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Patel, and Shri R.P.Patel. All the founders of Duke are quality conscious. Technology serving the nation since 1989 by providing quality pumping solution to pump industry. India’s 2/3 population about 66% is mainly dependent on rain water. Now rapid changing of modernization is experienced in ruler villages are now days becoming changing its ground water. It start up for catering in form of small submersible pumps repairing workshop. Today’s company has sound financial position powerful management skill and motivated staff. It is having production of producing pumps sets per day company is square over 41000 sq. Feet there strong building in 225000 sq. Feet land area. Duke Plasto Technique Pvt. Ltd. synonymous for manufacturing quality consistent and reliable products and as its name Duke itself speaks king in pumping solution industries and winners of national quality award in 2007 from government of India.
1.2 VISION To be eminent global brand providing complete, innovative, invincible quality pumping paraphernalia under one roof. 1.3 MISSION
We are committed to manufacture products complying with the best quality standards of the world. We strive to create an environment that nurtures youth and nourishes the experienced. On the bedrock of ethics, Duke is instituted by amalgamating the best practices and technologies of the world. 1.4 VALUES The values that guide us are trust, ethics, integrity, discipline and performance.
1.5 COMPANY PROFILE Name of Company :
Duke Plasto Technique Pvt. Ltd.
Corporate Office :
401, 4th floor, Ankit Building, Near Shilp, C.G.Road, Navarangpura, Ahmedabad-09 Phone : +91 -79 -26405782 Fax : +91 – 79 – 26403428
N.H.14, Deesa Highway,
Opp. Hotel Green Wood, Badarpura, Palanpur – 385510 (N.Gujarat, India.)
Size of the Unit :
Medium Scale Industry
Form of Organization :
Name of the Product :
1. Submersible Pumps 2. Motors 3. Monoblock Pumps 4. Centrifugal Pumps 5. Pressure Booster Pumps
Existing Management Body :
Managing Director Executive Director Executive Director Executive Director Chief Accountant Bankers
Mr. P.P.Patel Mr. S.N.Patel Mr. D.K.Patel Mr. R.P.Patel Mr. Manubhai Patel (1) Bank of Baroda (2) State Bank of India
HR Manager Managing Partner
Mr. Bharatbhai Joshi Mr. K.B.Solanki
1.6 ORGANIZATION STRUCTURE
Manager Production Department
Manager Marketing Department
Manager HR Department
Manager Finance Department
Ex. Accountants Cash & Bank
Ex. Accountants Sales
Ex. Accountants Purchase
Ex. Accountants Other Works
Recognized by the Best Certification
1. Duke Plato Technique Pvt. Ltd. has received ISI certification for IS 4985 in the year 1999. 2. Received ISI certification for ISI 12818, and ISO 9001:2000 from ABS in the year 2000. 3. Approval from GWSSB, Gujarat in the year 2001. 4. Approval from UP Jal Nigam in the year 2002. 5. Approval from PHED, Rajasthan in the year 2003. 6. Supplied to UNISEF & WHO, South Africa in the year 2004. 7. Approval from Karnataka water Supply Board in the year 2005. 8. Received National Quality Award for Quality Product in 2006. 9. ISO 9001:2000 certification from TUV:SUD South Asia for quality Management System in 2008. 10. CE certification from TUV:SUD for Outsource/Export to European Countries. 11. NSIC-CRISIL rating of “CRISIL SE28” for high Performance Capability certification in year 2008. 12. Received ISI certification for IS 8034 in the year 2008. 13. Applied for BEE Star rating in the year 2008.
1.8 ORGANIZATION CHART - HR & ADMIN. DEPARTMENT
Managing Director Shri P.P.Patel
PA to MD Thakor Dhanji
Dy. Manager HR & System Mr. P.M.Dalwadi
Director–Admin. & Purchase Shri R.P.Patel
Asst. Executive-HR Shubham Chandel
Asst. ExecutiveAdmin. Bharat Joshi
Canteen In charge Ramesh Loh
Receptionist Mrs.Sunita Prajapati
Driver Harchand Mafatlal
Sweeper Babubhai Punjabhai Maganbha i
Security Guard Dinesh Sabbir Babubhai Ganpatlal
2. WORKING CAPITAL MANAGEMENT 2.1 Introduction Working Capital management is a significant fact of financial management due to the fact that it plays a pivotal role in keeping the wheels of a business enterprise running. Working Capital management is concern with short term financial decisions have been relatively neglected in the literature of finance. Shortage of funds for working capital has caused many businesses to fail and in many cases, has recorded their growth, Lack of efficient and effective utilization of working capital leads to earn low rate of return on capital employed or even compels to sustain losses. Working Capital to a company is like the blood of human body. It is the most vital ingredient of a business. Working Capital management if carried out effectively, efficiently and consistently, will assure the health of the organization.
An Executive function of Finance for taking Liquidity decisions. Signifies money required for day-to-day operations of an organization. Business cannot run without adequate working capital (WC). Requirements of WC may differ from organization to organization.
