabilities to
shareholders' equity, as opposed to total assets in the debt ratio. Similar to the
debt ratio, a lower the percentage means that a company is using less leverage
and has a stronger equity position.

YEAR TOTAL DEBTS
(Rs. In lakhs)
TOTAL EQUITY (Rs. In
lakhs)
DEBT EQUITY
RATIO
2005-06 1113.34 44.61 14655.41 9560.28 0.08 4.67
2006-07 967.71 513.16 17878.64 11794.82 0.05 0.04
2007-08 9446.68 8527.19 21392.92 14060.29 0.44 0.61
2008-09 7000 9186.08 23122.89 15069.22 0.30 0.61
2009-10 3000 5167.29 26884.03 18001.20 0.11 0.29
2010-11 _____ _____ 33166.7 24287.49 0.00 0.00

0.08 0.05
0.44
0.3
0.11
0
4.67
0.04
0.61 0.61
0.29
0
1
2
3
4
5
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Debt Equity Ratio
Axles Transmission
Interpretation :
The ratio indicates to what extent long term debts have been employed in
relation to shareholders funds. The extent of employment of long term debts
in relation to shareholders funds has increased to 0.61 in 2007-08. The
sudden hike in the ratio is because the company took a term loan in the
financial year 2007-08.As there was no loan in 2010-11Debt Equity Ratio is
0.
This ratio measures the debt servicing capacity of a firm as fixed interest on
long term loan is concerned. It is determined by dividing the operating profits
or earnings before interest and taxes (EBIT) by the fixed interest charges on
loans. Thus, interest 45 coverage = EBIT / Interest From the point of view of
the creditors, the larger the coverage, the greater is the ability of the firm to
handle fixed charge capabilities and the more assured is the payment of
interest to the creditors. However, too high a ratio may imply unused debt
capacity.

The lower the ratio, the more the company is burdened by debt expense.
When a company's interest coverage ratio is 1.5 or lower, its ability to meet
interest expenses may be questionable. An interest coverage ratio below 1
indicates the company is not generating sufficient revenues to satisfy interest
expenses.
Present and prospective loan creditors such as bondholders, are vitally
interested to know how adequate the interest payments on their loans are
covered by the earnings available for such payments.
Owners, managers and directors are also interested in the ability of the
business to service the fixed interest charges on outstanding debt.

YEAR PBIT (Rs. In lakhs) INTEREST (Rs. In
lakhs)
INTEREST COVERAGE
Axles Transmission Axles Transmission Axles Transmissi
on
2005-06 6944.95 4560.02 8.55 6.84 812.27 666.67
2006-07 9681.56 7359.86 49.25 2.26 196.58 3256.57
2007-08 8926.11 7632.56 310.93 386.56 28.70 19.74
2008-09 4930.83 3472.78 838.21 889.68 5.88 3.90
2009-10 13806.75 8403.39 339.15 655.92 40.71 12.81
2010-11 18539.16 13559.11 _______ 50.50 0.00 268.50

812.27
196.58
28.7
5.88
40.71
0
666.67
3256.57
19.74 3.9
12.81
0
500
1000
1500
2000
2500
3000
3500
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Axles Transmission
Interpretation :
This ratio measures the ability of a firm to service debts. HVTL has a
favorable interest coverage ratio which means that in the year 2006-07.
HVTL had operating profits which were 19 times that of its interest liability.
The interest coverage ratio of HVTL & HVAL has decreased considerably in
2007-08 because fresh debts were raised by the firm in the year 2007-08 the
service of the term loan required huge funds still decreasing in 2010-11 in
HVAL but HVTL ratio has again increased during 2010-11

ACTIVITY RATIOS
The activity ratios are used for the evaluation of enterprise efficiency. It
aids the entrepreneur or the manager to manage and utilize the assets.
Owners equity and creditors fund are invested in various assets to
generate profits and sales. With proper analysis of activity ratios of an
enterprise assets will be better managed. Activity ratios are also known
as turnover ratios because they show the speed with which assets are
converted to sales. Hence, the ratio demonstrate the relationship
between sales and assets. When they are well managed, it reflects a
proper balance between sales and assets utilization.
Types of Activity Ratio
Inventory Turnover Ratio
Fixed Assets Turnover Ratio
Total Assets Turnover Ratio

Inventory Turnover Ratio indicates how fast inventory is sold. A high ratio is
good from the viewpoint of liquidity and vice versa. A low ratio would
signify that inventory does not sell fast and stays on the shelf or in the
warehouse for a long time.

