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INTRODUCTION
Financial statements are prepared primarily for decision-making. They play a dominant role in setting
the framework of the managerial decisions. But the information provided in the financial statements is
not an end in itself as no meaningful conclusions can be drawn from these statements alone. However
the information provided in the financial statements is of immense use in decision – making through
analysis and interpretation of financial statements. Financial analysis is the process of identifying the
financial strength& weaknesses of the Firm by property, establishing relationship between the items of
the Balance Sheet and the Profit and Loss Account
Meaning
The term “Financial Analysis” also known as analysis and interpretation of financial statements refer to
the process of determining financial strength and weaknesses of the firm by establishing strategic
relationship between the items of the balance sheet, profit and loss account and other operative data.

According to Metcalf and Titard, “Analyzing financial statements is the process of evaluating the
relationship between the component parts of the financial statements to obtain a better understanding of
a firm‟s position and performance.”

In the words of Myers, “Financial statement analysis is largely a study of relationship among the
various financial factors in a business as disclosed by a single set of statements, and a study of the trend
of these factors as shown in a series of statements”.

Objective of financial statements
The purpose of objective of financial analysis is to diagnose the information contained in financial
statements so as to judge the profitability and financial soundness of the firm. Just like a doctor
examines his patient by recording his body temperature, blood pressure etc. before making his
conclusion regarding the illness and before giving his treatment, a financial analyst analysis the
financial statements with various tools of analysis before commenting upon the financial wealth or
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weaknesses of an enterprise. The analysis and interpretation of financial statements is essential to bring
out the mystery behind the figures in financial statements. Financial statements analysis is an attempt to
determine the significance and meaning of the financial statement data so that forecast may be made of
the future earnings, ability to pay interest and debt maturities (both current and the long term) and
profitability of a sound dividend policy.


Types of financial analysis

However, we can classify various types of financial analysis into different categories depending upon
(i) the material used, and (ii) the method of operation followed in the analysis or the modus operandi of
analysis.














(i) On the basis of Material used:
a. External analysis
b. Internal analysis

Types of Financial Analysis

On the basis of
Material Used
On the basis of
Modus operandi
External
analysis
Internal
analysis
Horizontal
analysis
Vertical
analysis
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a. External analysis
This analysis is done by outsiders who do not have access detailed internal accounting records of the
business firm. These outsiders include investors, potential investors, creditors, potential creditors,
government agencies, credit agencies, and the general public. For financial analysis, these external
parties to the firm depend almost entirely on the published financial statements.


b. Internal analysis
The analysis conducted by persons who have access to the internal accounting records of a business
firm is known as internal analysis. Such an analysis can therefore, be performed by executives and
employees of the organization as well as government agencies which have statutory powers vested in
them. Financial analysis for managerial purposes is the internal type of analysis that can be affected
depending upon the purpose to be achieved.



(ii) On the basis of modus operandi
a. Horizontal analysis
b. Vertical analysis

a. Horizontal analysis
Horizontal analysis refers to the comparison of financial data of a company for several years. The
figure for this type of analysis are presented horizontally over a number of columns. The figures of the
various years are compared with standard or base year. A base year is a year of analysis is also called
„Dynamic analysis‟ as it is based on the data from year to year rather than on data of any one year.


b. Vertical analysis
Vertical analysis refers to relationship of the various items in the financial statements of one accounting
period. In this type of analysis the figures from financial statements of the year are compared with a
base selected from the same years statement. It is also known as „static analysis‟. Common size
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financial statements and financial ratios are the two tools employed in vertical analysis. Since vertical
analysis considers data for one time period only. It is not very conducive to a proper analysis of
financial statements.
Methods or devices of financial analysis: -

The analysis and interpretation of financial statements is used to determine the financial position and
results of operations as well. A number of methods or devices are used to study the relationship
between different statements. The following methods of analysis are generally used:
1. Comparative statements
2. Trend analysis
3 Common size statements
4.Funds flow analysis
5.Cash flow analysis
6.Ratio analysis
7.Cost volume profit analysis

These are explained as follows:
1. Comparative statements
The comparative financial statements are statements of the financial position at different periods of
time. The elements of financial position are shown in a comparative form so as to give an idea of
financial position at two or more periods. Any statement prepared in a comparative form will be
covered in comparative statements. From practical point of view. Generally, two financial statements
(Balance Sheet and the Income Statement) are prepared in comparative form for financial analysis
purposes.