2.2 Meaning Working Capital management is the administration of the firm’s current assets and the financing needed to support the current assets. Current assets are those assets, which will be converted into cash within the current accounting period or within the next year as a result of the ordinary operation of the business. They are cash or nearly converted cash resources. These include Cash and Bank Balances, Receivables, Inventory, Prepaid expenses, Short Term advances, Temporary Investments. The value represented by these assets circulates among several items. Cash is used to buy raw materials, to pay wages and to meet other manufacturing expenses. Finished goods are produced further held as inventories and when inventories are sold account receivables are created. Then the collection of account receivables brings cash into the firm and the cycle starts again.
Circulation of Current Assets
Current Liabilities are the debts of the firm that have to be paid during the current accounting period or within a year. This includes creditors for goods purchased, 8
outstanding expenses, short term borrowing, advances received against sales, taxes and dividends payable and other liabilities maturing within a year. Working Capital is also known as circulation capital, fluctuating capital and revolving capital.
2.3 Goals of Working Capital Management Manage Firm’s Current Assets And Current Liabilities: Main goal of WCM is to provide cash whenever there arise any liability. It is not easy to convert fixed assets into cash quickly so current assets are used for WCM. If the firm maintains very high level of current assets then it will not able to invest in fixed asset, this will tend to high level of block up of cash in current assets and firm will not be able to increase its wealth, this in turn can create problems at the time of liquidation. If the firm will maintain low level of current assets then it will not able to meet its current obligations. So to manage current asset according to the current liabilities is very essential for any company. Maintain Level Of Working Capital: Working Capital is important for any firm whether big or small. Working Capital helps to maintain liquidity in the firm. Not only liquidity but also to pay day-to-day expenses. If firm does not maintain a specific level of working capital, then it can create problems for the firm. Sometimes due to lack of working capital even firm can face solvency or bankruptcy. Trade Off Between Liquidity And Profitability: One of the objectives of working capital management is balancing the “liquidity” and “profitability” criteria while taking into consideration the attitude of management towards risk.
2.4 Working Capital Cycle
Collection of Receivable
Purchase of Raw material
Raw material Inventory
Issue of material production And incurring expenses
Finished Goods Work in process
Cash flows in a cycle into, around and out of a business. It is the business’s lifeblood and every manager’s primary task to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn’t generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash, will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm’s total profits. There are two elements in the business cycle that absorb cash-Inventory (stocks and work-in-progress) and Receivables (debtors owing company’s money). The main sources of cash are Payables (company’s creditors) and Equity and Loans. Each component of working capital (namely inventory, receivables and payables) has two dimensions TIME and MONEY. When it comes to managing working capital – “TIME IS MONEY”. If company can get money to move faster around the cycle (e.g. collect payments from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or 10
it will need to borrow less money to fund working capital. As a consequence, company could reduce the cost of bank interest or company will have additional free money available to support additional sales growth or investment. Similarly, if company can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, company effectively create free finance to help fund future sales.
5. RATIO ANALYSIS 5.1 Introduction to Ratio Analysis Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company’s financial statements. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and attractiveness as an investment. The financial statements as prepared and presented annually are of little use for the guidance of prospective investors, creditors and even management. If relationships between various related items in these financial statements are established, they can provide useful clues to gauge accurately the financial health and ability of business to make profit. This relationship between two related items of financial statements is known as ratio. A ratio is thus, one number expressed in terms of another. A ratio is expressed either as a proportion between two figures or in form of percentage or as rates. It is very interesting to know that the use of ratios has become popular during the last few years only. Originally the bankers used the Current Ratio to judge the capacity of the borrowing business enterprises to repay the loan and make regular interest payments. But today, it has assumed such an importance that anybody connected with business turns to ratio for measuring the financial strength and earning capacity of the business. A supplier of funds in the form of share capital would like to analyze the accounts to ascertain its earning capacity and future prospects. A banker or other creditor will measure the repaying capacity and financial strength on the basis of financial ratios. Only calculating ratio is of no use unless it is interpreted so as to be useful to management in making policy decisions. Interpretation of ratios can be done either by comparing it with the ideal/past ratios or by taking help of some related ratios or by comparing with the ratios of other firms. In short, business results and situations can understood properly only through ratios. Thus ratio analysis is an important technique of financial analysis as it is a means of judging the financial health of the company.