YEAR COST OF GOODS SOLD
(Rs. In lakhs)
AVERAGE INVENTORY
(Rs. In lakhs)
INVENTORY
TURNOVER RATIO
2005-06 14389.66 12762.43 859.37 1253.9 16.74 10.18
2006-07 19667.29 17550.09 1472.07 1728.02 13.36 10.16
2007-08 20324.31 19197.82 1320.11 1508.93 15.40 12.72
2008-09 16024.04 14259.23 1238.11 1678.4 12.94 8.50
2009-10 23953.86 20983.71 948.08 1332.73 25.27 15.74
2010-11 31301.49 29437.15 893.68 1745.13 35.03 16.87

16.74
13.36
15.4
12.94
25.27
35.03
10.18 10.16
12.72
8.5
15.74
16.87
0
5
10
15
20
25
30
35
40
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Axles Transmission
Interpretation :
The inventory turnover ratio ranges from 13.36 to 35.03 for HVAL and from
8.5 to 16.87 for HVTL . It was highest in the year 2010-11 for HVAL
&HVTL due to inventory control measures taken by the management.
Days Of Inventory Holding :

The number of days inventory is also known as average inventory period and
inventory holding period.
A high number of days inventory indicates that their is a lack of demand for
the product being sold.
A low days inventory ratio (inventory holding period) may indicate that the
company is not keeping enough stock on hand to meet demands.

Years
Days of Inventory Holding
Axles Transmission
2005-2006 21.80 35.85
2006-2007 27.32 35.93
2007-2008 23.70 28.96
2008-2009 28.21 42.94
2009-2010 14.44 23.19
2010-2011 10.42 21.64

Interpretation :
The number of days of inventory holding has been fluctuating since inception
it gradually came down to its lowest in year 2010-11. However, it is seen that
it ranges from 10.42 days of inventory holding to 42.94 days.
Fixed Assets Turnover Ratio
This ratio is a rough measure of the productivity of a company's fixed assets
(property, plant and equipment or PP&E) with respect to generating sales.
For most companies, their investment in fixed assets represents the single
largest component of their total assets. This annual turnover ratio is designed
to reflect a company's efficiency in managing these significant assets. Simply
the higher the yearly turnover rate, the better.
It represents a multiplicity of management decisions on capital expenditures.

21.8
27.32
23.7
28.21
14.44
10.42
35.85 35.93
28.96
42.94
23.19
21.64
0
5
10
15
20
25
30
35
40
45
50
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Days of Inventory Holding
Axles Transmission

YEAR NET FIXED ASSETS
(Rs. In lakhs)
SALES (Rs. In lakhs) FIXED ASSETS
TURNOVER RATIO
2005-06 11548.58 11377.41 14389.66 12762.43 0.80 0.89
2006-07 18101.26 16226.64 19667.29 17550.09 0.92 0.92
2007-08 32408.07 289302.78 20324.31 19197.82 1.59 1.51
2008-09 31911.81 29302.78 16024.04 14259.23 1.99 2.06
2009-10 28981.04 28765.23 23953.86 20983.71 1.21 1.37
2010-11 25638.28 25848.70 31301.49 29437.15 0.82 0.88

0.8
0.92
1.59
1.99
1.21
0.82
0.89
0.92
1.51
2.06
1.37
0.88
0
0.5
1
1.5
2
2.5
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Fixed Assets Turnover ratio
Axles Transmission
Interpretation :
The fixed asset turnover ratio went up gradually from 0.8 in the year 2005-06
to 1.99 in the year 2008-09 for HVAL and 0.89 in the year 2005-06 to 2.06 in
the year 2008-09 for HVTL but due to capitalization in the year 2010-11 it
fell to 0.82 for HVAL and 0.88 for HVTL.

