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RAYALASEEMA HYPO HI-STRENGTH

LIST OF CONTENTS Chapter no Topic name

01

Introduction Working capital management

02

Research methodology Objectives Company profile

03 04

Analysis and interpretation Findings and suggestions

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RAYALASEEMA HYPO HI-STRENGTH

CHAPTER I

INTRODUCTION

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RAYALASEEMA HYPO HI-STRENGTH

WORKING CAPITAL
When facing volatile economic conditions it is still important for companies to enhance shareholders value, but this is difficult to achieve in periods of near zero growth. By re-engineering their internal process to increase the efficiency of working capital, corporations can achieve significant results that will keep their shareholders happy. The viability of every business activity rest on daily changes in receivables, inventory and payable. It’s the life hood of the business and every manger’s primary task is to keep it moving and put shareholders capital to work efficiently and effectively. Lack of Working Capital may lead a business to “Technical Insolvency” and ultimately liquidation. The faster a business expands the more cash it will need for Working Capital and investment. Good management of working capital will generate cash, help to improve profits solidify relationships with suppliers and customers and reduce risks. When it come to managing working capital. If you can get money to move faster-speed the cash conversion cycle, by say reducing the amount of money tied up in inventory or accounts receivables the liquidity of the business increases the internal cash flow can be generated. Likewise, the business may be able to reduce its debt and interest expenses. If one can negotiate improved terms with suppliers. E.g. obtain longer terms; one can leverage financial resources in new ways. Money trapped in working capital is money no being used to grow. Working Capital management involves decisions relating to current assets including decisions about how these assets have its own importance, but the question of financing is, in fact, the key area of working capital management. Therefore, it is pertinent to estimate the financing pattern of working capital. Capital requirement of a business can be divided into two main categories. Viz.

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1. 2.

Fixed Capital Requirement Working Capital Requirement

The capital which is required for the acquisition of fixed assets is known as “Fixed Working Capital”, where as the capital which is required to meet day to day obligations is know as working Capital.

Concept of Working Capital:On the basis of concept, Working Capital can be classified into two types as under. 1. 2. Gross Working Capital Net Working Capital

Gross Working Capital:It refers to the firm’s investment in total current assets.

Net Working Capital:It represents excess of current assets over current liabilities. The extent to which the sum of current assets exceeds to the sum of current liabilities is known as “Net Working Capital”.

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On the basis of gross concept the working capital is to be either positive or zero. But on the basis of net concept, the working capital is to be either positive or negative.

Types of Working Capital:Working capital can be divided into two categories on the basis of naature as under.

1. Permanent Working Capital:This refers to the minimum amount of investment in all current assets, which is required at all times to carry out minimum level of activities. This is also known as “Core Working Capital”

2. Temporary Working Capital:The amount of working capital, which is difference between maximum working capital and minimum working capital. This capital keeps on fluctuating from time to time on the basis of business activities.

Estimating Requirement of Working Capital:In order to determine the amount of Working Capital required, no of factors to be considered by the finance manager. The following are different techniques for assessment of Working Capital.

1. Percentage of Sales Method:
This is traditional and simple method of estimating Working Capital requirements. According to this method, on the basis of cost experience between sales and Working Capital requirements, a ratio can be determined for estimating the Working Capital requirements in future.
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i. Finished Goods Inventory Stage. The duration of the operating Cycle for the purpose of estimating requirements of Working Capital is equalant to the sum of the durations of each of these stages less the credit period allowed by the suppliers of goods. The operating cycle begins with the acquisition of raw materials and ends with collection of receivables.RAYALASEEMA HYPO HI-STRENGTH 2 Estimation of Components of Working Capital Method: This method is based on the various figures of Balance Sheet since. Work in Process Stage 3. It many be broadly classified into the following four stages.e. Raw Material Storage Stage 2. accounts receivables. the requirements of Working Capital depend upon the operating cycle of business. Receivables Collection Stage. Operating Cycle Method:According to this approach. 1. cash balances and bills payable. 6 . Working Capital is the excess of current assets over current liabilities estimating amount of different constituents can make an assessment of Working Capital requirements of Working Capital. 3. 4.

O=R+W+F+D-C Where. the duration of the Working Capital cycle can be put as follows.RAYALASEEMA HYPO HI-STRENGTH Symbolically. R = Average Stock of Raw Material ——————————————————————————— Average Stock of Raw Material Consumption per Day W = Average Work In Progress Inventory Average Cost of Production per Day F = Average Finished Stock Average Cost of Goods Sold per Day D = Average Debtors ——————————————— Average Credit Sales per Day 7 ——————————————————————————— ——————————————————————————— . O=Operating Cycle R=Raw Material Storage Period W=Work In Process Period F=Finished Goods Inventory Storage Period D=Debt Collection Period C=Credit Payment Period Each of the above can be classified as follows.

RAYALASEEMA HYPO HI-STRENGTH C = Average Creditors ———————————————— Average Credit Purchases per Day After computing the period of one operating cycle. Maximum Permissible Bank Finance Regarding Tandon Committee:The Reserve Bank of India constituted a study group to frame guidelines for follow up of bank credit under the chairmanship of P L Tandon in 1974. the total number of operating cycles that can be completed during a year can be completed by dividing 365 days with number of operating days in a cycle. 1975 is popularly known as “Tandon Committee Report”. the bank should only supplement the borrower resources or carrying a reasonable level of current assets in relation to his production requirements. The following are various approaches recommended by the committee 1. The total operating expenditure in the year when divided by the number of operating Cycles in a year will give the average amount of Working Capital requirement. As a lender. The report submitted by the committee in August. 8 .