5.2 Liquidity Ratio Liquidity ratios measure the ability of the firm to meet its current obligations. A firm should ensure that it does not suffer from lack of liquidity, and also that it does not have excess liquidity. The failure of a company to meet its obligations due to lack of lack of sufficient liquidity, will result in poor creditworthiness, loss of creditors’ confidence, or even in legal tangles resulting in the closure of the company. A very high degree of liquidity is also bad; idle assets earn nothing. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity. 1. Current Ratio: Meaning & Objective: Current ratio is also known as ‘Working Capital Ratio’ as it is a measure of working capital available at a particular time. Current Ratio establishes relationship between current assets and current liabilities. Current Ratio of the firm measures its short-term solvency, which indicates the rupees of current assets available for each rupee of current liability. The current ratio represents a margin of safety for creditors. It is generally believed that 2:1 ratio shows a comfortable working capital position. Formula: Current Ratio=Current Assets/Current Liabilities
Current assets: Particulars Inventories Debtors Cash / bank balance Loans / Adv. Total Current Assets 2007-08 91386956 90010454 2249399 12670651 2006-07 17321124 38901280 6406755 3637734 2005-06 15298939 26136734 2413365 2227512 46076550 2004-05 13355265 24394603 654352 3495698 41899918 (Rs.) 2003-04 13282460 21937665 489525 2100366 37810016
Current liabilities: 13
(Rs.) Particulars Liabilities & Provisions Current Ratio: (Rs.) Particular Current Assets Current Liabilities Ratio(Times) 2007-08 196317460 99489259 1.97 2006-07 66266893 22984930 2.88 2005-06 46076550 15812495 2.91 2004-05 41899918 19328289 2.17 2003-04 37810016 13121717 2.88 2007-08 99489259 2006-07 22984930 2005-06 15812495 2004-05 19328289 2003-04 13121717
3.5 3 2.5 2 1.5 1 0.5 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 1.97 2.88 2.91 2.17
Analysis: Here we can see that the current ratio is above 2:1, without current year. As per the current ratio, value of ratio should be 2:1 which standard ratio is. Compared to previous year there is increase in the current liability in the year 2007-08. It means that the company might be able to meet its current obligations by decreasing liability in future also .In short, Higher the current ratio, greater the margin of safety. Recommendation: Company’s condition is not good and there is need to decrease the liability by using reserve and surplus if the functions are not affected. 2. Quick Ratio:
Meaning & Objective: Quick ratio establishes a relationship between quick assets and quick liabilities. This ratio used to check whether the company has adequate cash or cash equivalent to meet its current obligation without having to liquidate non-cash assets. From the current assets categories, inventory being least liquid and it normally requires some time for realizing in to cash therefore it is excluded while calculating quick ratio. Formula: Quick Ratio = Quick assets/ Total Quick Liabilities (Rs.) Particulars Total Current Assets Inventories Quick Assets Quick liabilities: (Rs.) Particulars Total Quick Liabilities 2007-08 99489259 2006-07 22984930 2005-06 15812495 2004-05 19328289 2003-04 13121717 2007-08 196317460 91386956 104930504 2006-07 66266893 17321124 48945769 2005-06 46076550 15298939 30777611 2004-05 41899918 13355265 28544653 2003-04 37810016 13282460 24527556
Quick Ratio: (Rs.) Particulars Quick assets Quick liabilities Ratio(Times) 2007-08 104930504 99489259 1.05 2006-07 48945769 22984930 2.13 2005-06 30777611 15812495 1.95 2004-05 28544653 19328289 1.48 2003-04 24527556 13121717 1.87
2.5 2 1.5 1.05 1 0.5 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 2.13
Analysis: Standard quick ratio is 1:1 & is considered to represent a satisfactory current financial condition. The decrease in the quick ratio shows the weak liquidity strength of the company. From the graph, we came to know that in the quick ratio is less than 1 it means that our firm is not capable to pay all its current liabilities. Here company’s condition is quiet good as its quick ratio is above 1:1. Recommendation: company’s condition is quiet good and there is need to decrease the liability by using reserve and surplus if the functions are not affected.
3. Cash Ratio: Meaning & Objective: Cash Ratio establishes a relationship between liquid assets and current liabilities. Cash is the most stringent measure of liquidity. It generally measures the liquidity of the firm. A high ratio shows the high liquidity of the firm. In other words we can also say that how much cash a company holds in hand to pay its liabilities.
Formula: Cash + Marketable Securities/Current Liabilities
Total Liquid Assets: (Rs.) Particulars Cash & Bank Bal. 2007-08 2249399 2006-07 6406755 2005-06 2413365 2004-05 654352 2003-04 489525
Current Liabilities: (Rs.) Particulars Provisions Cash Ratio: (Rs.) Particulars Cash & Bank Bal. Total C.L. Ratio(Times) 2007-08 2249399 99489259 0.023 2006-07 6406755 22984930 0.279 2005-06 2413365 15812495 0.153 2004-05 654352 19328289 0.034 2003-04 489525 13121717 0.037 2007-08 99489259 2006-07 22984930 2005-06 15812495 2004-05 19328289 2003-04 13121717
0.3 0.25 0.2 0.15 0.1 0.05 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 0.023 0.034 0.037 0.153 0.279
From the data we can see cash ratio for the years 2003-04, 2004-05, 2005-06, 2006-07, 2007-08 are 17
0.023, 0.279, 0.153, 0.034, 0.037 From the graph we can interpret that in 2006-07 cash ratio is highest and in 2007-08 cash ratio is lowest. In 2006-07 cash ratio is highest because the portion of cash is good.
Recommendation: Company should compare the growth rate and inventory rate. The inventory is more than required for appropriate growth for the company.
5.3 Leverage Ratios To judge the long-term financial position of the firm, financial leverage, or capital structure, ratios are calculated. The ratios indicate mix of debt and owner’s equity in financing the firm’s assets. The leverage ratios may be defined as financial ratios that throw light on the long-term solvency of a firm as reflected in its ability to assure the long-term creditors with regard to Periodic payment of interest during the period of the loan. Repayment of principal on maturity or in predetermined installments at due dates. Accordingly, there are two different, but mutually dependent and interrelated, types of leverage ratios. Ratios that are based on the relationship between borrowed funds and owner’s capital. These ratios are computed from balance sheet. Capital structure ratios, popularly called coverage ratios, are calculated from the profit and loss account.