2. Trend analysis
The financial statements may be analyzed by computing trends of series of information. This method
determines the direction upwards or downwards and involves the computation of the percentage
relationship that each statement items bears to the same in the base year. The information for a number
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of years is taken up and one year, generally taken for the base year. In figures for the base year are
taken as 100 and trend ratios for other years are calculated on the basis of the base year. The analyst is
able to see the trend of the figures, whether upward or downward.

3.Common size statements
The common size statements, balance sheet and the income statements are shown in analytical
percentages. The figures are shown as percentages of total assets, total liabilities and the total sales. The
total sales are taken as 100 and different assets are expressed as a percentage of the total. Similarly
various liabilities are taken as a part of the total liabilities. These statements are also known as
component percentage as 100 percent statements because every individual item is stated as a percentage
of the total 100.

4.Funds flow analysis
The fund flow statement is a statement, which shows the movement of the funds and is the report of the
financial operations of the business undertaking. It indicates various means by which funds were
obtained during a particular period and the ways in which these funds were employed. In simple words,
it is a statement of sources and application of funds.

5. Cash flow analysis
Cash flow statement is a statement, which describes the inflow (sources) and outflow (uses) of the cash
and cash equivalents in an enterprise during the specified period of time. Such a statement enumerates
net effects of the various business transactions on cash and its equivalents and takes into account
receipts and disbursements of cash. A cash flow statement summarizes the causes of changes in cash
position of a business enterprise between the dates of the two balance sheets.

6. Ratio analysis
Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making certain decisions. However ratio is
not end itself. It is only a means of better understanding of financial strengths and weaknesses of a firm.
A ratio is a simple arithmetical expression of the relationship of one number to another. It may be
defined as the indicated quotient of the two mathematical expressions.
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7. Cost volume profit analysis
Profit is the most important measure of a firm‟s performance. In the free market economy, profit is a
guide for allocating resources efficiently. An analysis of the effects of various factors on profit is an
essential step in financial planning and decision-making. The analytical techniques used to study the
behavior of profit in response to the changes in the volume costs and price is called the Cost Volume
Profit (CVP) analysis.


RATIO ANALYSIS
Introduction
The ratio analysis is one of the most powerful tools of the financial analysis. It is the process of
establishing and interpreting various ratios (quantitative relationship between figures and groups of the
figures). It is with the help of ratio that the financial statements can be analyzed more clearly and
decisions made from such analysis.

Meaning

A ratio is a simple arithmetical expression of the relationship of one number to another. It may be
defined as the indicated quotient of two mathematical expressions.

According to the Accountant’s Handbook by Wixon, Kell and Bedford, a ratio is an expression of
the quantitative relationship between the two numbers.

According to the Kohler, a ratio is the relation of the amount, a, to another b, expressed as the ratio of a
to b; a:b (a is to b) or as a simple fraction, integer, decimal fraction &percentage. In simple language
ratio is one number expressed in terms of the another and can be worked out by dividing one number
into the other.

The term “Ratio” refers to the numerical and quantitative relationship between two items or variables.
This relationship can be exposed as
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• Percentages
• Fractions
• Proportion of numbers

Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements. So that
the strengths and weaknesses of a firm, as well as its historical performance and current financial
condition can be determined. Ratio reflects a quantitative relationship helps to form a quantitative
judgment.


Importance Of Ratio Analysis

• Aid to measure general efficiency
• Aid to measure financial solvency
• Aid in forecasting and planning
• Facilitate decision making
• Aid in corrective action
• Aid in intra-firm comparison
• Act as a good communication
• Evaluation of efficiency
• Effective tool

Classification Of Ratios
The ratios have different use for different people. Therefore ratios can be classified into different
categories. Various ratios can be divided into following categories depending upon their use.