While the balance should be provided by trade creditors and current liabilities as also banks. That change over should 9 . The committee recommended that. the limit under the particular methods exceeds. the excess should be converted into a funded debt and liquidated within agreed period. bank may provide 75% of Working Capital gap and the customer should provide the balance 25% from long-term sources. Method-3 This method is similar to method-2. It was also suggested that.RAYALASEEMA HYPO HI-STRENGTH 2. Method-1 Under this method. Method-2 According top this method. the borrower should be required to provide through long-term sources to the extent of 25% of the gross current assets. The Bank should finance a part of Working Capital gap and balance should be financed through long-term sources. the core current assets should be determined and separately funded from long-term resources. if any borrower’s case. The difference between the total current assets and the current liabilities other than bank borrowings is termed as “Working Capital Gap”. But it further requires that even out of gross current assets.

a borrower is first brought into the method. Therefore.Hence.e. I. 2970709/.e. Company’s Method:SRHH Ltd generally computes the MPBF as given under o 30% on Debtors o 20% on Stores and Spares Financial Ratio Analysis Introduction:Financial Analysis is the process of identifying the financial strengths and weaknesses of the firm by the properly establishing relationships between he items of the Balance Sheet and the Profit and Loss Account. ‘Financial Statement Analysis is managerial interpretation of financial statements for parties demanding financial information.RAYALASEEMA HYPO HI-STRENGTH be gradual i. anticipated turnover for forthcoming year may be Rs.3000000. Turnover Method:In the year 2005-06 turnover was Rs.then after method-2 and finally to method-3. MPBF should be Rs. 10 .. 20% of Rs.600000.3000000.

III. it is known as the time series analysis. A single ratio does not convey much meaning and has to be compared with some standard. Standard of comparison may consist of: I. IV. The performance of a firm is evaluated by comparing its present ratios with past ratios. strength and weaknesses of a firm. II. Past Ratios Projected Ratio Competitors Ratios Industry ratios Time Series Analysis:When financial ratios over a period are compared.RAYALASEEMA HYPO HI-STRENGTH Ratio Analysis Meaning and Scope:Ratio Analysis is a widely used tool in financial analysis. 11 . A financial Ratio helps to express the relationship between two accounting figures in such a way that users can draw conclusions about the performance. The term ratio in it refers to the relationship expressed in mathematical terms between two individual figures or group of figures connected with each other in some logical manner and are selected from Financial Statements of the concern. A ratio reflecting a quantitative relationship helps to from a qualitative judgment.

Proforma Analysis:The comparison of current (or) past ratios with future ratios is projected analysis or proforma analysis. The extent to which the firm has used its long-term solvency by borrowing 12 . financial statements. Future ratios can be developed from the projected or pro forma. • • The efficiency with which of the firm is utilizing its assets in generating sales The overall operating efficiency and performance of the firm revenue.RAYALASEEMA HYPO HI-STRENGTH Cross-sectional Analysis:Comparing the ratios of one firm with some selected firms in the same industry at the same point of time is known as the cross-sectional analysis. It shows the firm’s relative strengths and weaknesses in the past and future. Utility of Ratio Analysis The Ratio analysis is the most powerful tool of financial analysis with the help of ratios one can determine: • • funds. and The ability of the firm to meet its current obligations.

He will also be interested in the profitability of the firm. the analyst will usually select a few important ratios. The equity shareholders are generally concerned with their return and also about the financial conditions only when their earnings are depressed. 13 .RAYALASEEMA HYPO HI-STRENGTH Performance analysis: A short term creditor will be interested in the current financial position of the firm. Credit Analysis: In credit analysis. Security Analysis: The ratio analysis is also useful in security analysis. debt-equity ratio to determine the stake of the owners in the business and the firm’s capacity to survive in the long run and any one of the profitability ratios. while a long-term creditor will pay more attention to the solvency of the firm. The major focus in security analysis is on the long-term profitability. The detailed analysis of the earning power is important for security analysis. He may use the current ratio or quick-ratio to judge the firm’s liquidity or debt-paying ability.

the firm should undertake a detailed analysis to spot out the trouble areas. Trend Analysis: Trend analysis of the ratios adds considerable significance to the financial analysis because it studies ratios of several years and isolates the exceptional instances occurring in one or two periods. Their survival depends upon their operating performance. Management has to protect the interest of all the conditional parties. creditors.RAYALASEEMA HYPO HI-STRENGTH Comparative Analysis: The ratio of a firm by themselves does not reveal anything. If it is significantly out of line. Although the trend analysis of the company’s ratios itself is informative. 14 . and others. This comparison will reveal whether the firm is significantly out of line with its competitors. but it is more informative to compare the trends in the company’s ratios with the trends in industry ratios. They have to ensure some minimum operating efficiency and keep the risk of the firm at a minimum level. For meaningful interpretation. owners. the ratios of a firm should be compared with the ratios of similar firms and industry.

 Investors:They are most concerned about the firm’s earnings. Hence their analysis is confined to evaluation of the firm’s liquidity position. its ability to generate cash to be able to pay interest and repay principal and the relationship between various sources of funds. They analyze the firm’s profitability over time.RAYALASEEMA HYPO HI-STRENGTH Objectives (or) Purpose of Ratio Analysis The nature of analysis will differ depending on the purpose of the analyst. and that the firm’s financial condition is sound 15 .  Suppliers of long-term debt:They are concerned with firm’s long-term solvency and survival. investors and others. It is their overall responsibility to see that the resources of the firm are used most effectively and efficiently. or by parties outside the firm namely owners. It can be undertaken by management of the firm.  Management :They would be interested in every aspect of Financial Analysis.  Trade Creditors:They are interested in firm’s ability to meet their claims over a very short period of time. creditors. They are also interested in every aspect of the firm’s financial structure to the extent it influences the firm’s earnings ability and risk.

