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A study of financial year closure auditing process and ratio analysis at Suzlon Energies

A SUMMER PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT FOR THE REQUIREMENT OF THE TWO YEAR POST-GRADATE DIPLOMA IN MANAGEMENT (PGDM) 2012-14

By: Ila Agarwal 82/2012

LAL BAHADUR SHASTRI INSTITUE OF MANAGEMENT, DELHI JUNE, 2013

CERTIFICATE

ACKNOWLEDGEMENT

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I am extremely grateful to LBSIM for having prescribed this internship and project work to me as a part of the academic requirement in the PGDM course. The completion of this project work has enabled me to gain invaluable knowledge. I would like to express my gratitude towards my project guide Mr. Vallabh Patil ( ) and Mr. Yogesh Thanki (), whose invaluable support and guidance has helped me to gain knowledge of various aspects of financial auditing and has given me an opportunity to At this juncture, I wish to appreciate the management and staff of Suzlon Energies for providing the entire state of the art infrastructure and resources, to enable me to complete and enrich my project.

Ila Agarwal PGDM General Lal Bahadur Shastri Institute of Management

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1. COMPANY PROFILE: The Suzlon Group is ranked as the worlds fifth largest wind turbine supplier, in terms of cumulative installed capacity, at the end of 2011. The companys global spread extends across Asia, Australia, Europe, Africa and North and South America has over 21,500 MW of wind energy capacity installed in 30 countries, operations across 33 countries and a workforce of over 13,000. The Group offers one of the most comprehensive product portfolios ranging from submegawatt on-shore turbines at 600 Kilowatts (KW) to the worlds largest commercial 6.15 MW offshore turbines with a vertically integrated, low-cost, manufacturing base. The Group headquartered at Suzlon One Earth in Pune, India comprises Suzlon Energy Limited and its subsidiaries, including Repower Systems SE.

1.1 VISION: To be the technology leader in the wind sector To be in the top three wind companies in all the key markets of the world To be the global leader in providing profitable, end-to-end wind power solutions To be the 'company of choice' for stakeholders

1.2 Mission: To pursue social, economic and ecological sustainable development for our planet.

1.3 GENESIS & GROWTH: The seeds of Suzlon were sown by Mr. Tulsi Tantis venture into the textile industry. Faced with soaring power costs and the infrequent availability of power, he looked to wind energy as an alternative. Beginning with a wind farm project in the Indian state of Gujarat in 1995, with a capacity of just 3 MW - he set forth to acquire the basic technology and varied expertise to set up Suzlon Energy Limited - Indias first homegrown wind technology company.

About Suzlon: Over 21,500 MW of installations across the world Ranked 5th leading wind power equipment manufacturer Earned a global cumulative market share of 7.6% Suzlon in India has a cumulative installed base of over 7500 MW across 8 states, acquired over 43% (as on September 2012) cumulative market share and is the market leader for the last 14 consecutive years.

1.4 MILESTONES (2012-13): Suzlon crosses 1,000 MW establishing India's largest wind park. Suzlon Group crosses 20 GW in global installations. Suzlons S11X turbine was adjudged as the best turbine under construction by Windpower Monthly Suzlon crosses 1,000 MW in Jaisalmer, Rajasthan in India. Suzlon Brazil established its first Panel and Hub facility in Maracanau, Brazil.

Suzlon site (Icaraizinho) was recognized by the Brazilian Regulatory Agency, ANEEL (Agncia Nacional de Energia Eltrica) as one of the best in energy generation in 2012.

Suzlon dedicated its Satara Knowledge Centre to the Indian Wind Industry Successful completion of the S8X testing.

AWARDING AUTHORITY

DETAILS

Business world FICCI Corporate Social Suzlon awarded the Appreciation Plaque for Responsibility Awards 2011-12 Superbrand being a Socially Responsible Company Suzlon wins the 4th Edition of Consumer Superbrand for 2012 World Consulting & Research Corporation Suzlon chosen as Asia's Most Promising Brand (Energy) World Consulting & Research Corporation Asia's Most Promising Business Leaders from India Tulsi Tanti Business Initiative Direction (BID) Gold Award for excellence and business prestige Quality Forum of India, Pune Chapter HSE (Environment) Improvement Project Silver award for Best Quality Practice

2. PROJECT DETAILS: 2.1 ABOUT THE PROJECT: This project is A study of financial year closure auditing process and ratio analysis at Suzlon Energies, Pune has been undertaken as a summer internship

project for the partial fulfilment of the two years full time Post Graduate Diploma in Management (PGDM) 2012-14 from Lal Bahadur Shastri Institute of Management. The project provides an understanding of the auditing process taking place at the end of the financial year and to analyse the financial statements of the company. During the tenure of two months, various bills from the sites of Suzlon were tallied with the bills from the vendors. A reconciliation report was developed to settle the differences in the bill amounts. Also, schedules from the sites were formatted in the required format by the auditor. Once the auditing was completed and the financial statement was prepared, the analysis was done. Various ratios were calculated in order to compare the performance of the company with previous years. The purpose of this project was to gain the knowledge of the auditing process taking place at the financial year closure. The names of the vendors and the internal data has not been used anywhere in the report in order to comply with the Non-Disclosure policy of Suzlon.

2.2 OBJECTIVES OF THE PROJECT: Auditing is a vital part of accounting. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business. Therefore understanding of the auditing process is necessary in every business or organization. With this view kept in mind, the project was undertaken to fulfil the following objectives: To consolidate the data of various sites in one file for the complete billing of the company. To analyze the process of data formatting for the auditing. To understand the process of reconciliation of the bills.

To analyze the financial ratios of the company in order to understand the companys performance for the year. 2.3 SOURCE OF DATA: The data for the project was obtained from: The bill schedules from various sites. The format of the report from the auditor. The format of the consolidated data of previous year. The annual report of previous report from the website of the company.