Traditional classification
Traditional classification or classification according to the statement, from which ratios are calculated
is as follows:
 Profit and loss account
 Balance sheet ratios
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 Inter statement ratios



Classification according to the nature of ratios
In this type of ratios more emphasis is given to the nature of ratios, whether these pertain to sales,
earning, inventory etc.
 Liquidity or solvency ratio
 Debtors ratio
 Creditors ratio
 Sales ratio
 Earning ratios
 Cost of expenses ratio

According to importance of ratios
Under this type of ratios, ratios can be divided into two categories as following:
Primary ratios:
1. Return on capital employed
Secondary ratios:
1. Production cost ratios
2. Distribution cost ratios
3. Selling cost ratios

According to users of the ratios
.Ratios for management Ratios for shareholders Ratios for creditors
Return on capital Earning per share Current ratios
employed
Gross profit ratios Yield ratios Liquid ratios
Current ratio Payout ratio Debt equity ratio


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Functional Classification
The four most important financial dimensions, which a firm would like to analyze, are:
 Liquidity ratios
 Leverage ratios
 Activity ratios
 Profitability ratios

























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SONALIKA GROUP OF INDUSTRIES


SONALIKA GROUP PROFILE
SONALIKA GROUP OF INDUSTRIES was established as a small-scale unit about three decades ago.
Fabricate and assemble harvesting machines at Hoshiarpur. Gradually over a period of time the
company developed itself into a major force in agricultural harvesting machines. And today is the
largest group of the manufacturer of machines. The group has progressed well in short period of time
with increase in its product ranges. The group has maintained an increasing record of continues
profitability since its inception.

INTERNATIONAL TRACTORS LIMITED.
INTERNATIONAL TRACTORS LIMITED was established on 14th October, 1969 for manufacture
of tractors. It is situated at village Chak Gujran, Hoshiarpur with its head office at Delhi. The unit is
spread over 13 acres of the land. The unit international tractors are presently holding 18 % of the
market share.
The Company's authorized Capital = Rs.56 million (As on 31/03/2001)
Issued, subscribed and Paid up Capital = Rs.50 Million (As on 31/03/2000)

DETAILS OF TOP EXECUTIVES
1. Chairman- Mr. L.D. Mittal
2. Vice Chairman- Mr. A.S. Mittal
3. Managing Director- Mr. Deepak Mittal
4. Finance Head- Mr. Rajnesh Jain
5. Production Head- Mr. Ashok Kapoor
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6. Marketing Head- Mr. L.R.Yadav (CEO)
7 R&D Head- Mr. Ashwani Malik


COMPANY PROFILE
Name of the Company: M/s International Tractors Limited.
Location: Village Chak Gujran, Jalandhar Road, Hoshiarpur
(PUNJAB)
Brand Name: SONALIKA
Product: TRACTORS
Established on: 14.10.1996
Present production: 60 Tractors per day
Installed capacity: 200 Tractors per day
Total Area: 13 Acres of Land.
Employees: 2000
ITL Certificates: 9001 and 14001 certification.

VISION STATEMENT
 To become the world‟s leading tractor manufacturing company and a major player in
automotive products and services.
 To provide value for money to the customers by producing High Quality Innovative Products at
competitive price.

MISSION STATEMENT
To translate vision into reality.

CORE VALUES
 Fast adaptability to change
 Innovative in fields and business
 Offer service with a smile to customers
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 Provide enjoyable working environments to employees.


ETHO STATEMENT OR LOGO RATIONALE



Red symbolizes the strength, power, determination, and desire of company.
Yellow surrounding the Sonalika produces a warming effect, arouses cheerfulness, stimulates mental
activity, and generates the same.
Green Leaf in the center symbolizes growth, harmony, freshness, and fertility. Black underlining the
logo associates with power, elegance, and formality.
Orange surroundings the complete logo represents enthusiasm, fascination, happiness, creativity,
encouragement, and stimulation. All this permutation of persona represents the Sonalika group as an
asset in the industry.


SONALIKA HIGHLIGHTS

2010
 Sonalika Tractors are now EURO –III A Norms Compliant
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 Started Export of Tractors to Argentina & Serbia
 Executed the export order to Cameroon worth 40 Million US$.


2009
 Grand Launch of technical advanced worldtrac series of tractors. The series comprises of
tractors with advanced features.
 Developed in-house unique DIESEL SAVER UNIT FOR SONALIKA Tractors.
 Became only Company in India to produce 90 Hp tractors.