This ratio is also known as the investment turnover ratio. It is based on the
relationship between the cost of goods sold and assets/ investments of a firm
as reflected in its earning power. Depending upon the different concepts of
assets employed, there are many variants of this ratio.

YEAR NET SALES
(Rs. In lakhs)
TOTAL ASSETS (Rs. In
lakhs)
TOTAL ASSETS TURNOVER
RATIO
2005-06 14389.66 12762.43 14261.17 13804.88 1.00 0.92
2006-07 19667.29 17550.09 21701.16 19376.7 0.91 0.91
2007-08 20324.31 19197.82 37370.22 32262.22 0.54 0.60
2008-09 16024.04 14259.23 36495.43 32923.24 1.12 0.43
2009-10 23953.86 20983.71 34310.25 32077.10 0.70 0.65
2010-11 31301.49 29437.15 33769.56 32369.95 0.93 0.10

Interpretation :
As it is a manufacturing industry it has a higher composition of fixed assets
.The trend shows that this ratio has been decreasing from 1.00 to 0.7 but it has
again increased to 0.93.Sales has been decreased in the year 2008-09 due to
Recession.
1
0.91
0.54
1.12
0.7
0.93 0.92 0.91
0.6
0.43
0.65 0.66
0
0.2
0.4
0.6
0.8
1
1.2
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Axles Transmission
PROFITABILITY RATIOS
These ratios are used to measure the operating efficiency of an
enterprise profitability indices are expressed in the income statement.
The primary financial analysis of profit ratios should include only the
types of income arising from the normal operations of the business.
An enterprise is expected to earn profit to survive and grow over a long
time. Profit making is essential, but management should not place
customers concern, employees welfare consequences of suppliers and
other social needs in the lower rung of the ladder in its quest for profit
maximization.
Profit is the difference between revenues and expresses over the
period could be one year computation. This is the expectation of the
enterprise and will help in evaluating the performance (efficiency) of the
business.
As an objective, the entrepreneur owners (managers) will through this
process, want to get the rate of return of their invest. On the other hand,
creditors will evaluate the ability for them to continue business if the
profitability ratio is assuring for interest and principal regular
repayment.

Types of Profitability Ratios
EBIDTA
Net Profit Margin
Return on Equity
Return on Investment
Earnings per share

EBIDTA
A company's cost of sales, or cost of goods sold, represents the expense
related to labour, raw materials and manufacturing overhead involved in its
production process. This expense is deducted from the company's net
sales/revenue, which results in a company's first level of profit, or gross
profit. The gross profit margin is used to analyze how efficiently a company
is using its raw materials, labour and manufacturing-related fixed assets to
generate profits. A higher margin percentage is a favorable profit indicator.

YEAR PBIT (Rs. In
lakhs)
NET SALES (Rs. In lakhs) EBIDTA
2005-06 6944.95 4560.02 14389.66 12762.43 48.26 35.73
2006-07 9681.56 7359.86 19667.29 17550.09 49.23 41.94
2007-08 8926.11 7632.56 20324.31 19197.82 43.92 39.76
2008-09 4930.83 3472.78 16024.04 14259.23 30.77 24.35
2009-10 13806.75 8403.39 23953.86 20983.71 57.64 40.04
2010-11 18539.16 13557.11 31301.49 29437.15 59.23 46.05

Interpretation :
The gross profit margin is consistently high. We can see that in year 2006-07
it went up to 49.23% for HVAL and 41.94% for HVTL then reduced to
30.77% for HVAL and 24.35% in 2008-09 and it again went up in the year
2010-11.

Net Profit Margin
Often referred to simply as a company's profit margin, the so-called bottom
line is the most often mentioned when discussing a company's profitability.
While undeniably an important number, investors can easily see from a
complete profit margin analysis that there are several income and expense
operating elements in an income statement that determine a net profit margin.
It behooves investors to take a comprehensive look at a company's profit
margins on a systematic basis.