FINANCIAL AUDITING PROCESS

3.1 INTRODUCTION TO INTERNAL AUDIT Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organizations operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Internal auditing is a catalyst for improving an organizations effectiveness and efficiency by providing insight and recommendations based on analyses and assessments of data and business processes. With commitment to integrity and accountability, internal auditing provides value to governing bodies and senior management as an objective source of independent advice. Professionals called internal auditors are employed by organizations to perform the internal auditing activity. Internal Audit is not a discipline of Accountancy; External Audit is related to Accountancy, but Internal Audit is an entirely separate discipline more closely related to Enterprise Risk Management. Internal Audit does, of course, cover financial risk amongst its portfolio, but this is one very minor element of the role. Significant misunderstandings in this area have resulted in many organizations recruiting accountants with external audit experience to staff an internal audit function; this is usually detrimental to the quality and completeness of assurance provided to the NonExecutive Directors/Board, and may, in part, have contributed to corporate failures where key operational risks that were not directly related to financial statements remained unidentified and/or unmanaged by the Executive Management. The scope of internal auditing within an organization is broad and may involve topics such as the efficacy of operations, the reliability of financial reporting, deterring and investigating fraud, safeguarding assets, and compliance with laws and regulations. Traditionally, internal auditing involved measuring compliance with the entitys policies and procedures. However, internal auditors are not responsible for the execution of company activities; they advise management and the Board of Directors (or similar oversight body) regarding how to better execute their responsibilities. As a result of their broad scope of involvement, internal auditors may have a variety of higher educational and professional backgrounds. Developments in internal auditing have moved away

from "compliance" which is a function of management control, towards Risk Based Internal Auditing (RBIA) which results in monitoring and evaluation of the risk based control framework to manage enterprise risk. The modern approach seeks to ensure that key risks are identified, a risk appetite is defined, and Controls are instigated in a fit for purpose way to manage risk according to the risk appetite of the organization. Publicly-traded corporations typically have an internal auditing department, led by a Chief Audit Executive ("CAE") who generally reports to the Audit Committee of the Board of Directors, with administrative reporting to the Chief Executive Officer. 3.2 HISTORY OF INTERNAL AUDITING The Internal Auditing profession evolved steadily with the progress of management science after World War II. It is conceptually similar in many ways to financial auditing by public accounting firms, quality assurance and banking compliance activities. Much of the theory underlying internal auditing is derived from management consulting and public accounting professions. With the implementation in the United States of the Sarbanes-Oxley Act of 2002, the professions growth accelerated, as many internal auditors possess the skills required to help companies meet the requirements of the law. 3.3 ROLE OF INTERNAL CONTROL The role of internal audit is to provide independent assurance that an organizations risk management, governance and internal control process are operating effectively. Internal auditors deal with issues that is fundamentally important to the survival and prosperity of any organization. Unlike external auditors, the look beyond financial risks and statements to consider wider issues, such as the organizations reputations, growth, its impact on the environment and the way it treats its employees. Internal auditors have to be independent people who are willing to stand up and be counted. Their employers value them because they provide an independent, objective and constructive view. To do this they need a remarkably varied mix of skills and knowledge. They might be

advising the projective running a difficult change programme one day, or investigating a complex overseas fraud the next. From very early on in their careers, they talk to executives at the very top of the organization about complex, strategic issues, which is one of the most challenging and rewarding parts of their role Internal auditing activity is primarily directed at improving internal control. Under the COSO Framework, internal control is broadly defined as a process, affected by an entitys board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following internal control categories: Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with laws and regulations. Management is responsible for internal control. Managers establish policies and processes to help the organization to achieve specific objectives in each of these categories. Internal auditors perform audits to evaluate whether the policies and processes are designed and operating effectively and provide recommendations for improvement. 3.3A) ROLE IN RISK MANAGEMENT Internal auditing professional standards require the function to monitor and evaluate the effectiveness of the organizations Risk management processes. Risk management relates to how an organization sets objectives, then identifies, analyzes, and responds to those risks that could potentially impact its ability to realize its objectives. In larger organizations, major strategic initiatives are implemented to achieve objectives and drive changes. As a member of senior management, the Chief Audit Executive (CAE) may participate in status updates on these major initiatives. This places the CAE in the position to report on many of the major risks the organization faces to the Audit Committee, or ensure managements reporting is effective for that purpose.

3.3B) ROLE IN CORPORATE GOVERNANCE Internal auditing activity as it relates to corporate governance is generally informal, accomplished primarily through participation in meetings and discussions with members of the Board of Directors. Corporate governance is a combination of processes and organizational structures implemented by the Board of Directors to inform, direct, manage, and monitor the organizations resources, strategies and policies towards the achievement of the organizations objectives. The internal auditor is often considered one of the "four pillars" of corporate governance, the other pillars being the Board of Directors, management, and the external auditor. A primary focus area of internal auditing as it relates to corporate governance is helping the Audit Committee of the Board of Directors (or equivalent) perform its responsibilities effectively. This may include reporting critical internal control problems, informing the Committee privately on the capabilities of key managers, suggesting questions or topics for the Audit Committees meeting agendas, and coordinating carefully with the external auditor and management to ensure the Committee receives effective information. 3.4 NATURE OF THE INTERNAL AUDIT ACTIVITY Based on a risk assessment of the organization, internal auditors, management and oversight Boards determine where to focus internal auditing efforts. Internal auditing activity is generally conducted as one or more discrete projects. A typical internal audit project involves the following steps: 1. Establish and communicate the scope and objectives for the audit to appropriate management. 2. Develop an understanding of the business area under review. This includes objectives, measurements, and key transaction types. This involves review of documents and interviews. Flowcharts and narratives may be created if necessary. 3. Describe the key risks facing the business activities within the scope of the audit.

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4. Identify control procedures used to ensure each key risk and transaction type is properly controlled and monitored. 5. Develop and execute a risk-based sampling and testing approach to determine whether the most important controls are operating as intended. 6. Report problems identified and negotiate action plans with management to address the problems. 7. Follow-up on reported findings at appropriate intervals. Internal audit departments maintain a follow-up database for this purpose. Project length varies based on the complexity of the activity being audited and Internal Audit resources available. Many of the above steps are iterative and may not all occur in the sequence indicated. By analyzing and recommending business improvements in critical areas, auditors help the organization meet its objectives. In addition to assessing business processes, specialists called Information Technology (IT) Auditors review information technology controls. 3.5 INTERNAL AUDIT REPORTS Internal auditors typically issue reports at the end of each audit that summarizes their findings, recommendations, and any responses or action plans from management. An audit report may have an executive summary; a body that includes the specific issues or findings identified and related recommendations or action plans; and appendix information such as detailed graphs and charts or process information. Each saudit finding within the body of the report may contain five elements, sometimes called the "5 Cs": 1. Criteria: What is the standard? The standard may be a company policy or other benchmark. 2. Condition: What is the particular problem identified (difference between criteria and actual status)?