Yet it suffers from various limitations.RAYALASEEMA HYPO HI-STRENGTH Limitations of Ratio Analysis The ratio analysis is a widely used technique to evaluate the financial position and performance of business. o It is difficult to decide on proper basis of comparison. o The ratios are generally calculated from past financial statements and. o The differences in the definitions of items in the Balance Sheet and the Profit and Loss Statement make the interpretation of ratios difficult. o The company is rendered difficult because of differences in situations of two companies or of one company over years. o The price level changes make the interpretation of ratios invalid. 16 . thus are no indicators of future. o The ratios calculated at a point of time are less informative and defective as they suffer from short-term changes.

Objectives & Company profile 17 .RAYALASEEMA HYPO HI-STRENGTH CHAPTER II Research Methodology.

are to be collected then. trends for the purpose of ratio analysis has to carried out financial analysis is the analysis and interpretation of financial statements and a proper financial analysis can be give the user better insight about financial strengths and weakness of the firm. The sources of information fall under two categories. ideas from texts. etc. the data in statements is to properly organized and arranged and then relationship is to be established between financial statements and finally conclusions are to be drawn from the interpreted information and presented form of report. The collection of data is an important aspect of Research. income statement. Internal Sources: 18 . Financial analysis is the starting point for making plans before using any sophisticated forecasting and planning procedures For the purpose. records. Research involves getting tools.RAYALASEEMA HYPO HI-STRENGTH RESEARCH METHODOLOGY To analyze the Working Capital. first the required information has to get collected like ratio analysis. Working Capital and management analysis. and websites. books. journals. trading and profit and loss.

2. External Sources: When internal records are insufficient and required information is not available. The primary of the study is collected through interaction and discussion with the officials and staff at Rayalaseem Hi-Strenth Hypo Ltd. not for the first time is called “Secondary Data”. then the organization depends on external sources. The researcher himself to study a particular problem collects the data. The external sources of data are 1. records. etc. 19 . reports. The secondary data for the study is collected from o o Annual Reports of the company from the year 2002-06 Accounting journals and manuals. Secondary Data: The data collected from the published sources i. Primary Data Secondary Data Primary Data The data collected for the purpose in original and for the first time is known as “Primary data”.RAYALASEEMA HYPO HI-STRENGTH Every company keeps certain records such as accounts. Kurnool.e. these records provide simple information for research.

1) To identify the amount of Gross and Networking Capital of In Rayalaseem Hi-strenth Hypo Ltd.RAYALASEEMA HYPO HI-STRENGTH o Register of Companies (R O C) Websites. Data Analysis:Data Analysis is by implementing various tools like Ratio Analysis. 4) To understand the impact on Liquidity management on the Shareholders Profitability. etc Objectives of the Study The present Study in Sri Rayalaseem Hi-strenth Hypo Ltd. Kurnool over the study period. 2) To study the changes in Net Working Capital during the study period. Kurnool is undertaken to evaluate the working capital strategy in the organization by establishing the following objectives. 5) To give viable suggestions based on the findings to improve the Liquidity progress of Rayalaseem Hi-strenth Hypo Ltd. Trend Analysis. 3) To design the Operating Cycle and to find the duration for each cycle. 20 .

This involved discussing the drivers of the superior Working Capital performance because it is a barometer for the underlying business behavior. The prime focus is to gain and develop a common language that will be used within the organization to talk about communicate and set targets for Working Capital. Need for the study The need for the study is to find out the effective means of Working capital management followed this path with focused strategies for improving corporate liquidity. The objective is to better assess the true potential of the company and its ability to achieve sustainable results from this potential. investment optimization and the flow of financial information across the value chain.RAYALASEEMA HYPO HI-STRENGTH To various objectives are interrelated and it is clear that the analysis and interpretation of these objectives are helpful to different users for different purposes. 21 .

Thirdly. Secondly. The reason for restricting the study of this period is due to time.RAYALASEEMA HYPO HI-STRENGTH Scope of the Study The scope of the study is defined below in terms of concepts adopted and period under focus: First the study management or working capital is confined only to the Rayalaseem Hi-strenth Hypo Ltd.e. the concepts of working capital i. Gross and Net is used in measuring profitability and liquidity respectively and also to arrive at various objectives of the study. Kurnool. the study is based on the annual reports of the company for a period of four years form 2002-2006. Thus on the whole the purpose of the project is to analyze the past and present performance of company on various financial areas like 22 .

23 .RAYALASEEMA HYPO HI-STRENGTH 1. due to lack of time in depth of financial matters have not been touched. 4. The information available in the balance sheets has taken from the published annual report. The information provided in the company balance sheet is only the data source available. Limitations of the Study 1. Since financial matters are sensitive in nature the same could not be acquired easily. so it has only limitations. 2. Inventory Management 3. Working Capital Management 2. 3. There is only two months period to finish the project. Some required secondary data which is not provided by company. 5. Receivables Management Since the past performance will be the essential yard stick or data for predicting.

1986 as a public limited company and obtained its certificate commencement of business on 30th October. He is bestowed with rich experience in the art of industrial management. Initially the company has set up facilities for manufacture of chemicals and later on the company has diversified into generation of power through wind turbines and biomass. T G Venkatesh. both in financial and technical areas. Since its inception.RAYALASEEMA HYPO HI-STRENGTH Company Profile Sree Rayalaseema HI-Strength Hypo Ltd (SRHHL) was incorporated on 24 th October. he bestowed all the devotion and hard work and ensured that the company worked at optimum capacity and post a stellar performance. Technology: 24 . 1986. Promotions: Mr. who hails from an industrial family promoted SRHHL.