1. Debt Ratio: 18
Meaning & Objective: Debt Ratio may be used to analyze the long-term solvency of a firm. The firm may be interested in knowing the proportion of the interest-bearing debt (also called funded debt) in the capital structure. Formula: Total debt/Capital Employed Capital employed = Share Holders’ Funds + Total Debt Total Debts: (Rs.) Particulars Secured Loans Unsecured Loans Total Debts Capital Employed: (Rs.) Particulars Share Holders’ funds Total Debts Capital Employed Debt Ratio: Particulars TD CE Ratio(Times) 2007-08 122373022 154848606 0.790 2006-07 49659967 64391273 0.771 2005-06 37707933 50570043 0.746 (Rs.) 2004-05 2003-04 28698038 31869074 40441266 42062489 0.710 0.758 2007-08 32475584 122373022 154848606 2006-07 14731306 49659967 64391273 2005-06 12862110 37707933 50570043 2004-05 11743228 28698038 40441266 2003-04 10193415 31869074 42062489 2007-08 82406819 39966203 122373022 2006-07 32673410 16986557 49659967 2005-06 22564754 15143179 37707933 2004-05 18553980 10144058 28698038 2003-04 18455464 13413610 31869074
0.8 0.78 0.76 0.74 0.72 0.7 0.68 0.66 2007-08 2006-07 2005-06 Year 2004-05 2003-04 0.71 0.79 0.771 0.746 0.758
Analysis: The ratio is continuously increasing from 2005-06 to 2007-08 because increase in CE more then total debt. The ratio is increasing from 0.746 to 0.790. Recommendation: The forgone income of the company’s own assets should be considered and than company should decide the level of debts. If company can earn more than paid to debtor, than in that condition company should go for higher debt ratio. Liquidity should be also considered in this matter.
2. Debt-Equity Ratio: Meaning & Objective: The ratio establishes a relationship between long term debts and shareholders’ funds. It reflects the relative claims of creditors and shareholders against the assets of the firm and in other terms it indicates the relative proportion of debt and equity in financing the assets of the firm. Formula: Long term Debt/Shareholders’ funds
Long-Term Debt: (Rs.) Particulars Secured Loans Unsecured Loans Total 2007-08 82406819 39966203 122373022 2006-07 32673410 16986557 49659967 2005-06 22564754 15143179 37707933 2004-05 18553980 10144058 28698038 2003-04 18455464 13413610 31869074
Shareholders Fund: (Rs.) 20
Particulars Share Capital Reserves and Surplus Total
2007-08 31475584 1000000 32475584
2006-07 13731306 1000000 14731306
2005-06 11862110 1000000 12862110
2004-05 10743228 1000000 11743228
2003-04 9193415 1000000 10193415
Debt-Equity Ratio: (Rs.) Particulars Total Long-term Debt Total Share holders Fund Ratio(Times) 2007-08 122373022 32475584 3.77 2006-07 49659967 14731306 3.37 2005-06 37707933 12862110 2.93 2004-05 28698038 11743228 2.44 2003-04 31869074 10193415 3.13
4 3.5 3 2.5 2 1.5 1 0.5 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 3.77 3.37 2.93 2.44 3.13
Analysis: This ratio shows the ratio of borrowed to owned funds of the company. From the above chart it can be seen that over the five years the ratio has increase from 3.13 to 3.77. This indicates that the amount of debt is increasing as compared to the owner’s equity in the company. 21
Recommendation: The ratio should not be more than 1 due to decrease the burden level. Company should try to decrease the level of debts as it can affect the share prices as well as the wealth of share holders. Company should try to keep the ratio around 1.
3. Capital Employed to Net worth Ratio: Meaning & Objective: There is yet another alternative way of expressing the basic relationship between debt and equity. One may want to know: How much funds are being contributed together by lenders and owners for each rupee of the owners’ contribution? Formula: Capital Employed (C.E.)/Net worth (N.W.) Capital Employed: (Rs.) Particulars Share Holders’ funds Total Debts C.E. Net Worth: (Rs.) Particulars Share Capital Reserves and Surplus Total 2007-08 31475584 1000000 32475584 2006-07 13731306 1000000 14731306 2005-06 11862110 1000000 12862110 2004-05 10743228 1000000 11743228 2003-04 9193415 1000000 10193415 2007-08 32475584 122373022 154848606 2006-07 14731306 49659967 64391273 2005-06 12862110 37707933 50570043 2004-05 11743228 28698038 40441266 2003-04 10193415 31869074 42062489
Capital Employed to Net worth Ratio: (Rs.) Particu lars C.E. NW Ratio(Times) 2007-08 154848606 32475584 4.77 2006-07 64391273 14731306 4.37 2005-06 50570043 12862110 3.93 2004-05 40441266 11743228 3.44 2003-04 42062489 10193415 4.13
Capital Employed to Net worth Ratio
6 5 4 3 2 1 0 2007-08 2006-07 2005-06 year 2004-05 2003-04 4.77 4.37 3.93 4.13 3.44
Analysis: From the above graph, we can say that in the company, total external contribution is increasing year by year. This ratio was 4.13 in 2003-04 and declined to 3.44 in 2004-05. The ratio increases after the year by year from 3.93 to 4.77 due to increase in C.E. Recommendation: The ratio less than 1 is good for the company. So company should try to decrease the liability. Company should use reserves and surplus rather than expanding liability. It will reduce the ratio.