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3. Cause: Why did the problem occur (which control over risk was missing - design effectiveness failure; or which control did not execute as planned -operating effectiveness failure)? 4. Consequence: What is the risk/consequence (or opportunity foregone) because of the finding? 5. Corrective action: What should management do about the finding? What have they agreed to do and by when? The recommendations in an internal audit report are designed to help the organization achieve its goals, which may relate to operations, financial reporting or legal/regulatory compliance. They may relate to effectiveness (i.e., whether goals were met or compliance with standards was achieved) or efficiency (i.e., whether the outputs were generated with minimum inputs).Audit findings and recommendations also relate to particular assertions about transactions, such as whether the transactions audited were valid or authorized, completely processed, accurately valued, processed in the correct time period, and properly disclosed in financial or operational reporting, among other elements. 3.6 DEVELOPING THE PLAN OF ENGAGEMENTS Internal auditing standards require the development of a plan of audit engagements (projects) based on a risk assessment, updated at least annually. The input of senior management and the Board is typically included in this process. Many departments update their plan of engagements throughout the year as risks or organizational priorities change. This effort helps ensure the audit activity is aligned with the organizations objectives, by answering two key questions: First, what goals are the organizations trying to accomplish in the upcoming period? Second, how can the Internal Audit Department assist the organization in achieving these goals? Internal auditors often conduct a series of interviews of senior management to identify potential engagements. Changes in people, processes, or systems often generate audit project ideas.

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Various documents are reviewed, such as strategic plans, financial reports, consulting studies, etc. Further, the results of prior audits and resolution of open issues are considered. The preliminary plan of engagements is documented and prioritized. Audit resources and expertise are then considered and a final plan is presented to senior management and the Audit Committee.

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FINANCIAL STATEMENT ANALYSIS

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4.1 LIQUIDITY RATIOS 4.1A) CURRETN RATIO (WORKING CAPITAL RATIO) = (CURRENT ASSETS)/ (CURRENT LIABILITIES) Definition The current ratio is balance-sheet financial performance measure of company liquidity. It indicates a company's ability to meet short-term debt obligations. It measures whether or not a firm has enough resources to pay its debts over the next 12 months. Potential creditors use this ratio in determining whether or not to make short-term loans. It can also give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. It is also known as the working capital ratio. Norms and Limits The higher the ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's a comfortable financial position for most enterprises. Acceptable current ratios vary from industry to industry. For most industrial companies, 1.5 may be an acceptable current ratio. Low values for the current ratio (values less than 1) indicate that a firm may have difficulty meeting current obligations. However, an investor should also take note of a company's operating cash flow in order to get a better sense of its liquidity. A low current ratio can often be supported by a strong operating cash flow. If the current ratio is too high (much more than 2) then the company may not be using its current assets or its short-term financing facilities efficiently. This may also indicate problems in working capital management. All other things being equal, creditors consider a high current ratio to be better than a low current ratio, because a high current ratio means that the company is more likely to meet its liabilities which are due over the next 12 months.

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4.1B) QUICK RATIO = (CURRENT ASSETS - INVENTORIES) / (CURRENT LIABILITIES) Definition The quick ratio is a measure of a company's ability to meet its short-term obligations using its most liquid assets (near cash or quick assets). Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. Quick ratio is viewed as a sign of a company's financial strength or weakness; it gives information about a companys short term liquidity. The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice. The quick ratio is also known as the acid-test ratio or quick assets ratio. Alternative formula for the quick ratio is the following: QUICK RATIO = (CASH AND CASH EQUIVALENTS + MARKETABLE SECURITIES + ACCOUNTS RECEIVABLE) / CURRENT LIABILITIES Norms and Limits The higher the quick ratio the better is the position of the company. The commonly acceptable current ratio is 1, but may vary from industry to industry. A company with a quick ratio of less than 1 cannot currently pay back its current liabilities; it's the bad sign for investors and partners. 4.1C) CASH RATIO = (CASH AND CASH EQUIVALENTS) / (CURRENT LIABILITIES) Definition Cash ratio (also called cash asset ratio) is the ratio of a company's cash and cash equivalent assets to its total liabilities. Cash ratio is a refinement of quick ratio and

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indicates the extent to which readily available funds can pay off current liabilities. Potential creditors use this ratio as a measure of a company's liquidity and how easily it can service debt and cover short-term liabilities. Cash ratio is the most stringent and conservative of the three liquidity ratios (current, quick and cash ratio). It only looks at the company's most liquid short-term assets cash and cash equivalents which can be most easily used to pay off current obligations. Norms and Limits Cash ratio is not as popular in financial analysis as current or quick ratios, its usefulness is limited. There is no common norm for cash ratio. In some countries a cash ratio of not less than 0.2 is considered as acceptable. But ratios that are too high may show poor asset utilization for a company holding large amounts of cash on its balance sheet. 4.2 DEBT RATIOS 4.2A) DEBT RATIO = (TOTAL LIABITIES) / (TOTAL ASSETS) Definition Debt ratio is a ratio that indicates the proportion of a company's debt to its total assets. It shows how much the company relies on debt to finance assets. The debt ratio gives users a quick measure of the amount of debt that the company has on its balance sheets compared to its assets. The higher the ratio, the greater the risk associated with the firm's operation. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk. It is similar to debt-to-equity ratio which shows the same proportion but in different way. Norms and Limits The optimal debt ratio is determined by the same proportion of liabilities and equity as a debt-to-equity ratio. If the ratio is less than 0.5, most of the company's assets are

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financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Maximum normal value is 0.6-0.7. But it is necessary to take into account industry specific, explained in the article about debt-to-equity ratio. 4.2B) DEBT TO EQUITY RATIO = (LONG TERM DEBTS) / ( AVERAGE SHAREHOLDERS EQUITY) Definition The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known as financial leverage. Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's financial standing. It is also a measure of a company's ability to repay its obligations. When examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the ratio is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Thus, companies with high debt-to-equity ratios may not be able to attract additional lending capital. Norms and Limits Optimal debt-to-equity ratio is considered to be about 1, i.e. liabilities = equity, but the ratio is very industry specific because it depends on the proportion of current and noncurrent assets. The more non-current the assets (as in the capital-intensive industries), the more equity is required to finance these long term investments. For most companies the maximum acceptable debt-to-equity ratio is 1.5-2 and less. For large public companies the debt-to-equity ratio may be much more than 2, but for most

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small and medium companies it is not acceptable. US companies show the average debt-to-equity ratio at about 1.5 (it's typical for other countries too). In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. However, a low debt-to-equity ratio may also indicate that a company is not taking advantage of the increased profits that financial leverage may bring. 4.2C) LONG TERM DEBT EQUITY RATIO = (LONG TERM DEBTS) / (TOTAL ASSETS) Definition Long Term Debt Equity Ratio is the ratio that represents the financial position of the company and the companys ability to meet all its financial requirements. It shows the percentage of a companys assets that are financed with loans and other financial obligations that last over a year. As this ratio is calculated yearly, decrease in the ratio would denote that the company is faring well, and is less dependent on debts for their business needs. Norms and Limits The higher the level of long term debt, the more important it is for a company to have positive revenue and steady cash flow. It is very helpful for management to check its debt structure and determine its debt capacity. It also shows how many assets of your company are finances with the help of debts. To calculate long term debt to total assets ratio you need to add together your current liabilities and long term debts and sum up the current and fixed assets and divide both the total liabilities and the total asset to get an output in percentage form. The output is the assets that are financed by the debt financing while the other half is financed by the investors in your firm. Having the long term debt to total asset ratio as a high percentage should be worrying factor for the firm and the company should look in