48.26
49.23
43.92
30.77
57.64
59.23
35.73
41.94
39.76
24.35
40.04
46.05
0
10
20
30
40
50
60
70
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
EBIDTA
Axles Transmission

32.15
29.44
31.2
17.37
26.65
30.1
23.56
25.62
24.71
13.64
25.08
30.83
0
5
10
15
20
25
30
35
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Net Profit Margin
Axles Transmission
YEAR PAT(Rs. In lakhs) NET SALES (Rs. In lakhs) NET PROFIT MARGIN
(%)
2005-06 4626.85 3007.29 14389.66 12762.43 32.15 23.56
2006-07 5789.62 4495.87 19667.29 17550.09 29.44 25.62
2007-08 6340.76 4744.32 20324.31 19197.82 31.20 24.71
2008-09 2783.76 1944.89 16024.04 14259.23 17.37 13.64
2009-10 6384.84 5264.16 23953.86 20983.71 26.65 25.08
2010-11 9420.66 9075.63 31301.49 29437.15 30.10 30.83

Interpretation :
The net profit margin was high in the year 2005-06 but is decreased in the
year 2008-09. The trend however shows a consistent net margin since 2005-
06.
Return on Equity
This ratio indicates how profitable a company is by comparing its net income
to its average shareholders' equity. The return on equity ratio (ROE)
measures how much the shareholders earned for their investment in the
company. The higher the ratio percentage, the more efficient management is
in utilizing its equity base and the better return is to investors.
Widely used by investors, the ROE ratio is an important measure of a
company's earnings performance. The ROE tells common shareholders how
effectively their money is being employed. Peer company, industry and
overall market comparisons are appropriate; however, it should be recognized
that there are variations in ROEs among some types of businesses.

YEAR PAT (Rs. In lakhs) EQUITY (Rs. In lakhs) RETURN
ON EQUITY
2005-06 4626.85 3007.29 14655.41 9560.28 31.57 31.46
2006-07 5789.62 4495.87 17878.64 11794.82 32.38 38.12
2007-08 6340.76 4744.32 21392.92 14060.29 29.64 33.74
2008-09 2783.76 1944.89 23122.89 15069.22 12.04 12.91
2009-10 6384.84 5264.16 26884.03 18001.20 23.75 29.24
2010-11 9420.66 9075.63 33166.7 24287.49 28.40 37.37

31.57
32.38
29.64
12.04
23.75
28.4
31.46
38.12
33.74
12.91
29.24
37.37
0
5
10
15
20
25
30
35
40
45
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Return on Equity
Axles Transmission
Interpretation:
HV Transmission Limited has done well in terms of return on equity which
shows that in year 2005-06 it was 31.57%& 31.46% but in year 2008-09 in
turn decreasing to 12.04% & 12.91% but it has again risen to 28.4%for
HVAL and 37.37% for HVTL.
Return on Investment
In finance, rate of return (ROR), also known as return on investment (ROI),
rate of profit or sometimes just return, is the ratio of money gained or lost
(whether realized or unrealized) on an investment relative to the amount of
money invested. The amount of money gained or lost may be referred to as
interest, profit/loss, gain/loss, or net income/loss. The money invested may be
referred to as the asset, capital, principal, or the cost basis of the investment.
ROI is usually expressed as a percentage rather than a fraction.
Return on investment is a very popular metric because of its versatility and
simplicity. That is, if an investment does not have a positive ROI, or if there
are other opportunities with a higher ROI, then the investment should be not
be undertaken.

YEAR PBIT (Rs. In
lakhs)
NET ASSETS (Rs. In lakhs) RETURN ON
INVESTMENT
2005-06 6944.95 4560.02 17510.37 11920.7 39.66 38.25
2006-07 9681.56 7359.86 21203.27 15002.65 45.66 49.06
2007-08 8926.11 7632.56 33306.58 26015.07 26.80 29.34
2008-09 4930.83 3472.78 33462.84 27873.74 14.74 12.45
2009-10 13806.75 8403.39 33156.59 26929.10 41.64 31.20
2010-11 18539.16 13557.11 35939.32 27650.31 51.58 49.03