Oleum. Thailand. Vietnam. Oman. France. Kenya. USA. Other division benefit from the cutting edge research. Mauritius. Iran. Cyprus. Saudi Arabia. exports Calcium Hypochlorite to countries all across the globe Viz. Bangladesh. England. Brunei. Colombia. Monochloro Acetic Acid. They are only manufactures of Calcium Hypochlorite in India using the Sodium process. and one of the very few in the world. the torch bearer of the conglomerate. MCA. Sri Lanka. Netherlands. There are very few companies in the world with this level of technology. Philippines. Hungary. Stable Bleaching powder. Durban. Main Products: The main products include Sulphuric Acid. A state of the art sodium process technology developed through in house Research and Development efforts helps the company in manufacturing the product with a chlorine content of 65% to 70%. Korea. Bleach Liquor. Hydrochloric Acid and Non-Ferric alum. etc. Germany. Sodium Hypo. Australia. China. Peru. The certificate of Merit awarded by CHEMEXCIL for outstanding export performance reinforces its status as a recognized export house. Singapore. Calcium Hypochlorite. Malaysia. Belgium. Tanzania. Sree Rayalaseema Hi-Strength Hypo Ltd. Chloro Sulphonic Acid. Geared Up For Exports: Sree Rayalaseema Hi-Strength Hypo Ltd. They have won national level awards in Research and Development.RAYALASEEMA HYPO HI-STRENGTH The company has very strong Research and Development team. is only India manufacturer of Calcium Hypochlorite. 25 .

has distinctive edge in the maucfacture of this product. the product meets international quality standards. other pharmaceuticals. Product Range and Applications: o Calcium Hypochlorite (Gramules and Tablets) o Stable Bleaching Powder o Monochloro Acetic Acid o Chloro Sulphonic Acid o Oleum 23% and 65% o Bromine 26 . The company is also a front-ranking producer of Monochloro Actic Acid. organ chemicals. All leading manufactures of Non-Seroid AntiInflammatory Drugs. Manufactured by the scientific Crystallizer technology. etc use Monochloro Acetic Acids. thanks to the twin advantages of indigenous raw materials availability and supply of some specialized chemicals by Sree Rayalaseema Alkalis and Allied Chemicals Ltd. pesticides.RAYALASEEMA HYPO HI-STRENGTH Calcium Hypoclorite touches vital facets of human existence and its of proven importance in many areas of day-to-day activity. Sree Rayalaseema HiStrength Hypo Ltd.

Paper and Sugar Industries. leather. and aquaculture and pesticide makers. bleaching of paper. Producers of dyes & intermediaries. textile. Production Capacity: Product Installed Capacity (Tons Per annum) Calcium Hypoclorite 6600 27 . Chloro Sulphonic Acid Caters to the Pharmaceutical. soaps and dtergetns. water treatment. fertilizer industry. manufactured by a proven indigenous technology. dye intermediates photography. Stable Bleaching powder has taker in sanitization. Bromine. pharmaceuticals. Sulphuric Acid finds widespread usage in sulphonation. as an intermediary in pharmaceutical industry amongst others. pesticides.RAYALASEEMA HYPO HI-STRENGTH o Battery and Commercial grades Sulphuric acid Calcium Hypoclorite is used extensively in aquaculture. and dyes & Intermediaries industry. pulp and others. explosives and others use oleum. finds application in various industries including petrochemicals.

Sree Rayalaseema Dutch Kassenbouw Limited is a leading producer of premium Stable Bleaching Powder (tropical chloritde of lime) under the brand name Rayalaseema Stable Bleaching Powder. 28 . The ISO 14001 certification for Environmental Management and the ISO 9002 certification for Quality systems bear out the company’s commitment to ensuring quality of implacable standards. Sree Rayalaseema Hi-Strength Hypo Ltd adheres to all international standards of quality. The company specializes in the production of approved ISI Grade-I. Grade-II and TGV Super-9 brands of leaching powder. The state of the art manufacturing facility has an output capacity of 15 TPD.RAYALASEEMA HYPO HI-STRENGTH Stable Bleaching Powder Monochloro Acetic Acid Sulphuric Acid Chloro Sulphonic Acid Bromine 9900 2400 49500 33000 65 Sree Rayalaseema Hi-Strength Hypo Ltd has provided capacitors and also uses steam for refrigeration to conserve energy. Brick lined CSA operating efficiencies. A 9 MW biomass powder project at Kurnool cater to the company’s growing power requirements. Sree Rayalaseema Dutch Kassenbouw Limited Purifying Water for Health.

30 31 Days (1*5)+(2*6)+(3*7)+(4*8) 29 .Debtors 8.17 88. bleachers and others. railways.Raw Material 2. aqua culturists.41 0.76 1.66 1. Stable Bleaching Powder manufactured by the Rheinfedlen’s bleaching powder process.Finished Goods 7. It is widely used by municipalities. bactericide. textile manufactures.17 22.00 0.92 0.80 1.67 8.77 64.Debtors 4.Creditors Weights of Various Stage 5.00 0.46 80.30 0.30 123 Days 2004-05 225. Weighted Operating Cycle:2002-03 Duration of Various Stage 1. fungicide and bleaching agent.23 1.RAYALASEEMA HYPO HI-STRENGTH The company has the credit of contributing hygienic water to all the surrounding areas.00 3.71 1.50 18.30 0. is an effective disinfectant.1 0.00 0.58 0.7 56.Finished Goods 3. algaecide.30 149 Days 2003-04 221.00 44.30 94 Days 2005-06 107.00 0. hospitals.30 0.Raw Material 6.61 68.67 69.Creditors Weighted Operating Cycle 244.17 0.