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to it and determine the reason of the high percentage and try to minimize it as much as possible. The high value would mean that your company needs to have a good cash inflow to meet all the expenses. Long Term Debt to Total Asset Ratio therefore provides a measurement to the investor regarding the percentage of a companys assets which are financed with the help of loans or debts for a period lasting over a year. 4.2D) INTEREST COVERAGE RATIO = (EBIT) / (INTEREST EXPENSES) Definition The interest coverage ratio (ICR) is a measure of a company's ability to meet its interest payments. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time period, often one year, divided by interest expenses for the same time period. The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its EBIT. It determines how easily a company can pay interest expenses on outstanding debt. Interest coverage ratio is also known as interest coverage, debt service ratio or debt service coverage ratio. Norms and Limits The lower the interest coverage ratio, the higher is the company's debt burden and the greater the possibility of bankruptcy or default. A lower ICR means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1.0 indicates the business is having difficulties generating the cash necessary to pay its interest obligations (i.e. interest payments exceed its earnings (EBIT)).

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A higher ratio indicates a better financial health as it means that the company is more capable to meeting its interest obligations from operating earnings. On the other hand, a high ICR may suggest a company is "too safe" and is neglecting opportunities to magnify earnings through leverage. 4.3 PROFITABILITY RATIOS 4.3A) GROSS RPOFIT RATIO = (GROSS PROFIT) / (NET SALES) = (NET SALES - COGS) / (NET SALES) Definition Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales. Net sales mean sales minus sales returns. Gross profit would be the difference between net sales and cost of goods sold (COGS). COGS in the case of a trading concern would be equal to opening stock plus purchases, minus closing stock plus all direct expenses relating to purchases. In the case of manufacturing concern, it would be equal to the sum of the cost of raw materials, wages, direct expenses and all manufacturing expenses. In other words, generally the expenses charged to profit and loss account or operating expenses are excluded from the calculation of cost of goods sold. Norms and Limits Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products. As the gross profit is found by deducting cost of goods sold from net sales, higher the gross profit better it is. There is no standard GP ratio for evaluation. It may vary from business to business. However, the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends.

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4.3B) RETURN ON SALES = (OPERATING INCOME) / (NET SALES) Definition Return on sales (ROS) is a ratio widely used to evaluate an entity's operating performance. It is also known as "operating profit margin" or "operating margin". ROS indicates how much profit an entity makes after paying for variable costs of production such as wages, raw materials, etc. (but before interest and tax). It is the return achieved from standard operations and does not include unique or one off transactions. ROS is usually expressed as a percentage of sales (revenue). Norms and Limits Return on sales (operating margin) can be used both as a tool to analyze a single company's performance against its past performance, and to compare similar companies' performances against one another. The ratio varies widely by industry but is useful for comparing different companies in the same business. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is becoming more efficient, while a decreasing ratio could signal looming financial troubles. Though, in some instances, a low return on sales can be offset by increased sales.

4.3C) NET PROFIT MARGIN = (NET PROFIT) / (NET SALES) Definition Net profit margin (or profit margin, net margin, return on revenue) is a ratio of profitability calculated as after-tax net income (net profits) divided by sales (revenue). Net profit margin is displayed as a percentage. It shows the amount of each sales dollar left over after all expenses have been paid.

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Norms and Limits Net profit margin is a key ratio of profitability. It is very useful when comparing companies in similar industries. A higher net profit margin means that a company is more efficient at converting sales into actual profit.

4.3D) RETURN ON EQUITY = (NET INCOME)/ (AVERAGE SHAREHOLDERS EQUITY) Definition Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. ROE is one of the most important financial ratios and profitability metrics. It is often said to be the ultimate ratio or the mother of all ratios that can be obtained from a companys financial statement. It measures how profitable a company is for the owner of the investment, and how profitably a company employs its equity. Norms and Limits Historically, the average ROE has been around 10% to 12%, at least in the US and UK. For stable economics, ROEs more than 12-15% are considered desirable. But the ratio strongly depends on many factors such as industry, economic environment (inflation, macroeconomic risks, etc.). The higher the ROE the better. But a higher ROE does not necessarily mean better financial performance of the company. The higher ROE can be the result of high financial leverage, but too high financial leverage is dangerous for a company's solvency.

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4.3E) RETURN ON ASSETS = (NET INCOME) / (TOTAL ASSETS) Definition Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources (total assets). Return on assets is a key profitability ratio which measures the amount of profit made by a company per dollar of its assets. It shows the company's ability to generate profits before leverage, rather than by using leverage. Unlike other profitability ratios, such as return on equity (ROE), ROA measurements include all of a company's assets including those which arise from liabilities to creditors as well as those which arise from contributions by investors. So, ROA gives an idea as to how efficiently management use company assets to generate profit, but is usually of less interest to shareholders than some other financial ratios such as ROE. Norms and Limits Return on assets gives an indication of the capital intensity of the company, which will depend on the industry. Capital-intensive industries (such as railroads and thermal power plant) will yield a low return on assets, since they must possess such valuable assets to do business. Shoestring operations (such as software companies and personal services firms) will have a high ROA: their required assets are minimal. The number will vary widely across different industries. This is why, when using ROA as a comparative measure, it is best to compare it against a company's previous ROA figures or the ROA of a similar company. 4.3F) BASIC EARNING POWER RATIO = EBIT / (TOTAL ASSETS) Definition Basic Earning Power Ratio (BEP) is calculated as the ratio of earnings before interest and taxes (EBIT) to total assets.

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Using EBIT instead of operating income means the ratio considers all income earned by the company, not just the income from the operating activity. Norms and Limits BEP is useful for comparing firms with different tax situations and different degrees of financial leverage. The higher the BEP ratio, the more effective the company is in generating income from its assets.

4.3G) RETURN ON CAPITAL EMPLOYED = EBIT / (TOTAL ASSETS - CURRENT LIABILITIES) Definition Return on capital employed (ROCE) is a measure of the returns that a business is achieving from the capital employed, usually expressed in percentage terms. Capital employed equals a company's Equity plus Non-current liabilities (or Total Assets Current Liabilities), in other words all the long-term funds used by the company. ROCE indicates the efficiency and profitability of a company's capital investments. Norms and Limits ROCE should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders' earnings, and vice versa; a good ROCE is one that is greater than the rate at which the company borrows. One limitation of ROCE is the fact that it does not account for the depreciation and amortization of the capital employed. Because capital employed is in the denominator, a company with depreciated assets may find its ROCE increases without an actual increase in profit.