39.66
45.66
26.8
14.74
41.64
51.58
38.25
49.06
29.34
12.45
31.2
49.03
0
10
20
30
40
50
60
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Return On Investment
Axles Transmission

Interpretation:
The return on investment had been quite encouraging where as it has been
inconsistent . It is fluctuating every year. A more sustainable and consistent
figures are something which the management should look forward to achieve.
It ranges from 39.66% for HVAL & 38.25% for HVTL in year 2005-06 to
51.58% for HVAL & 49.03% for HVTL in year 2010-11.
Earnings per Share
The portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serves as an indicator of a company's
profitability. When calculating, it is more accurate to use a weighted average
number of shares outstanding over the reporting term, because the number of
shares outstanding can change over time. However, data sources sometimes
simplify the calculation by using the number of shares outstanding at the end
of the period.
Earnings per share is generally considered to be the single most important
variable in determining a share's price. It is also a major component used to
calculate the price-to-earnings valuation ratio.
Calculated as:

YEAR EPS
Axles Transmission
2005-06 10.28 7.52
2006-07 12.87 11.24
2007-08 14.09 11.86
2008-09 6.19 4.86
2009-10 14.19 13.16
2010-11 20.93 22.69

Interpretation :
The earnings per share has gone up considerably which is a very good news
for the share holders . From 10.28 & 7.52 in year 2005-06 it has climbed to
20.93& 22.69 in year 2010-11 with a decrease to 6.19 for HVAL &4.86 for
HVTL in the year 2008 09.
10.28
12.87
14.09
6.19
14.19
20.93
7.52
11.24
11.86
4.86
13.16
22.69
0
5
10
15
20
25
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Earnings per Share
Axles Transmission
WORKING CAPITAL
Working capital, also known as net working capital, is a financial metric which
represents operating liquidity available to a business. Along with fixed assets
such as plant and equipment, working capital is considered a part of operating
capital. It is calculated as current assets minus current liabilities. If current
assets are less than current liabilities, an entity has a working capital deficiency,
also called a working capital deficit.
A company can be endowed with assets and profitability but short of liquidity if
its assets cannot readily be converted into cash. Positive working capital is
required to ensure that a firm is able to continue its operations and that it has
sufficient funds to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable and cash.
An increase in working capital indicates that the business has either increased
current assets (that is received cash, or other current assets) or has decreased
current liabilities, for example has paid off some short-term creditors.
Gross Working Capital : Total current assets.
Net Working Capital : Current assets -Current liabilities.
Net operating working capital (NOWC) : Operating CA Operating CL =
(Cash + Inv. + A/R) (Accruals + A/P)
Factors To Consider
Accounts receivable management
Inventory management
Diversification of operations
Type of business
Grain merchandising practices
Prepayment activity
Leverage
Expansion plans

PRINCIPLES OF WORKING CAPITAL

There are four principle of working capital management. They are being
depicted as below :
(i) Principle of Risk Variation: - The goal of WC management is to establish a
suitable trade between profitability and risk. Risk here refers to a firm's ability
to honor its obligation as and when they become due for payments. Larger
investment in current assets will lead to dependence. Short term borrowings
increases liquidity, reduces risk and thereby decreases the opportunity for gain
or loss On the other hand the reserve situation will increase risk and profitability
And reduce liquidity thus there is direct relationship between risk and
profitability and inverse relationship between liquidity and risk.
(ii) Principle of Cost Capital: - The various sources of raising WC finance
have different cost of capital and the degree of risk involved. Generally higher
the cost lower the risk, Lower the risk higher the cost. A sound WC
management should always try to achieve the balance between these two.
(iii) Principle of Equity Position: - This principle is considered with planning
the total investment in current assets. As per this principle the amount of WC
investment in each component should be adequately justified by a firms equity
position Every rupee contributed current assets should contribute to the net
worth of the firm The level of current assets may be measured with the help of
two ratios. They are:
Current assets as a percentage of total assets.
Current assets as a percentage of total sales.
(iv) Principle of Maturity Payment: - This principle is concerned with
planning the source of finance for WC. As per this principle a firm should make
every effort to relate maturities of its flow of internally generated funds in other
words it should plan its cash inflow in such a way that it could easily cover its
cash out flows or else it will fail to meet its obligation in time.
NEED FOR WORKING CAPITAL
Working capital is used to pay short-term obligations such as your accounts
payable and buying inventory. If working capital dips too low, risk running
out of cash. Even very profitable businesses can run into trouble if they lose
the ability to meet their short-term obligations.