4. Total Liabilities to Total Assets Ratio: 23
Meaning & Objective: Current liabilities are generally excluded from the computation of leverage ratios. One may like to include them on the ground that they are important determinants of the firm’s financial risk since they represent obligations and expert pressure on the firm and restrict its activities. Formula: Total liabilities (TL)/ Total Assets (TA)
Total Liabilities: (Rs.) Particular Current Liabilities Secured Loans Unsecured Loans Total Total Assets: (Rs.) Particular Fixed Assets Current Assets Total 2007-08 58020404 196317460 254337864 2006-07 21109310 66266893 87376203 2005-06 20305988 46076550 66382538 2004-05 17869636 41899918 59769554 2003-04 17374190 37810016 55184206 2007-08 99489259 82406819 39966203 221862281 2006-07 22984930 32673410 16986557 72644897 2005-06 15812495 22564754 15143179 53520428 2004-05 19328289 18553980 10144058 48026327 2003-04 13121717 18455464 13413610 44990791
Total Liabilities to Total Assets Ratio: (Rs.) Particular TL TA Ratio(Times) 2007-08 221862281 254337864 0.872 2006-07 72644897 87376203 0.831 2005-06 53520428 66382538 0.806 2004-05 48026327 59769554 0.804 2003-04 44990791 55184206 0.815
Total Liabilities to Total Assets Ratio
0.88 0.86 0.84 0.82 0.8 0.78 0.76 2007-08 2006-07 2005-06 Year 2004-05 2003-04 0.831 0.806 0.815 0.804 0.872
Analysis: In the year 2003-04 the ratio was 0.815, it was declining in the year 2004-05 and after that it increase year by year. The ratio increases because of the total liabilities increases compare to total assets. It is negative and harmful for the firm. Recommendation: Company should try to reduce the ratio by increasing the current assets portion, which will further help to the company to expand their business. Company should also see whether the liquidity is affected or not.
5.4 Activity Ratios Activity ratios are concerned with measuring the efficiency in asset management. Funds of creditors and owners are invested in various assets to generate sales and profits. If the management of assets is better, the amount of sales is large. Activity ratios are employed to evaluate the efficiency with which the firm managers and utilizes its assets. These ratios are also called efficiency ratios or asset utilization ratios. The efficiency with which the assets are used would be reflected in the speed and rapidity with which assets are converted into sales. The greater is the rate of turnover or conversion, the more efficient is the utilization/management, other things being equal. For this reason, such ratios are designated as turnover ratios. An activity ratio may, therefore, be defined as test of the relationship between sales and the various assets of a firm. 25
Activity ratios, thus, involve a relationship between sales and assets. A proper balance between sales and assets are generally reflects that assets are managed well.
1. Inventory Turnover Ratio: Meaning & Objective: Inventory turnover ratio reflects the efficiency of inventory management. It indicates the number of times inventory is replaced during the year. The higher ratio, efficient the management of inventory and vice versa in the organization. Formula: Cost of Goods sold/ Average inventory Cost of Goods Sold (COGS): (Rs.) Particular Sales Gross Profit COGS Average Inventory: (Rs.) Particular Opening Stock Closing Stock Average Inventory 2007-08 17321124 91386956 54354040 2006-07 15298939 17321124 16310032 2005-06 13355265 15298939 14327102 2004-05 13282460 2003-04 7284361 2007-08 270972400 7256850 263715550 2006-07 193272131 7197696 186074435 2005-06 157822704 3675383 154147321 2004-05 157171139 3285812 153885327 2003-04 86388513 2531177 83857336
13355265 13282460 13318863 10283411
Inventory Turnover Ratio: 26
(Rs.) Particular COGS Avg. Inventory Ratio(Times) 2007-08 263715550 54354040 4.85 2006-07 186074435 16310032 11.41 2005-06 154147321 14327102 10.76 2004-05 153885327 13318863 11.55 2003-04 83857336 10283411 8.15
Inventory Turnover Ratio
14 12 10 8 6 4 2 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 4.85 11.41 10.76 11.55 8.15
Analysis: The inventory turnover ratio is decreasing in the year 2007-08 which indicates that its performance in terms of generating cash flow is decreasing in this year because the companies’ cash flow has blocked in inventories. However, in 2006-07 the ratio increased by 11.41 times, which is a positive sign Recommendation: Company should compare the cogs with the net sales and try to reduce the cost as it decreases the profits and net income for the company. Growth rate and inventory rate should be also compared in order to decide the level of inventory.