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4.4 ACTIVITY RATIOS 4.4A) ASSET TURNOVER RATIO = (NET SALES) / (TOTAL ASSETS) Definition Asset turnover (total asset turnover) is a financial ratio that measures the efficiency of a company's use of its assets to product sales. It is a measure of how efficiently management is using the assets at its disposal to promote sales. The ratio helps to measure the productivity of a company's assets. The numerator of the asset turnover formula shows revenues which are found on a company's income statement (statement of comprehensive income) and the denominator shows total assets which is found on a company's balance sheet (statement of financial position). Norms and Limits There is no set number that represents a good total asset turnover value because every industry has varying business models. It also depends on the proportion of labour costs in relation to the capital required, i.e. whether the process is labour intensive or capital intensive. The higher the number the better. If there is a low turnover, it may be an indication that the business should either utilize its assets in a more efficient manner or sell them. But it also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. It should be noted that the asset turnover ratio formula does not look at how well a company is earning profits relative to assets. The asset turnover ratio formula only looks at revenues and not profits. This is the distinct difference between return on assets (ROA) and the asset turnover ratio, as return on assets looks at net income, or profit, relative to assets

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4.4B) STOCK TURNOVER RATIO = (COGS) / (NET SALES) Definition Stock turnover or Inventory turnover is a measure of the number of times inventory is sold or used in a given time period such as one year. It is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices, and inventory management. This ratio is important because gross profit is earned each time inventory is turned over. In the income statement (statement of comprehensive income, IFRS) cost of goods sold (COGS) is named "Cost of sales". The number of days in the period can then be divided by the inventory turnover formula to calculate the number of days it takes to sell the inventory on hand or "inventory turnover days": Days inventory outstanding = 365 / Inventory turnover Norms and Limits There is no general norm for the inventory turnover ratio; it should be compared against industry averages. A relatively low inventory turnover may be the result of ineffective inventory management (that is, carrying too large an inventory) and poor sales or carrying out-of-date inventory to avoid writing off inventory losses against income. Normally a high number indicates a greater sales efficiency and a lower risk of loss through un-saleable stock. However, too high an inventory turnover that is out of proportion to industry norms may suggest losses due to shortages, and poor customerservice. A high value for inventory turnover usually accompanies a low gross profit figure. This means that a company needs to sell a lot of items to maintain an adequate return on the capital invested in the company.

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4.5 LEVERAGES 4.5A) DEGREE OF OPERATING LEVERAGE = (% CHANGE IN EBIT) / (% CHANGE IN NET SALES) Definition The Degree of Operating Leverage (DOL) is the leverage ratio that sums up the effect of an amount of operating leverage on the companys earnings before interests and taxes (EBIT). Operating Leverage takes into account the proportion of fixed costs to variable costs in the operations of a business. If the degree of operating leverage is high, it means that the earnings before interest and taxes would be unpredictable for the company, even if all the other factors remain the same. Norms and Limits The DOL Ratio helps a company in understanding the effects of operating leverage on the companys probable earnings. It is also important in determining a suitable level of operating leverage which can be used in order to get the most out of the companys Earnings before interest and taxes or EBIT. If the operating leverage is high, then a smallest percentage change in sales can increase the net operating income. The net operating income is the amount of income that is left after payments of fixed cost are made, regardless of how much sales has been made. Since the DOL helps in determining how the change in sales volume would affect the profits of the company, it is important to ascertain the value of DOL in order to minimize the losses to the company. A business would benefit if it can estimate the DOL. The impact of the leverage on the percentage of sales can be quite striking if not taken seriously; therefore it is really important to minimize these risks of the business. A higher degree of operating leverage or DOL then you should try and balance the operating leverage to balance with the financial leverage in order to provide with profits to the company. A companys balance

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DOL can provide the financial leverage is an important factor contributing to business profits. Even a small percentage of increase in sales can help in having a greater proportion of profits in the company, so it is really important to maintain a balance between both financial leverage and operating leverage to yield maximum benefits.

4.5B) DEGREE OF FINANCIAL LEVERAGE = (% CHANGE IN EPS) / (% CHANGE IN EBIT) Definition The degree of financial leverage (DFL) is the leverage ratio that sums up the effect of an amount of financial leverage on the earning per share of a company. It makes use of fixed cost to provide finance to the firm and also includes the expenses before interest and taxes. If the Degree of Financial Leverage is high, the Earnings Per Share or EPS would be more Norms and Limits The DFL helps in calculating the comparative change in net income caused by a change in the capital structure of business. It helps in determining the suitable financial leverage which is to be used to achieve the business goal. The higher the leverage of the company, the more risk it has, and a business should try and balance it as leverage is similar to having a debt. It can be even used to compare data of many companies that can help an investor in deciding which company to invest in, based on the result of how much risk is attached with each companies capital structures. Also the losses of the company can be substantiated with this investment and during the rise in the economic conditions the volume of sales would be well compensated.

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The DFL is useful for predicting the net income in the future based on the changes that take place in the interest rates, taxes, operating expenses and other financial factors. Debts added to a business would provide an interest expense to the company which is a fixed cost, and this is when the companys business begins to turn to provide profit. It is important to balance the financial leverage according to the operating costs of the company as it would minimize the level of risks involved.

4.5C) DEGREE OF COMBINED LEVERAGE = DOL * DFL

Definition The Degree of Combined Leverage (DCL) is the leverage ratio that sums up the combined effect of the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL) has on the Earning per share or EPS given a particular change in shares. This ratio helps in ascertaining the best possible financial and operational leverage that is to be used in any firm or business. Norms and Limits This ratio has been known to be very useful to a company or firm as it helps a firm understand the effects of combining financial and operating leverage on the total earnings of the company. A high level of combined leverage shows the risk involved in the company as there are more fixed costs in the company, while a low combined leverage would mean better for the company. Since the degree of combined leverage is calculated by combining both the operational leverage and the financial leverage, it helps us in ascertaining the total risk involved in the business. Operating Leverage measures the operating risk or business risk of the company while Financial Leverage measures the financial risk of the company. Together when combined, both the financial leverage ratio and the operating leverage ratio can provide you with an idea of how much risk per share are involved. Operating

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leverage is determined by the percentage change in earning before tax or interest is due and similarly financial leverage is determined by the percentage change in the gross before the tax and interest per share is due. It is up to the company to maintain the degree of combined leverage so as to minimize the risks involved in the business. Maintaining the risk and not increasing it from where it is, the business should try to lower or minimize the financial leverage in order to balance the operating leverage and by minimizing the operating leverage when the financial leverage is to be balances. The balanced degree of combined leverage (DCL) provides with an increase in the earnings per share of the equity holders which is why it is important to calculate the Degree of Combined Leverage (DCL) for better understanding of the position of the company and minimizing the risks of the company

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METHODOLOGY

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5.1) AUDITING PROCESS


The process of financial year closure auditing is an extensive process. In this process, all the bills from various sites have to be cross-checked, formatted, reconciled and audited. In order to complete the process many steps were followed. Various bills from the sites of Suzlon India business were tallied with the bills from the vendors. Consolidated schedule was made using the schedules data from various sites. Schedules from the sites were formatted in the required format by the auditor. A reconciliation report was developed to settle the differences in the bill amounts.