2008
 Launch of RX Series of Tractors. Aesthetically appealing designs and shape accepted across the
world.
 Export of Tractors started to USA.

2007
 Joint Venture between International Tractors Ltd. and Magma Shrachi Finance.

2006
 Successfully Developed Four Wheel Drive front axles and Transmission of tractor for Yanmar.

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2005
 Achieved turnover of USD 235 Million.
 Joint venture with Yanmar of Japan for manufacturing of tractors in India.


2001
 Started in house manufacturing of engine for tractor application.

2000
 Entered into Joint venture with Renault-France and Class-Germany. This helped the group to
upgrade its technology and systems.


ITL DEALERS IN ALL OVER INDIA
 PUNJAB
 UTTAR PRADESH
 MADHYA PRADESH
 ORISSA
 BIHAR
 HARYANA
 MAHARASHTRA
 ANDHRA PRADESH
 KARNATAKA
 TAMIL NADU
 RAJASTHAN
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 WEST BENGAL
 NEPAL
COMPANY SHAREHOLDINGS
 80 % Sonalika Group
 20 % Renault Agriculture

TOTAL NUMBER OF DEALERS IN INDIA, NEPAL, SRILANKA, AND
BANGLADESH is 548

REGIONAL OFFICES
 DELHI
 KANPUR
 PATNA
 BHOPAL
 AHMEDABAD

SONALIKA GROUP –MILESTONE

1) 1969, Modest beginning into farm equipment and machine manufacture and earning name and fame
over all these year.
2) 1995 Diversification into manufacture of tractor over whelming response from the market.
3) 1996 Roll out of first tractor from ITL.
4) 2000 Enter into joint venture with Renault Agriculture France for Tractor manufacture in India.
5) 2000 Started in house manufacture of engine for tractor application.
6) 2002 Started export of tractor to Africa, Asian sub continental.
7) 2004Started Roll out of 100000 Tractors
8) 2004 Started establishment of ICML.
9) 2005 Become the fourth largest tractor manuf. In India.
10) 2005, Roll out of first vehicle from ICML facility.
11) 2005 Joint venture with Yanmar Agriculture of Japan.
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12) 2006 Successfully developed 4 wheels drive front Axles and transmission of tractors for Yanmar.
13) 2006 Rollout of 100000th tractor engine.
14) 2006 Become 3rd largest manufacture of tractor in India.
15) 2006 Market launch of Rhino (MUV) and establish dealer‟s network


SONALIKA GROUP UNITS

Sonalika group divided into four companies. Sonalika‟s group units is as follow:









INTERNATIONAL TRACTORS LIMITED
International Tractors Limited was incorporated on October 14, 1996 for the manufacture of Tractors









Sonalika Group
International
tractors ltd
International
cars & motors
International
autotrac financial
ltd
Sonalika agro
industries
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and has since then built a distinct position for itself in the Tractor industry. ITL is manufacturing
various Tractors of Sonalika brand between 30 H.P to 90 H.P, and CLASS brand between 70 hp to
90hp. The tractors manufactured by company have secured a reputation of performance, quality and
reliability in the market because of their maximum pulling power, minimum fuel consumption and low
emission. All this makes ITL one of the top five tractor selling companies in India. These tractors are
also exported to various countries including South Africa, Australia, Zimbabwe, Sri Lanka, Canada,
Bangladesh, Algeria, Zambia, Senegal, Ghana etc.
ITL has entered into strategic alliance with YANMAR of Japan for joint manufacturing tractors in
India. ITL has a marketing arrangement with TATA International for development of selected South
American and African market. The company‟s marketing efforts are promoted by dealer network of
600, and 450 sub dealers. Such a networking has enabled the company to grow like a well-knit family
whose roots lie in its customers, who have providing constant feedback and support to allow the
company to turn their dreams into products.
They are also manufacturing tractors, meeting norms of Smoke & Mass Emission, Tested and certified
by ARAI, Pune. United States Environmental Norms Agency, Washington DC has also certified our
Engines. These certifications enabled SONALIKA Tractors to enter into world Market. All the Models
of Tractors and Combines Harvesters manufactured by us are tested &approved by central Farm
Machinery and Tractors Training & Testing Institute, Bundi (MP)India, (the Government of India
Institute authorized for issuing test reports).
Address-International Tractors Limited
Jalandhar Road, Hoshiarpur (Pb.)
Pin-146022
(India)