58 1366.66 1548.81 2005-06 653.91:1 0.64 1612.RAYALASEEMA HYPO HI-STRENGTH Summary of Performance S No 01 02 03 04 05 06 Particulars Working Capital Gap Current Ratio Debt-Equity Ratio Operating Profit Profit from Previous years Total Balance of P&L A/c 2002-03 1984.91 The main purpose of Working Capital Ratio Analysis is  To indicate Working Capital management performance and .56 222.34:1 0.62 2.54 231.84 1612.66 7.69 1548.25 8.68 2.54 183.77 1366.24:1 0.25 2.38 1167.81 1620.66 2003-04 2064.  To assist in identifying areas requesting closer management 30 .62 2004-05 1671.90:1 0.

unfavorable results are usually significant.  Different departments face very different situations. whereas. Comparisons among them. Consequently.  The results are based on highly summarized information. favorable results mean little. situations which require might not be apparent. or with Global “ideal” ratio values. might be unnecessarily highlighted. can be misleading.RAYALASEEMA HYPO HI-STRENGTH Key points have been taken into consideration while analyzing financial ratios. 31 .  Ratio analysis is somewhat one-sided. or situations which don’t warrant significant effort. They are as under.

Ratios help to summarize the large quantities of financial data and to make qualitative judgement about the firm’s financial position. which can be in turn. used to make a qualitative judgement. The greater ratio. Introduction to the ratio analysis: Nature of ratios: Ratio analysis is a powerful tool of financial analysis. investors and others. A ratio is defined as “the indicated quotient of two mathematical expressions” and as “the relationship between two or more things. viz. the greater firm’s liquidity and vice versa.. It can be under taken by the management of the firm. The point to note is that a ratio indicates a quantitative relationship. 32 . owners creditor.RAYALASEEMA HYPO HI-STRENGTH Theoretical background of the study Financial analysis is helpful in assessing the financial position and profitability of a company. a ratio is used as an index or yardstick for evaluating the financial position and performance of affirm. is known as a financial a ratio. The relationship between two accounting figure. It is the process of identifying the financial strengths of the balance sheet and profit and loss account. Or by parties outside the firm.” In financial analysis. Such is in the nature of all financial ratios. expressed mathematically.

. 1. there is need for fixing relationship between various related items. From this time onward. Long term creditors: The requisite of ratio analysis to come in to being caused by the following facts. Their significance likes in the fact that they are interrelated. 2. REQUISITE FOR RATIO ANANLYSIS: more confidence in those firms that shows steady growth in earnings as such. An accounting ratio shows the relationship between the two interrelated accounting figures as gross profit to sales etc. Ratio analysis is done to develop meaning full relationship between individual items and group of items usually shown in the periodical financial statements published by the concern. Ratio analysis a tool for the interpretation of financial statements is also important because ratios helps the analysis to have a profound 33 . 2. Owners are investors desire primarily a basis for estimating capacity. they concentrate on the analysis of the firm’s present and future profitability. Creditors: Creditors are concerned primarily with liquidity and ability to pay interest on redeem loan with in a specific period. They are also interested in the firms financial position to the extent it influences the firms earnings ability. 1.RAYALASEEMA HYPO HI-STRENGTH Ratio analysis gives the efficiency and effectiveness of the company’s performance on many parameters. Business facts displayed in balance sheet and profit and loss account do not convey any pompous individually.

They restore The long-term creditors are interested in firm’s long-term solvency and survival. its ability to generate cash. Government : Government is also interested to know the strength and weakness of the firm. Government makes the future plans. management of the firms or executives would be interested in every aspect of the fianancial analysis. Shares are most concerned about the firm’s earnings.RAYALASEEMA HYPO HI-STRENGTH cautiously in to the data given statements figure in their peremptory forms shown in financial statements are neither significant nor to enable to be compared. Management: Finally. 3.. share holders and investors: Investors and shareholders. Ratio analysis the starting point for making plans before using any sophisticated forecasting and budgeting procedures. to be able to pay interest and repay principal and relationship between various sources of funds. most effectively and efficiently. The employees make use of information available in financial statements. Employees: The employees are also interested in the financial position of the concern especially profitability. 6. It is their overall responsibility to see at the resources of the are used. who have invested their money in the firms. and that the firm’s financial condition is should. There wages increase the amount of fringe benefits are related to the volume of profits earned by the concern. 4. Through the financial analysis they try to seek answers to the following questions. They analyses about the firm’s future solvency and profitability overtime. Users of ratio analysis: The nature of ratio analysis will differ depending on the purpose of analyst. The ratio analysis is useful for the following persons. policies on the basis of financial information available from various units of the company. 34 . 5.

It should be compared with some standard. When financial ratios over a period of time are compared it gives an indication of the direction of change and reflects whether the firms financial position and performance has improved.RAYALASEEMA HYPO HI-STRENGTH 1. Standards of comparison may consist of : 1. Ratios of some selected firm. 4. 3. Standards of comparisons: A single ratio in itself does not indicate favorable or unfavorable condition. 35 . Is the firm in a position to meet it’s current obligations? 2. How efficiently does the firm use it’s assets? 4. What sources of long term finance are employed by the firm and what is the relationship between them? Is there any danger due to the employment of excessive debt? 3. 2. The easiest way to evaluate the performance of a firms is to compare its present ratios with past ratios. Ratios developed using the projected or performed financial statements of the same firm. but it does indicate what can be expected in the future. Ratios of the industry to which the firm belongs. deteriote or remained constant over time. Are the earnings of the firm adequate? 5. Ratios calculated from past financial statements of the same firm. Do investors consider the firm profitable and safe for the purpose of investing their money in the shares of the firm? Financial analysis may not provide exact answers to these questions. This kind of comparison is valid only when the firms accounting policies and procedures have not changed over time. especially the most progressive and successful at the same point in time.