STEP 1: Tallying the bills from various sites

Sheet 1 (A) Suzlon Bills for the vendors Source: Business

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Sheet 1 (B) Suzlon Bills for the vendors Source: Business

Sheet 2 (A) Vendor Bills for Suzlon Source: Vendor

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Sheet 2 (B) Vendor Bills for Suzlon Source: Vendor

For this, the data from the business was taken using the SAP tool. The bills from various vendors were also collected. The bill numbers from the vendors were checked in the data from the business. The bill amount, TDS, debit notes, payables etc. were checked. Then the bills for which the amounts were not matching, remarks were made and sent to the vendors for confirmation of the payment.

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STEP 2 Consolidated report for all the sites.

Sheet 3 (A) Consolidation of all India sites bills Source : Self consolidation from the business data

Sheet 3 (B) Consolidation of all India sites bills Source: Self consolidation from the business data

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Sheet 3 (C) Consolidation of all India sites bills Source: Self consolidation from the business data

Sheet 3 (D) Consolidation of all India sites bills Source: Self consolidation from the business data

For this, the schedules from various sites were collected. Total for various categories like external lines, CJI3, total and trial balance was calculated manually

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STEP 3 Formatting of the schedules from various sites in the format provided by the auditor.

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Sheet 4 (A) Audit format for vehicles and fixed secrities, Source: Auditor

Sheet 4 (B) Audit format for trailers, Source: Auditor

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Sheet 4 (C) Audit format for rotor, Source: Auditor

Sheet 4 (D) Audit format for roads, Source: Auditor

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For this, data from various sites was formatted under different category heads in the format provided by the auditor.

STEP 4 Reconciliation of the bills.

Sheet 5 Reconciliation of the vendor bills, Source Self analysis using the bills of Suzlon and the vendor

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5.2) RATIO ANALYSIS


5.2A) Liquidity Ratios: 5.2A.1) Current Ratio:

CURRETN RATIO (WORKING CAPITAL RATIO) = (CURRENT ASSETS)/ (CURRENT LIABILITIES)


Particulars Current ratio Current assets Current liabilites 2008 2.4037566 17,560.62 7,305.49 2009 2010 2011 2012 1.894241157 1.825396 1.704902218 0.965703559 21,882.88 17,198.17 16,754.04 18,473.32 11,552.32 9,421.61 9,826.98 19,129.39

Current ratio
3 2.5 2 1.5 1 0.5 0 2008 2009 2010 2011 2012

Current ratio

Figure 5.1 Current ratio Source: Self calculation

Current ratio of the company has declined noticeably in the last 5 years indicating short liquidity of the company. The ratio has gone below 1 in the year 2012, indicating the company might face issues in meeting the current obligations.

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5.2A.2) Quick Ratio: QUICK RATIO = (CURRENT ASSETS - INVENTORIES) / (CURRENT LIABILITIES)
Particulars Quick Ratio Current assets Inventories Current liabilites 2008 1.8446114 17,560.62 4,084.83 7,305.49 2009 1.27327065 21,882.88 7,173.65 11,552.32 2010 1.189167 17,198.17 5,994.30 9,421.61 2011 1.160323925 16,754.04 5,351.56 9,826.98 2012 0.674016265 18,473.32 5,579.80 19,129.39

Quick Ratio
2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2008 2009 2010 2011 2012 Quick Ratio

Figure 5.2 Quick ratio Source: Self calculation

Quick ratio of the company has declined noticeably in the last 5 years indicating financial weakening of the company. The ratio has gone below 1 in the year 2012, indicating the company might face issues in meeting the current liabilities and problems for investors.

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5.2A.3) Cash Ratio: CASH RATIO = (CASH AND CASH EQUIVALENTS) / (CURRENT LIABILITIES)
Particulars Cash Ratio Cash and Cash equivalents Current liabilites 2008 2009 0.9527355 0.245480561 6,960.20 7,305.49 2,835.87 11,552.32 2010 0.290749 2,739.32 9,421.61 2011 0.27332507 2,685.96 9,826.98 2012 0.137614425 2,632.48 19,129.39

Cash Ratio
1.2 1 0.8 0.6 0.4 0.2 0 2008 2009 2010 2011 2012

Cash Ratio

Figure 5.3 Cash ratio Source: Self calculation

Cash ratio of the company has been almost consistent since last 4 years and has been below 0.2. The ratio indicates proper utilization of the assets is proper.

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5.2B) Debt Ratios: 5.2B.1) Debt Ratio: DEBT RATIO = (TOTAL LIABITIES) / (TOTAL ASSETS)
Particulars Debt Ratio Total liabilities Total assets 2008 0.656501278 17445.97 26574.16 2009 0.71055924 26863.63 37806.32 2010 2011 0.801962747 0.766489526 22272.35 22,385.02 27772.3 29,204.60 2012 0.843747302 27,360.43 32,427.28

Debt Ratio
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2008 2009 2010 2011 2012 Debt Ratio

Figure 5.4 Debt ratio Source: Self calculation

Debt ratio of the company has increased in the last 5 years and had crossed the maximum limit of 0.7. The ratio indicates that maximum assets of the company are financed through debt.

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5.2B.2) Debt to equity Ratio: DEBT TO EQUITY RATIO = (LONG TERM DEBTS) / ( AVERAGE SHAREHOLDERS EQUITY)
Particulars Debt to Equity ratio Long term debts Shareholder's equity 2008 2.047152868 8292.31 8,101.31 2009 1.092291552 9084.07 8,531.74 2010 1.233175687 9330.83 6,601.27 2011 1.47446798 9,677.56 6,525.58 2012 1.258236079 7,364.72 5,180.84

Debt to Equity ratio


2.5 2 1.5 1 0.5 0 2008 2009 2010 2011 2012 Debt to Equity ratio

Figure 5.5 Debt to equity ratio Source: Self calculation

Debt to equity ratio of the company has been below 2 in the past 5 years. The ratio indicates that the liabilities and equity if the company are almost equal and so the company is taking proper advantages of the financial leverages.