2. Debtors Turnover Ratio: Meaning & Objective: Debtor’s turnover indicates the number of times debtor’s turnover each year. Generally, the higher the value of debtor’s turnover, the more efficient is the management of credit. Formula: Credit Sales/ Average Debtors 27
Credit Sales: (Rs.) Particulars Credit Sales Average Debtors: (Rs.) Particulars Opening Debtors Closing Debtors Average Debtors 2007-08 38901280 90010454 64455867 2006-07 26136734 38901280 32519007 2005-06 24394603 26136734 25265669 2004-05 2003-04 2007-08 270972400 2006-07 193272131 2005-06 157822704 2004-05 2003-04
21937665 11444895 24394603 21937665 23166134 16691280
Debtors Turnover Ratio: (Rs.) Particular Credit Sales Average Debtors Ratio(Times) 2007-08 270972400 64455867 4.20 2006-07 193272131 32519007 5.94 2005-06 157822704 25265669 6.25 2004-05 157171139 23166134 6.78 2003-04 86388513 16691280 5.18
Debtors Turnover Ratio
8 7 6 5 4 3 2 1 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 4.2 5.94 6.25 6.78 5.18
Analysis: The debtor turn over ratio is 4.20 in current year which is lower then the previous years. In 2003-04 it was 5.18 and next year it was 6.78 in 2004-05 and then in 2005-06 it again decreased and reached to 6.25 and than in 2006-07, it was 5.95. This indicates that credit management team’s efficiency of the company is reducing. The reason behind this is the company is following a strict collection or credit policy because as compared to increase in sales, the increase in debtors is low. Recommendation: Now-a-days the competition is tougher. Credit period should be expanded to have more liquidity in business. More credit period can provide the chance to grow for the company.
3. Assets Turnover Ratio: Meaning & objective: A firm’s ability to produce a large volume of sales for a given amount of net assets is the most important aspect of its operating performance. Unutilized assets increase the firm’s need for costly financing as well as expenses for maintenance and upkeep. The net assets turnover should be interpreted cautiously. Formula: Sales/ Net Assets
Sales: (Rs.) Particulars Net Sales Net Assets: (Rs.) Particulars Fixed Assets Net Current Assets Net Assets Assets Turnover Ratio: (Rs.) 29 2007-08 58020404 96828202 154848606 2006-07 21109310 43281963 64391273 2005-06 20305988 30264055 50570043 2004-05 17869636 22571630 40441266 2003-04 17374190 24688299 42062489 2007-08 270972400 2006-07 193272131 2005-06 157822704 2004-05 157171139 2003-04 86388513
Particular Sales N.A. Ratio(Times)
2007-08 270972400 154848606 1.75
2006-07 193272131 64391273 3.00
2005-06 157822704 50570043 3.12
2004-05 157171139 40441266 3.89
2003-04 86388513 42062489 2.05
Assets Turnover Ratio
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 3.89 3 1.75 3.12 2.05
Analysis: Asset turnover ratio for the year 2007-08 is 1.75 lower then the previous years due to increase in net assets than sales of the firm and it is not good for the company. The ratios for the previous years are 3, 3.12, 3.89 and 2.05 respectively for 2006-07, 2005-06, 2004-05 and 2003-04. Net Assets Turnover Ratio is lower, so it is not favorable for the firm. Recommendation: The ratio should be increase consecutively over the period of the years to have better condition in the company. The sales should be more than net assets of the company.
4. Total Assets Turnover Ratio: Meaning & objective: Total assets turnover ratio indicates productivity ratio, which measures the output produced from the given input deployed. Assets are inputs, which are deployed to generate production. Higher the asset turnover ratio, the higher the efficiency or productivity use of inputs. Formula: Sales/Total Assets
Sales: (Rs.) Particulars Sales Total Assets (T.A.): (Rs.) Particulars 2007-08 Fixed Assets 58020404 Current Assets 196317460 Total 254337864 Total Assets Turnover Ratio: Particulars Sales T.A. Ratio(Times) 2007-08 270972400 254337864 1.07 2006-07 21109310 66266893 87376203 2005-06 20305988 46076550 66382538 2004-05 17869636 41899918 59769554 (Rs.) 2006-07 193272131 87376203 2.21 2005-06 157822704 66382538 2.38 2004-05 157171139 59769554 2.63 2003-04 86388513 55184206 1.57 2003-04 17374190 37810016 55184206 2007-08 270972400 2006-07 193272131 2005-06 157822704 2004-05 157171139 2003-04 86388513
Total Assets Turnover Ratio
3 2.5 2 1.5 1 0.5 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 1.07 2.21 2.38 2.63
Analysis: From the above graph, we can say that in the year 2003-04 the ratio is 1.57 while in the year 200405 it increase and reaches to 2.63 which is due to increase in firm’s sales than the total assets while in year 2005-06 ratio decreases as compared to the year 2004-05 and reaches to 2.38 which is due to increase in total assets more than the sales. Generally the total assets turnover ratio stand 1:1 is better. So the year 2007-08 our firm’s ratio is 1.07 means firms’ sales of Rupees 1.07 for 1 Rupees Investment in fixed and current assets together.
Recommendation: company should try to increase consecutively over the period of the years to have better condition in the company. The sales should be more than total assets of the company.