the industry ratios will prove to be useful in evaluating the fianancial conditions and performance of a firm. 3. corrective actions should be initiated. 36 . But there are certain practical difficulties in using the industry ratios. It is difficult to get ratio for the industry. industry ratios are important standards in view of the fact that each industry. A firm can easily resort to such a comparison. 1. The comparisons strengths and weaknesses in the past and the future. as its characteristics which influences the financial and operating relationships. Future ratios can be developed from the projected or performed financial statements. Some times the spread may is wide that the average may not be little utility.RAYALASEEMA HYPO HI-STRENGTH Some times future ratio are used as the standard comparison. If the future ratios indicate weak financial position. as it is not difficult to get the published financial statements of the similar firms to determine the financial conditions and performance of a performance of a firm its may be compared with average ratios of the industry of which the firm in a member. It is possible to extremely strong and extremely weak firms. 2. it is more useful to compare the firms ratios of a few carefully selected competitors indicates the relative financial position and performance of the firm. they are averages of the ratios of strong and weak firms. Even if industry ratios are available. 4. Another way of comparison is to compare the ratio of one firm with some related firms in the same industry at the same point of time. The averages will meaningless and the comparison futile. If the firm within the same industry widely differ in their accounting policies and practices. In most of the cases. the industry and eliminate extremely6 strong and extremely weak firms.

In view of the requirements of the user of the ratios. which generally undertake financial analysis. Management is interested in evaluating every activity of the firm. These ratios can grouped in to various claases accoarding tyo the fianancialactivity or function to evaluated. or short-term creditors. owners and management. 2. long term creditors. Many diverse groups people are illustrated in analyzing the financial information to indicate the operating and financial efficiency and growth of the firm. Types of ratios: Several ratios can be calculated from the accounting data contained in the fianancial statements. the parties. 1. the extent which the firm has used its long-term solvency by borrowing funds. The people use ratios to determine those financial characterics of the firm in which they are interested with the help of ratio one can determine. The overall operating efficiency and performance. As stated earlier. we may classify them as follows: 37 .RAYALASEEMA HYPO HI-STRENGTH Utility of ratio analysis: It is most important tool of financial analysis. Long term creditors on other hand. They have to protect the interests of all parties and see that the firm goes profitability. Short-term creditor’s main interest is in the liquidity position of the short-term solvency of the firm. are more interested in the long-term solvency and profitability analysis and the analysis of the firms financial conditions. The ability of the firm to meet its current obligations. The efficiency to which the firm is utilizing its assets ingenerating its sales revenue and 3.

3. Profit and loss account ratios: This ratios deal with the relation ship between the two profit and loss account items. Functional classification 1. Balance sheet ratios: balance sheet ratios deal with the relationship between two balance sheet items must however pertain to same balance sheet ex: current ratios. Therefore it is necessary to strike a proper balance between liquidity and lack of liquidity. Composite or mixed ratios: These ratios are exhibit statement items and balance sheet items. 38 .RAYALASEEMA HYPO HI-STRENGTH Traditional classification: 1. Due to lack of sufficient liquidity will result in bad credit rating. Also that is not too much meets its obligations. analysis of liquidity needs the preparation of cash budgets and cash flows statements. current ratio and quick ratio. Stock turn over ratios. A view high degree of liquidity is also bad. Liquidity ratios: It is extremely essential for a firm to able to meet its obligations as they become due liquidity ratios measure the ability of the firm to meet its current obligations. loss of creditors confidence our even in law suits resulting in the closure of the company. But liquidity ratios by estabuilishing and relation ship between cash flow statements. Both the items must belong to the same profit and loss account. The most common ratios which indicates the extent of liquidity or lack of it are. In fact. Ex. But liquidity ratios by establishing a relation ship between cash and other current assets to currents obligations provide quick measure of liquidity. 2. Ex: current ratios.

Creditors and owners are also interestred in the profitability of the firm. thus involve a relation ship between sales and the various assets. The ratios indicate the funds provide by the owners and creditors as a general. 3. The profitability ratios are calculated to measure the operating efficiency of the company. Activity ratios are employed to evaluate the efficiency with which the firm managers and utilizes its assets. Profits are the ultimate output of the company and it will have no future if it falls to make sufficient profits.Profitability ratios: A company should earn profits to survive and grow over a long period of time. 39 . Activity ratios: The funds of creditors and owners are invested in various kinds of assets to generate sales and profits.RAYALASEEMA HYPO HI-STRENGTH 2. but it would be wrong to assume that every action initiated by management of company should be aimed at maximizing profits. financial institutions etc. Leverage of capital structure ratios is calculated. Profits are difference between total revenues and total expenses over period of time. Irrespective of social consequences. These ratios are also called turn over ratios because they indicate the speed with which assets are being converted or turned power in to sales activity ratios. Are more concerned with the firm’s long term financial position of the firm. there should be and appropriate mix of debt and owners equity in financing the firms assets. Leverage ratio: The long term creditors. like debenture holders. The better in management of assets. 4. A p[roper balance between sales assets generally reflects that assets are managed well. The larger the amount of sales. Profits are essential.

The analyst should be aware of these problems. The ratios are generally calculated from past financial statements and. The comparison is rendered difficult because of differences in situations of two companies or one of the companies over years. 2. The ratios calculated at a point of time or less informative and defective and they suffer from short term changes. 4. Ratios are only means of financial analysis and an end in itself. The following are the limitations of the ratio analysis. 40 . does not convey much sense. A single ratio usually. thus are indicators of future.RAYALASEEMA HYPO HI-STRENGTH Limitations of ratio analysis: The ratio is a widely used technique to evaluate the financial position and performance of a business. 5. Ratios have to be interpretated and difficult people may interpret the same in different ways. The price level changes make the interpretations of ratios invalid. 7. 6. 3. 8. It is difficult decide on paper for comparison. The differences in the definitions of items in the balance sheet and profit and loss statement make the interpretation of ratios difficult. 1. But there are problems in using ratios.