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5.2B.3) Long term debt to equity Ratio: LONG TERM DEBT EQUITY RATIO = (LONG TERM DEBTS) / (TOTAL ASSETS)
Particulars Long term debt equity ratio Long term debts Total assets 2008 0.312044106 8292.31 26574.16 2009 2010 2011 2012

0.240279139 0.335976134 9084.07 9330.83 37806.32 27772.3

0.331371085 0.227114948 9,677.56 7,364.72 29,204.60 32,427.28

Long term debt equity ratio


0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2008 2009 2010 2011 2012 Long term debt equity ratio

Figure 5.6 Long term debt to equity ratio Source: Self calculation

Long term debt ratio of the company has been 0.2 to 0.35 in the last 5 years. The ratio indicates the decrease in companys assets financed by long term debts and so less cash inflow is required to meet the liabilities.

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5.2B.4) Interest coverage ratio: INTEREST COVERAGE RATIO = (EBIT) / (INTEREST EXPENSES)
Particulars Interest coverage ratio EBIT Interest expenses 2008 2009 3.692554931 2.959598762 1964.55 2667.22 532.03 901.21 2010 0.512539434 612.5 1195.03 2011 0.399992956 454.26 1,135.67 2012 0.841094321 1,159.97 1,379.12

4 3.5 3 2.5 2 1.5 1 0.5 0 2008 2009

Interest coverage ratio

Interest coverage ratio 2010 2011 2012

Figure 5.7 Interest coverage ratio Source: Self calculation

Interest coverage ratio of the company has fallen noticeably since last 3 years and has been below 1. The ratio indicates that the company is facing problems in generating enough cash to pay the interest obligations.

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5.2C) Profitability Ratios: 5.2C.1) Gross profit ratio: GROSS RPOFIT RATIO = (NET SALES - COGS) / (NET SALES)
Particulars Gross Profit Ratio Net sales COGS 2008 1.04882952 13,679.43 -667.96 2009 1.041644141 26,081.70 -1,086.15 2010 0.991976 20,619.66 165.46 2011 2012 0.967723821 0.977128794 17,879.13 19,687.20 577.07 450.27

Gross Profit Ratio


1.06 1.04 1.02 1 0.98 0.96 0.94 0.92 2008 2009 2010 2011 2012 Gross Profit Ratio

Figure 5.8 Gross profit ratio Source: Self calculation

Gross profit ratio of the company has fallen in the last 3 years. The ratio implies that now less selling price can be reduced without incurring losses.

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5.2C.2) Return on sales (ROS): RETURN ON SALES = (OPERATING INCOME) / (NET SALES)
Particulars ROS Operating income Net sales 2008 0.194530766 2,661.07 13,679.43 2009 0.143698455 3,747.90 26,081.70 2010 2011 2012 0.120904 0.066975295 0.109038868 2,492.99 1,197.46 2,146.67 20,619.66 17,879.13 19,687.20

ROS
0.25

0.2

0.15 ROS 0.1

0.05

0 2008 2009 2010 2011 2012

Figure 5.9 Return on sales Source: Self calculation

The ROS has decreased since 2008. It indicates looming financial troubles.

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5.2C.3) Profit margin: PROFIT MARGIN = (NET PROFIT) / (NET SALES)


Particulars Profit Margin Net Profit for the year Net sales 2008 0.075302845 1,030.10 13,679.43 2009 0.009066894 236.48 26,081.70 2010 -0.04765 -982.56 20,619.66 2011 -0.07405114 (1,323.97) 17,879.13 2012 -0.0243092 (478.58) 19,687.20

Profit Margin
0.1 0.08 0.06 0.04 0.02 0 -0.02 -0.04 -0.06 -0.08 -0.1 2008 2009 2010 2011 2012 Profit Margin

Figure 5.10 Profit margin Source: Self calculation

Profit margin has declined tremendously and is negative since last 3 years. The ratio indicates that the company is unable to convert the sales into actual profit.

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5.2C.4) Return on equity (ROE): RETURN ON EQUITY = (NET INCOME)/ (AVERAGE SHAREHOLDERS EQUITY)
Particulars ROE Net Income Shareholder's equity 2008 2009 .. 0.028434953 1,030.10 236.48 8,101.31 8,531.74 2010 -0.12986 -982.56 6,601.27 2011 -0.20171938 (1,323.97) 6,525.58 2012 -0.08176368 (478.58) 5,180.84

ROE
0.05 0 2009 -0.05 2010 2011 2012

-0.1

ROE ..

-0.15

-0.2

-0.25

Figure 5.11 Return on equity Source: Self calculation

The ROE is negative since last 3 years. It indicates that the company is either incurring losses or low returns on certain investments.

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5.2C.5) Return on assets (ROA): RETURN ON ASSETS = (NET INCOME) / (TOTAL ASSETS)
Particulars ROA Net Income Total assets 2008 2009 0.03876322 0.006255039 1,030.10 236.48 26574.16 37806.32 2010 -0.03538 -982.56 27772.3 2011 -0.0453343 (1,323.97) 29,204.60 2012 -0.01475856 (478.58) 32,427.28

ROA
0.05 0.04 0.03 0.02 0.01 0 -0.01 -0.02 -0.03 -0.04 -0.05 2008 2009 2010 2011 2012 ROA

Figure 5.12 Return on assets Source: Self calculation

The ROA is negative since last 3 years. Since the company belongs to the capital-intensive industry, the lowering of ROA indicates that the company has increased the number of valuable assets (or increased the number of WTG installations).

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5.2C.6) Basic earning power ratio: BASIC EARNING POWER RATIO = EBIT / (TOTAL ASSETS)
Particulars BEPR EBIT Total assets 2008 0.073927078 1964.55 26574.16 2009 0.07054958 2667.22 37806.32 2010 2011 2012 0.022054 0.015554399 0.035771425 612.5 454.26 1,159.97 27772.3 29,204.60 32,427.28

BEPR
0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2008 2009 2010 2011 2012 BEPR

Figure 5.13 Basic earning power ratio Source: Self calculation

The BEPR has decreased in the last 3 years. The companys income generation from its assets have decreased.

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5.2C.7) Return on capital employed: RETURN ON CAPITAL EMPLOYED = EBIT / (TOTAL ASSETS - CURRENT LIABILITIES)
Particulars ROCE EBIT Total assets Current liabilities 2008 2009 2010 2011 2012 0.101955662 0.1015929 0.033377 0.023442507 0.087229628 1964.55 2667.22 612.5 454.26 1,159.97 26574.16 37806.32 27772.3 29,204.60 32,427.28 7,305.49 11,552.32 9,421.61 9,826.98 19,129.39

ROCE
0.12

0.1

0.08

0.06

ROCE

0.04

0.02

0 2008 2009 2010 2011 2012

Figure 5.14 Return on capital employed Source: Self calculation

The ROCE was very low in the last 2 years but now has increased again. It indicates greater return for the capital employed and so greater shareholders earning.