5. Fixed Assets Turnover Ratio: Meaning and Objective: Company's effectiveness in generating net sales revenue from investments back into the company. However, the Fixed Asset Turnover ratio evaluates only the Net Property, Plant, and Equipment investments. Manufacturing and other industries requiring major-investments will often spend heavily on properties, manufacturing plants, and equipment to push them ahead of the competition. Formula: Sales/Net Fixed Assets Sales: (Rs.) Particulars Sales Net Fixed Assets: (Rs.) Particulars Fixed Assets 2007-08 58020404 2006-07 21109310 2005-06 20305988 2004-05 17869636 2003-04 17374190 2007-08 270972400 2006-07 193272131 2005-06 157822704 2004-05 2003-04 157171139 86388513
Fixed Assets Turnover Ratio: (Rs.) Particulars Sales N.F.A. Ratio(Times) 2007-08 270972400 58020404 4.67 2006-07 193272131 21109310 9.16 2005-06 157822704 20305988 7.77 2004-05 157171139 17869636 8.80 2003-04 86388513 17374190 4.97
Fixed Assets Turnover Ratio
10 8 6 4 2 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 4.67 9.16 7.77 4.97 8.8
Analysis: The higher the Fixed Asset Turnover ratio, the more effective the company's investments in Net Property, Plant, and Equipment have become. From the above graph we can say that in the year 2003-04 the ratio was 4.97 while in the year 2004-05 it increase and reaches to 8.80 which is due to increase in firm’s net sales compared to net fixed assets while in year 2007-08 ratio decreases compared to the year 2003-04 and reaches to 4.67. So our company’s fixed Assets turnover isn’t favorable compared to the general fixed assets turnover ratio. Recommendation: Ratio isn’t getting higher, which is bad for the company. Company should keep growing sales along with remaining fixed assets.
6. Current Assets Turnover: Meaning & Objective: Current assets turnover ratio indicates productivity ratio, which measures the output, produced from the given input employed. Current Assets are inputs, which can be converted in to cash quickly. Higher the current assets turnover ratio, higher the liquidity of the firm. Formula: Sales / Current Assets Current Assets Turnover: (Rs.) Particulars Sales 2007-08 270972400 2006-07 193272131 2005-06 157822704 2004-05 157171139 2003-04 86388513 33
Current Assets Turnover
4 3.5 3 2.5 2 1.5 1 0.5 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 1.38 2.92 2.28 3.43 3.75
Analysis: From the above graph, we can say that in the year 2004-05 the ratio is 3.75 while in the year 200506 it decreases and reaches to 3.43 which is due to increase in firm’s current assets than sales while in year 2006-07 it is again decreased and reaches to 2.92 and also decreases in 2007-08 which is due to increase in current assets is more than the firms sales. So the current Assets turnover is unfavorable for this year. Recommendation: Ratio is decreasing which is not good for the company. Company should find the reasons for decreasing the sales over the period of the year compare to increase in the current assets. Company should keep growing sales.
Working Capital Turnover Ratio:
Meaning & Objective: The Working Capital Turnover ratio measures the company's Net Sales from the Working Capital generated. A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for 34
the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. Formula: Net Sales/Working Capital Working Capital = total current Assets –total current Liabilities
Net sales: (Rs.) Particulars Sales 2007-08 270972400 2006-07 193272131 2005-06 157822704 2004-05 2003-04 157171139 86388513
Working capital: (Rs.) Particulars Total Current Assets Total Current Liabilities Working Capital 2007-08 196317460 99489259 96828202 2006-07 66266893 22984930 43281963 2005-06 46076550 15812495 30264055 2004-05 41899918 19328289 22571630 2003-04 37810016 13121717 24688299
Working Capital Turnover Ratio: (Rs.) Particulars Sales Working Capital Ratio(Times) 2007-08 270972400 96828202 2.80 2006-07 193272131 43281963 4.47 2005-06 157822704 30264055 5.21 2004-05 157171139 22571630 6.96 2003-04 86388513 24688299 3.50
Working Capital Turnover Ratio
8 7 6 5 4 3 2 1 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 2.8 4.47 3.5 5.21 6.96
Analysis: A high or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. But the ratio decrease year by year, and 2.8 in year 2007-08. Recommendation: The sale has increased in given period of time, but the working capital has increased more than it in the period of four years. This shows mismanagement to some extent. Marketing department as well as the financial department should take steps to increase the sales and decrease the working capital.
5.5 Profitability Ratios A company should earn profits to survive and grow over a long period of time. Profit is the difference between revenues and expenses over a period of time. The financial manager should continuously evaluate the efficiency of company in term of profits. The profitability ratio is calculated to measure the operating efficiency of the company. Besides management of the company, creditors and owners are also interested in the profitability of the firm. This is possible only when the company earns enough profits. Generally, two major types of profitability ratios are calculated: 36
Profitability in relation to sales. Profitability in relation to investment.