Estimating Working Capital Needs

Working Capital needs can be estimated by three different methods, which
have been successfully applied in practice.
They are follows:
Operating cycle method: Operating cycle is a period that a
business enterprise takes in converting cash back into cash. It has the
fallowing four stages.
( a ) The raw material and stores inventory stage.
(b)The semi finished goods or work in progress stage
(c)The finished goods inventory stage
(d) The accounts receivable and book debt stage.

Each of the above stage is expressed in terms of days of relevant activity.
Each requires a level of investment to support it. The sum of these stage wise
investments will be total amount of working capital of the firm.

The operating cycle of working capital is shown below:

Percent of sales method:
It assumes that certain balance sheet items vary directly with sales. Thus the
ratio of the given balance sheet item to sales remains constant.
The firms need in terms of percentage of annual sales envisaged in each
individual balance sheet items are expressed in the following three ways: As
number of days of sale As turnover As percent of sales
Regression analysis method:
This is a very useful stastical technique of
workingcapital forecasting which helps in making projection after establishin
g therelationship in the past years between sales and working capital and its
various components. This analysis may be carried out through the graphic
portrayals or through mathematical formulae. The relationship between the
sales and working capital of various components may be simple and direct
indicating linearly between the two. It may be complex involving simpler
linear regression or simple curvilinear regression and multiple regression
situations. This method is particularly suitable for long term forecasting.
Criteria for Evaluation Of Working Capital Management
Working capital can be considered in 2 ways.
One, When working capital is viewed as the difference between current
assets and current liabilities, the basic objective of working capital
appears to be one of providing adequate cover to meet the current
obligations of a company as and when they become due. This approach
lays greater emphasis on the liquidity aspect of working capital.
Second, When working capital is looked upon as the amount held in
different forms of current assets to provide adequate support to the
smooth functioning of the normal business operations of a company the
objective becomes one of deciding the tradeoff between liquidity and
profitability.

Dangers of too little working capital
1) Acts as a contributing factor to business failures
2) Frustrates the enterprise objectives through lack of funds
3) Reduces the rate of return on total investment.
4) Influences the credit rating adversely.
5) Prevents discounts from being taken.
6) Prevents attractive opportunities from materializing.
7) Influences dividend policy adversely.
8) Influence management morale adversely.

Dangers of too much working capital
1) Management efficiency may deteriorate through complacence.
2) Speculation may be encouraged.
3) Unjustifiable expansion may be stimulated.
4) Dividend policy may be too liberal.
5) Total investment may be working in efficiently.

WORKING CAPITAL MANAGEMENT

Working capital management is the part of financial management. In working
capital management, management of cash, management of inventory,
management of debtor and creditor will include. Working
capital management is the device of finance. It is related to manage of current
assets and current liabilities.
A managerial accounting strategy focusing on maintaining efficient levels
of both components of working capital, current assets and current
liabilities, in respect to each other. Working capital management ensures a
company has sufficient cash flow in order to meet its short-term debt
obligations and operating expenses.
Implementing an effective working capital management system is an
excellent way for many companies to improve their earnings. The two
main aspects of working capital management are ratio analysis and
management of individual components of working capital.

A few key performance ratios of a working capital management system are
the working capital ratio, inventory turnover and the collection ratio. Ratio
analysis will lead management to identify areas of focus such as inventory
management, cash management, accounts receivable and payable
management.
Management Of Working Capital
Guided by the above criteria, management will use a combination of
policies and techniques for the management of working capital. These
policies aim at managing the current assets (generally cash and cash
equivalents, inventories and debtors) and the short term financing, such
that cash flows and returns are acceptable.