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5.2D) Activity Ratios: 5.2D.1) Asset turnover ratio: ASSET TURNOVER RATIO = (NET SALES) / (TOTAL ASSETS)
Particulars ATR Net Sales Total assets 2008 2009 2010 2011 2012 0.514764343 0.689876719 0.742454 0.61220253 0.607118451 13,679.43 26,081.70 20,619.66 17,879.13 19,687.20 26574.16 37806.32 27772.3 29,204.60 32,427.28

ATR
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2008 2009 2010 2011 2012 ATR

Figure 5.15 Asset turnover ratio Source: Self calculation

The ATR has been maintained fairly good over the last 5 years. It indicates proper utilization of the companys assets.

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5.2D.2) Stock turnover ratio: STOCK TURNOVER RATIO = (COGS) / (NET SALES)
Particulars STR COGS Net Sales 2008 2009 2010 2011 2012 0.04882952 0.04164414 0.008024 0.032276179 0.022871206 -667.96 -1,086.15 165.46 577.07 450.27 13,679.43 26,081.70 20,619.66 17,879.13 19,687.20

STR
0.04 0.03 0.02 0.01 0 -0.01 -0.02 -0.03 -0.04 -0.05 -0.06 2008 2009 2010 2011 2012 STR

Figure 5.16 Stock turnover ratio Source: Self calculation

The STR has increased over last 5 years. It indicates a greater sales efficiency and a lower risk of loss through un-saleable stock of the company.

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5.2E) Leverages: 5.2E.1) Degree of operating leverage (DOL): DEGREE OF OPERATING LEVERAGE = (% CHANGE IN EBIT) / (% CHANGE IN NET SALES)
Particulars DOL EBIT % change in EBIT Net Sales % change in NS 2008 2009 2010 0.394507392 3.678534 1964.55 2667.22 612.5 0.357674786 -0.77036 13,679.43 26,081.70 20,619.66 0.906636461 -0.20942 2011 1.943824808 454.26 -0.25835102 17,879.13 -0.132908593 2012 15.36218238 1,159.97 1.553537622 19,687.20 0.101127404

DOL
18 16 14 12 10 8 6 4 2 0 2009 2010 2011 2012 DOL

Figure 5.17 Degree of operating leverage Source: Self calculation

The DOL has increased greatly over last 5 years. It indicates that the net increase in the operating income for a small change in sales ha increased.

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5.2E.2) Degree of financial leverage (DFL): DEGREE OF FINANCIAL LEVERAGE = (% CHANGE IN EPS) / (% CHANGE IN EBIT)
Particulars DFL EPS % change in EPS % change in EBIT 2008 2009 2010 . -2.25114776 6.547981 8.11 1.58 -6.39 . -0.80517879 -5.0443 0.357674786 -0.77036 2011 2012 -0.835926411 -0.42084379 -7.77 -2.69 0.215962441 -0.65379665 -0.25835102 1.553537622

DFL
7 6 5 4 3 2 1 0 -1 -2 -3 2009 2010 2011 2012 DFL .

Figure 5.18 Degree of financial leverage Source: Self calculation

The DFL was high only in the year 2010 and has been negative otherwise. The EPS has been negative for the years indicating losses.

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5.2E.3) Degree of combined leverage (DCL): DEGREE OF COMBINED LEVERAGE = DOL * DFL
Particulars DOL DFL DCL 2008 2009 2010 0.394507392 3.678534 . -2.25114776 6.547981 -0.88809443 24.08697 2011 2012 1.943824808 15.36218238 -0.835926411 -0.42084379 -1.624894496 -6.46507899

DCL
30 25 20 15 10 5 0 2009 -5 -10 2010 2011 2012 DCL

Figure 5.19 Degree of combined leverage Source: Self calculation

The DCL has been negative except 2010 as DFL has been negative for these years. It indicates lower return on investments on the company.

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RECOMMENDATIONS

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6.1) Green power is a developing concept in India and hence awareness should be spread on this. The green power includes generating electricity using wind, water, solar energy or other natural resources. It is still not a developed concept in India. The technologies used are outdated and under-utilized. Since the company deals in the same area, it should spread the awareness among common people regarding the benefits of using green power. Awareness camps can be set in some cities for the same. Also, some demos can given to the officers of the electricity boards of the states.

6.2) Company deals only with wind energy, it should try to expand the field of expertise. The company has the technology to amplify and generate the electricity from wind energy. The similar technology can be used to generate electricity from water energy. Also, with some modifications, solar energy can also be generated. So the company should expand the field of expertise.

6.3) Maintaining a file for the vendor information which will be helping during the closure. The information for contacting the vendors for the bill closure is not readily available with the auditor. There is a long process to take out the information regarding each vendor which makes the closure procedure cumbersome. Maintaining a proper file for vendor information may help to reduce the time required for the bill closure process.

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6.4) Getting bills closure from the vendors should be improved. For this proper follow ups are required. As many vendors are local thekedars and construction company owners, they are not technologically advanced. As a result, the mails and e-mails for the bill closure are not replied by them. So the management closes the bills with the difference amount in the books of Suzlon. Instead the process should be improved by telling the vendors the importance of bill closure from their side too.

6.5) Reports should be developed from the business side. The data of the sales is extracted from the business using SAP tool which is not very user friendly. Instead some BI report can be developed which can send the data on timely basis as required. It can also send the reports manually on request for the required time frame.

6.7) Access points should be installed in the organization in order to ensure restricted entrance especially because of confidential financial data. The access point using the smart cards was missing which might result in the breach of security. The access points should be involved in order to ensure the entry of only company employees.

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CONCLUSIONS

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Although, the companys ABIT has increased but the company is facing net losses due to increase in other expenses like rent and foreign expenses. Company is facing issues in meeting current liabilities and interest obligations. Company needs more cash inflow in order to meet the liabilities. Company has expanded greatly in terms of its WTG installations. Earning per share (EPS) has decreased greatly and so no dividends were paid for last 2 years. Investing in the company presently is not a good idea.

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LEARNINGS

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Internal auditing helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Internal auditing also prevents frauds. Financial analysis helps the company to analyze the present financial strength of the company. Even though the revenue and EBIT increased in FY 12, the company faced great losses and so no dividends were paid. The organizational culture and the working environment are different in every organization and we need to adapt.

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