1. Gross Profit Ratio: Meaning & Objective: The gross profit margin reflects the efficiency with which management produces each unit of product. This ratio indicates the average spread between the cost of good sold and the sales revenue. Formula: Gross Profit * 100/Sales
Gross Profit Ratio: (Rs.) Particulars Gross Profit Sales Ratio (%) 2007-08 7256850 270972400 2.68 2006-07 7197696 193272131 3.72 2005-06 3675383 157822704 2.32 2004-05 3285812 157171139 2.09 2003-04 2531177 86388513 2.93
Gross Profit Ratio
4 3.5 3 2.5 2 1.5 1 0.5 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 2.68 2.32 2.09 3.72 2.93
Analysis: Gross profit is the difference between sales and cost of good sold. Cost of good sold include consumption, excise duty, process charges. From the above data we get Gross Profit of 2003-04, 37
2004-05, 2005-06, 2006-07, 2007-08 are 2.93, 2.09, 2.32, 3.72 and 2.68. In 2005-06 gross profit ratio is increase from 2.09 to 2.32 In 2006-07, gross profit ratio is increase from 2.32 to 3.72. In 2007-08, gross profit ratio decrease from 3.72 to 2.68.
Recommendation: Company should work on cost cutting activity, lean production, either increase the margins, if possible, or increase the overall sale by proper marketing strategy.
2. Net Profit Ratio: Meaning & Objective: It indicates the management’s ability to operate the business with sufficient success not only to recover from revenues of the current period the cost of merchandise or services but also the expenses of compensation to the owners for providing their capital at risk. This ratio shows that the earnings left for shareholders as a percentage of net sales. Formula: Net Profit * 100/Sales Net Profit Ratio: (Rs.) Particulars N.P. Sales Ratio (%) 2007-08 6093850 270972400 2.25 2006-07 4887696 193272131 2.53 2005-06 2875383 157822704 1.82 2004-05 2685812 157171139 1.71 2003-04 2131177 86388513 2.47
Net Profit Ratio
3 2.5 2 1.5 1 0.5 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 2.25 1.82 1.71 2.53 2.47
Analysis: By looking the above graph we can say that in the year 2004-05 the ratio was 1.71% as compared to 1.82 in the year 2005-06. It increase and reaches to 2.53 which is due to more increase in profit after tax than the sales. There after ratio decrease to the 2.25 in 2007-08. A high Net Profit Ratio is showing good indication of company’s efficiency at its business and the company is also on the path of growth. For year 2007-08, ratio isn’t showing good indication of company’s efficiency at its business. Recommendation: This shows decrease in profit margins or increase in expenses to some extent. Marketing department should take steps to increase the sales and the financial department should try to increase the investing activity and decrease the costs in order to increase the net profit.
3. Return on Investment Ratio: Meaning & Objective: Return on investment is a very good performance measure. Different companies calculate this return with different formula and call it also with different name like return on invested capital, Return on Capital Employed, Return on Net Assets etc. 39
Formula: PAT/Total Assets Return on Investment Ratio: (Rs.) Particulars PAT T.A Ratio (Times) 2007-08 6093850 254337864 0.02 2006-07 4887696 87376203 0.06 2005-06 2875383 66382538 0.04 2004-05 2685812 59769554 0.05 2003-04 2131177 55184206 0.04
Return on Investment Ratio
0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2007-08 2006-07 2005-06 Year 2004-05 2003-04 0.02 0.06 0.05 0.04 0.04
Analysis: From the above graph, we can interpret that in year 2003-04 the ratio was 0.04 times and which was increased in year 2004-05 and reaches to 0.05 times. In year 2006-07 ratio was increased to 0.06 due to increase in sales and increase in total assets. But in 2007-08, the ratio was decreased to 0.02 Recommendation: IN the year 2007-08, ratio decrease too much. This could be because of expansion planning of the company or due to mismanagement to some extent.
Current assets is 1.97 times from the Current liabilities in the current year .we see that current assets is increasing constantly and quick assets is growing more than the other year. In the year 2007-08 inventory turn over ratio is 4.85 Times. It is decrease from the last year due to inventory increasing fast from the cost of goods sold. 40
In the year 2007-08 cash ratio is 0.023 Times. It is decrease from the last year due to stock increasing fast in the company.
7. Recommendations Working Capital The Company has high internal accruals. Hence it should not go for working capital loan. It should try to reduce it inventory consumption period and Debtors collection period. It should try to reduce it Current Asset. 41
Inventory Management The Company should implement inventory management technique efficiently as there working capital amount is mostly blocked in inventory. If inventory holding is reduce there will be more Working Capital. Receivable Management The Company has to maintain against schedule in order to keep a proper track of the receivables. This schedule helps in finding out the payment which have gone beyond the credit limit. It would also help the management in taking proper action to recover the payments.
8. LIMITATIONS OF THE ANALYSIS
This financial analysis carried out does not consider the effect of the opportunity cost of money. It ignores the present value and the future value of money.
No information related to the effects of the external factors on the business conditions and the company policy can be obtained through the analysis. The analysis carried out is based only on the past information. No one can successfully predict the future conditions and strategies based on this data.
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The standards for comparison data of the other companies are not available easily. So an overall view of the analysis cannot be brought about through this analysis, Moreover at times there exists a confusion to record some of the expenses or financial terms into both different categories. So one cannot be 100% accurate in such analysis.