Cash Management : Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.
I nventory Management : Identify the level of inventory which
allows for uninterrupted production but reduces the investment in raw
materials -and minimizes reordering costs -and hence increases cash
flow; see Supply chain management; Just In Time (JIT); Economic
order quantity (EOQ); Economic production quantity.
Debtors Management : Identify the appropriate credit policy, i.e.
credit terms which will attract customers, such that any impact on
cash flows and the cash conversion cycle will be offset by increased
revenue and hence Return on Capital (or vice versa); see Discounts
and allowances.
Short Term Financing: Identify the appropriate source of financing,
given the cash conversion cycle: the inventory is ideally financed by
credit granted by the supplier; however, it may be necessary to utilize
a bank loan (or overdraft), or to "convert debtors to cash" through
"factoring".

GROSS WORKING CAPITAL
Gross Working Capital refers to the amount invested in the various
components of Current Assets. This concept has the following advantages:
a) Finance managers are mainly concerned with management of current
assets (gross working capital)
b) It enables the firm to release the greatest returns on its investment.
c) It enables the firm to plan and control the funds at its disposal.
d) It helps in the fixation of various areas of financial responsibility

The concept of Gross Working Capital focuses attention on two aspects of
Current Assets' management. They are:
a) Way of optimizing investment in Current Assets.
b) Way of financing current assets.

Gross Working Capital = Total Current Assets of the company during the
financial year.

YEAR CURRENT ASSETS(Rs. In lakhs)
Axles Transmission
2005-06 6705.67 2427.47
2006-07 10767.89 3150.06
2007-08 4962.15 3272.34
2008-09 4583.62 3620.46
2009-10 5329.21 3604.72
2010-11 8131.28 8049.03

Interpretation :
The gross working capital of the firm decreased initially but since 2009 it
has been increasing considerably for HVAL .

NET WORKING CAPITAL
Net Working Capital is the excess of Current Assets over Current
Liabilities and Provisions.Net Working Capital is Positive when current
assets exceed current liabilities and negative when current liabilities exceed
current assets.

6705.67
10767.89
4962.15
4583.62
5329.21
8131.28
2427.47
3150.06
3272.34
3620.46 3604.72
8049.03
0
2000
4000
6000
8000
10000
12000
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Gross Working Capital
Axles Transmission
Concept of Net Working Capital

This is a qualitative concept. It indicates the liquidity position of and
suggests the extent to which working Capital needs may be financed by
permanent sources of funds. Current Assets should be optimally more than
Courtney Liabilities. It also covers the point of right combination of long
term and short-term funds for financing court Assents. For every firm a
particular amount of net Working Capital in permanent. Therefore it can be
financed with long-term funds.
The net working capital metric is directly related to the current ratio. If you
look at the calculation of the current ratio, you see that you use the same
balance sheet data to calculate net working capital.
Net Working Capital = Total Current Assets Total Current Liabilities

YEAR CURRENT ASSETS(Rs in
lakhs)
CURRENT
LIABILITIES(Rs.In lakhs)
NET WORKING CAPITAL
2005-06 6705.67 2427.47 7383.98 3373.54 -678.31 -946.07
2006-07 10767.89 3150.06 10905.18 4624.05 -137.29 -1473.99
2007-08 4962.15 3272.34 6672.33 6247.15 -1710.18 -2974.81
2008-09 4583.62 3620.46 3641.77 5049.50 941.85 -1429.04
2009-10 5329.21 3604.72 6429.75 6540.85 -1100.54 -2936.13
2010-11 8131.28 8049.03 7019.26 6747.42 1112.02 1301.61

Interpretation :
The net working capital of the firm has been negative throughout since its
inception. There has been various changes in the net working capital of the
firm. However, the current liabilities have always been greater than the
current assets.
-678.31
-137.29
-1710.18
941.85
-1100.54
1112.02
-946.07
-1473.99
-2974.81
-1429.04
-2936.13
1301.61
-3500
-3000
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Net Working Capital
Axles Transmission