A. Quick Ratio. If current assets can pay off current liabilities. 41 . The following table gives the details of the items constituting these two elements. Current Ratio Current ratio may be defined as the relationship between current assets and current liabilities. The current assets should be either liquid or near liquidity. it is the ratio of current assets and current liabilities. The bankers. It is measure of general liquidity and is most widely used to make the analysis of a short term financial position or liquidity of a business enterprise.RAYALASEEMA HYPO HI-STRENGTH LIQUIDITY RATIOS Liquidity refers to the ability of a concern to meet its current debt obligations. The ratio is also known as working capital ratio. These should be convertible into cash for meeting the current debt obligations. They extend the credit only if they are sure that current assets are adequate to pay out the obligations. then liquidity position is said to be satisfactory. The two basic components of the ratio are: current assets and current liabilities. Current Ratio. then the current assets cannot be met from them. The short term expenses or current liabilities are met by realizing amounts from current assets. suppliers of the goods and other short term creditors are interested in the liquidity position of a business concern. To measure the liquidity position of a business concern. B. the following ratios can be calculated. then the liquidity position is considered bad. If the liabilities are less. In other words.

Bills receivables .90:1 2005 2006 2007 2008 2991760. Bills prepaid . Income tax payable .RAYALASEEMA HYPO HI-STRENGTH Components of Current Ratio CURRENT ASSETS .Work in progress .Dividend payable particulars Current assets (Rs in lakhs) Current liabilities (Rs in lakhs) Current ratio 2004 3149015.21:1 1.85:1 2.70:1 1.76 2 2.4 3578910.79 7 135237.7 0 9 . Out standing expenses .7 5 .Sundry creditors.Prepaid expenses Current ratio= Current assets Current liabilities CURRENT LIABILITIES .59 1928977. Cash at bank .77 1083661. .19 2.Sundry debtors . Cash in hand .6 1550552 2108740.4 4198691 4053543.92:1 42 . Bank overdraft . Inventories .

The current ratio of the firm was not good in the year 2006 and 2008 current ratio was not satisfactory. Because having less than 2:1 ratio. the company needs to improve its short term financial position. However.RAYALASEEMA HYPO HI-STRENGTH 4500000 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0 Current assets Current liabilities Current ratio 2004 2005 2006 2007 2008 INTERPRETATION: The current ratio of the firm measures in short term solvency. 43 . The accepted standard ratio is 2:1.

it can be converted in to cash with in a short period. As assets is said to be liquid.44:1 1.52:1 2007 3565590. Bills receivable .72 1.87:1 44 .49 1928977. marketable securities Quick ratio= Quick assets Current liabilities Particulars Quick assets Current liabilities Quick ratio 2004 2005 2006 2932398. Out standing expenses .34 7 1083661.1 1352237. Bank over draft 2653175.54 1550552.76 2. Components of quick ratio: Quick assets . Dividend payable .RAYALASEEMA HYPO HI-STRENGTH A Quick ratio/acid test ratio/liquid ratio The term liquidity refers to the ability of a business enterprise to pay its short term liabilities. Quick ratio may be defined as the relationship between quick assets and current liabilities. Sundry creditors . Cash at bank .65 1. Sundry debtors . Cash on hand .59 9 2.39:1 Quick liabilities .0 2533610.48 2108740.30:1 2008 2926053. Bills payable .

 A quick ratio of 1 is considered as ideal. INTERPRETATION:The position.RAYALASEEMA HYPO HI-STRENGTH 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0  All current assets. except stock and prepaid expenses are quick assets. Quick ratio is more than the standard of 1:1. the company Quick assets Current liabilities Quick ratio 3-D Column 4 had excess liquid assets. This indicates company extremely had high liquidity 45 . a quick ratio less than 1. indicates inadequate liquidity of the firm.

RAYALASEEMA HYPO HI-STRENGTH Super Quick Ratio/ Absolute Ratio: The cash Ratio measure the absolute liquidity of the business.26 2108740.08 0.02 1550552.13 Cash Ratio = 46 .72 Ratio (A/B) 0.13 0.59 113171.06 0.38 1928977. This ratio is calculated as.05 0.21 1083661.60 1352237.19 71150. This ratio considers only the absolute liquidity available with the firm. Inlakhs) Particulars 2004 2005 2006 2007 2008 Super Quick Current Liabilities Assets(A) (B) 91973.76 276745. Cash + Marketable Securities ______________________________ Current Liabilities (Rs.65 195291.

47 .08 Super Quick Ratios Ratios (A/B) 0.04 0.14 0.RAYALASEEMA HYPO HI-STRENGTH 0. So.1 0. Company almost all years had less super liquid Assets. This Indicates Company had huge balances in debtors besides their collection period was very high.06 0.50:1 so.02 0 1 2 3 2004-2008 4 5 INTERPRETATION: The Universal Standard is 0. company was not easy to meet quick obligations immediately.12 0.

These ratios are also called turn over ratios because they indicate the speed with which assets are being converted or turned or turned over into sales. thus involve a relationship between sales and various assets. Activity ratios are employed to evaluated the efficiency with which the firm managers and utilizes its assets. Active ratios. And presume that there exists an appropriate balance between sales and various assets generally reflect that assets are managed well.RAYALASEEMA HYPO HI-STRENGTH ACTIVITY RATIOS: The funds of creditors and owners are invested in various kinds of assets to generate sales and profits. The better the management of assets. Some of the activity ratios are given under: Inventory turnover ratio= Sales Inventory Debtors turnover ratio= Sales Debtors Assets turnover ratio=Sales Net assets Total asset turnover ratio=Sales Total assets Fixed asset turnover ratio=Sales Net fixed assets 48 . the larger the amount of sales.

dull business.22 226460.78 30. Low turn over implies over investment in inventories.08 2005 4117146.92 31. a test of efficient management. The lesser amount of money is required to finance the inventory.RAYALASEEMA HYPO HI-STRENGTH Inventory turnover ratio: This ratio is indicated the efficiency of the firm in selling its products. It is calculated by dividing the sales by average inventory or the year ended inventory. Usually a high inventory turn over ratio indicates efficient management of inventory because more frequently the stocks are sold.81(times ) 2007 6563134.08 155096.46(times) 2006 5998742.88 130849.78 28.94 227862.30 (times) turn over ratio 49 . Inventory turnover ratio= Sales Inventory Particulars Sales Inventory 2004 4544096.15 404966. This ratio measures how quickly inventory is sold.54 14.36(times) Inventory 29. This implied under investment in or very low level of inventory.80(times) 2008 6875918.

50 . the company produces goods quickly. This indicates company had a strong production capacity. However.RAYALASEEMA HYPO HI-STRENGTH 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 2004 2006 2008 Inventory Inventory turnover ratio Sales INTERPRETATION: This ratio measures the rapidity with which stock is turning into receivables through sales company produces good very quickly rest of year.

96(times) 5884308.58 Debtors turn over 9.04 10. 51 .6 5 Debtors 604128. Debtors turn over ratio= Sales Debtors Particulars Sales 2004 2005 5661902.36 9. Here sales were so rapidly converting into cash.60 (times) 2008 11755303.16 (times) 2007 11941052.36 (times) 2006 8309824.2 8 919879.77 71928655 16.74 ratio (times) 12000000 10000000 8000000 6000000 4000000 2000000 0 2004 2006 2008 Sales Debtors Debtors turn over ratio INTERPRETATION: Debtor’s turnover ratio measures the collection period of debtors.99 817828.62 18.RAYALASEEMA HYPO HI-STRENGTH Debtors turn over ratio Debtors turn over ratio is the relationship between the credit sales and debtors of the firm.9 2 604498. This so good to Company. Year 2007-08 was little bit high rather than rest of years.

34:1 2008 11755303.6:1 2005 5661902.67 1.RAYALASEEMA HYPO HI-STRENGTH Asset turn over ratio Asset turn over ratio is also known as Investment turn over ratio.25:1 Note: Net assets = net fixed assets + net current assets.07:1 2007 11941052. Here.27 8875816.99 7723318.43 1.84 0. company should concentrate on more fixed assets rather than current assets.01 0. 12000000 10000000 8000000 6000000 4000000 2000000 0 2004 2005 2006 2007 2008 Sales Net assets Assets turn over ratio 3-D Column 4 INTERPRETATION: This ratio measures the net assets capacity with turnover. However. It is based on the relationship between the cost of goods sold (sales) and the assets of the firm.92 8769273. net assets are not sufficient for production of goods. 52 . Asset turn over ratio=Sales Net assets Particulars Sales Net assets Assets turn over ratio 2004 5884308.64:1 2006 8309824.16 1.28 9419328.65 9040038.

28 4677124.90 2. fixed assets sufficient for production of goods.RAYALASEEMA HYPO HI-STRENGTH Fixed asset turn over ratio Fixed asset turn over ratio= Sales Net fixed assets Particulars Sales Net assets 2004 2005 2006 8309824.99 4144407. 53 .19:1 Fixed asset 1:1 turn over ratio 12000000 10000000 8000000 6000000 4000000 2000000 0 2004 2005 2006 2007 2008 Sales Net fixed assets Fixed asset turn over ratio INTERPRETATION: This ratio measures fixed assets capacity with turnover. However.44 0.65 5661902.24 5777513.64 5365784.98:1 11941052.67 2:1 2007 2008 58843089.92 fixed 591022.27 11755303. company should concentrate on more fixed assets rather than currents assets. Here.55:1 2.

• Movement of accounts payable is shown an decrease trend. • Operating statement of SRHH Ltd clearly indicates the heavy operating expenses. etc is satisfactory. Quick ratio.RAYALASEEMA HYPO HI-STRENGTH FINDINGS • Weighted operating cycle analysis helps in estimating the amount of funds that are required for the various stages of the cycle. • The inventory turnover ratio is continuously declining • The activity ratios are employed to know the efficiently of firm in managing and utilizing the assets. This indicates company is able to generate credit at liberal terms and generate revenues at other cost. That’s why they are getting less profits. • Company was able to manage with lower working capital borrowings because of short-term loans and outstanding creditors. • The liquidity ratio such as current ratio. The current ratio is more than 2:1 and quick ratio is more than 1:1 which is acceptable. 54 . It is a method of estimating working capital requirement for SRHH Ltd in the year 2002-03 was only 31 days.

etc 55 . EOQ. o The company should improve profits by reducing indirect or operating expenses. Company management must take necessary actions for forthcoming years. o Company’s had a more inventory.RAYALASEEMA HYPO HI-STRENGTH SUGGESTIONS o The company must try to maintain an optimum level of inventory and develop the strategy of investing excess cash balance. o SRHH Ltd should develop optimum credit policy o SRHH Ltd should determine the maximum length of trade-credit period with the help of following formula M=m+N/N-W*(n-m) o Company concentrate only shareholders funds it was so. o Year 2005-06 Company’s turnover was very poor. Management should adopt necessary inventory policies like ABC Analysis. expensive than other funds.

Still. which can’t be prevented within their scope.RAYALASEEMA HYPO HI-STRENGTH CONCLUSIONS The Management of Sri Rayalaseema Hi-Strength Hypo-Ltd. 56 . some time some decisions can’t be put into practice due to some other influences. Kurnool is well aware of taking necessary step in making of effective decisions.

RAYALASEEMA HYPO HI-STRENGTH BIBLIOGRAPHY Financial Management Management Accountancy : Research Methodology Company Profile Financial Analysis : : : : Khan & Jain. I M Pandy S N Maheswari C R Kothari Manual of SRHH Ltd Balance Sheets. Profit & Loss Accounts of SRHH Ltd from 2004 to 2008 57 .