FINDINGS,
CONCLUSION
AND
SUGGESTIONS

Findings:
The company TML is a subsidiary of Tata Motors and has an arrangement
with its holding company due to which TML does not have to pay the cost of
the raw materials that they purchase for the manufacturing of the axles. All
the material cost, material overhead and the sub contracting cost for the axles
are borne by the Tata Motors.
The company TML charges only for the processing charges of the axles and
bears the excise duty. Hence the inventory which includes the term of
unbilled cost is just the processing cost of the finished axles which have not
been billed and hence are lying in the stores. This unbilled cost is the cost tied
up in the finished axles and hence they are taken as the stock of finished
goods for the company. Whereas, the dispatches along with the unbilled
items excluding the closing unbilled stock for the previous year is taken as
the total production for the year and is termed as work in progress. All the
above calculations are based on processing or the conversion cost whichever
is lower as the company sometimes sub contracts the axles to outsiders. The
cost is evaluated each cost centre wise through which each model of axle has
been passed and the time they take to be assembled.
Inventory consists of only indirect materials as direct material Is not with TML
Drivelines Limited.
The debtor does not appear in the annuals of the company HVAL but they
exist in a very small value which is evaluated and is included in the
calculations shown. Hence the ratios and the values calculated differ from the
values in the annuals.
The company although has a negative working capital but its liquidity
position is quite sound due to the short term investments made during the
year. The companys liquidity position cannot be judged by just looking at
the current assets and the current liabilities.
The trend analysis is done to find the level of the constituents of the current
assets and liabilities of the firm and it is interpreted to support the findings of
ideal working capital situation of the firm.
Hence it is found that the working capital cycle is small for such a firm
whose business is of processing or conversion and the requirement of
working capital is also not large until the company starts its external business
for the other vendors and not just processing for its holding company.
Conclusion:
From the above analysis the conclusion that is drawn is that the company
should be quite attentive towards its working capital requirement hence it
should try and manage the following constituents fore mostly.
Management of debtors:
Cash flow can be significantly enhanced if the amounts owing to the business
are collected faster. Every business needs to know who owes them money,
how much is owed, how long it owes, and for what it is owed. Slow payment
has the crippling effect on business in particular on small businesses who can
least afford it. If the debtors are not managed properly then the late payments
shall erode profit and shall lead to bad debts.
Hence the debtors that are due over 90 days (unless within the agreed credit
terms) generally demand immediate attention but as in the case of TML there
is only a single debtor and the collection system through hundi payment is a
relief for the company and its efficient debtor management i.e. collection
within 6 days is outstanding.

Management of the inventories:
Managing inventory is a juggling act. Excessive stocks places a heavy burden
on the cash resources of the business and insufficient stocks lead to lost sales,
and delay for customers. The key is to know how quickly the overall stock is
moving out of the inventory to be sold. Hence, the inventory holding period
is influenced by the nature of the business. An automobile company would
have a huge inventory of spares and the direct material. So to manage the
inventory the companies follow the JIT (just in time) method to maintain the
efficient level of stock.
Management of sundry creditors:
Creditors play a vital part of effective cash management and should be
managed to enhance the cash position. Purchasing initiates cash outflow and
this can sometimes create liquidity problems. Hence its proper management
is required and the extended payment period helps company to have surplus
cash to meet its other prior obligations.
Hence a best management is like that of TML which has a short collection
period of 6 days, a payment period of 30 days with enough cash and bank
balances and short term investments this keeps the cash circulating into and
out of business so that the company never faces the liquidity crunch.

RECOMMENDATIONS
1. Improve the liquidity position of the company.
2. Hold Marketable Securities instead of Cash
3. Increase forecast accuracy to reduce the need for keeping high cash
4. Negotiate with your suppliers to gain more favorable credit terms for
payment of invoices, either increasing the amount of time allowed before
payment is due or negotiating a discount for earlier payment.
5. Reduce stockholding by making alternative arrangement with Suppliers
and possibly arrangement new internal procedure to speed up the flow of
goods from goods inwards through warehousing and onto production
floor.
6. Ensure that overheads are as economically controlled as possible, with the
privatized market for utilities, competitive buying is available, try to from
most economical suppliers of stationary, telephone, etc.

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Annual reports of Axles & Transmission

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SIKKIM MANIPAL UNIVERSITY

A Project Report on Financial Performance through Working Capital

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