INTERNATIONAL CARS AND MOTOR LIMITED
International Cars & Motors Limited (ICML) is a Group Company of the Rs 1200 Crores SONALIKA
Group. The Company is promoted by Mr. L.D.Mittal (Chairman), Mr.A.S.Mittal (Vice Chairman)&
Mr. Deepak Mittal, Managing Director, who are having vast experience in manufacturing of tractors,
farm Machines & Automobiles.
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ICML is a project of its kind and is the Pride of Himachal Pradesh. The Company is having its state-of-
the-art production facility, with centrally air-conditioned, dust & pollution free environment, to
manufacture multi-utility vehicles / sports utility vehicles, in Amb, HimachalPradesh.

The Company is a Mother Unit as its establishment shall attract many other ancillary & small units for
meeting the raw material requirements yielding manifold employment avenues, revenue&
industrialization in the state.
The Company has entered into Technical Collaboration Agreement with MG Rover of UK, with the
technical know ± how from MG Rover, UK. The Company has manufactured MUV with the name of
RHINO RX & the same MUV boasts of Rover engines. The company is in-process of developing its
own Common Rail Direct injection (CRDi) engines.

The company has the installed capacity to manufacture 2000 MUVs in a month i.e., 24000MUVs in a
year. In the first full year of production in 2006-2007, ICML is aiming to churn out about 5000 MUVs
& expects to achieve a turnover of 250 Crores. The Company, besides catering to the domestic market,
also has an eye on exports & exports to Malaysia, Nepal, Bangladesh & Indonesia are also in an
advanced stage. It will also offload the product in African continent soon.
The Company is eligible for the Central & State Govt. Tax sops, exemption from the excise duty &
income tax for 10 years, which shall add to its viability & future expansion.

Sonalika Group intends to inject Rs. 1000 Crores in Himachal Pradesh over the next 2 -3 years in the
upcoming ICML plant & ICML has an ambitious plan to play a major role in the Indian Automobile
Industry. International cars & motors ltd, car plant is located in foothills of Shivalik Range and
surrounded by natural greenery of Himalayas at AMB (HP) a tax-free zone. The total area of plant is
93,000 Sq. M. out of which 42,000 Sq. M. is covered area. Plant capacity to produce 24000 cars in a
year.

Address:-Amb Distt., Himachal Pradesh.{Tax Free Zone}

INTERNATIONAL AUTOTRAC FINANCE LIMITED
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International Autotrac Finance Limited is a non banking finance company approved by RBI. IAFL
provide finance to customers of International cars & motors limited in rural & semi urban areas across
India through customer friendly schemes.
Its parent company Sonalika Group ranks among the largest tractor & farm equipment manufacturer in
India.

Business Plans of IAFL
First Phase: In the first phase, the area of operations will be in the state of Punjab, Haryana, Jammu,
H.P (Done).
Second Phase: In the second phase, the area of operations will be extended to other parts of Northern
India.
Third Phase: In the third phase, the area of operations will be extended to whole India.

SONALIKA AGRO INDUSTRIES CORPORATION
Sonalika Agro was established in 1971 to support the Indian farmers with mechanization technology to
facilitate persistence of green revolution. Sonalika Agro Industries Corporation, the group‟s maiden
venture is one of the foremost Farm equipments and implements manufacturing companies in India
with 80% share in threshers alone. Its product line includes Combine Harvesters, Tractor/Self Driven
straw reapers, Potato Planters, Maize seller cum-Dehuskers, Seed ±Cum- Fertilizers Drills, various
kinds of threshers, etc.; Sonalika Agro is a pioneer in manufacturing tractors mounted combine
harvester, which is not popular in India, but also in various others countries across the globe. Today,
the company is supporting the farmers with world class farming equipment to ease the process of
making the Green Revolution II, a dream come true. In the light of the company's mission, highly
qualified and experienced staff is working as a family in the manufacturing facility at Hoshiarpur (Pb).


JOINT VENTURE
International tractors have signed a joint venture agreement with Renault Agriculture of France, a
leading manufacturer of cars and tractors. This is a technical, financial, commercial and exports
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collaboration. Renault Agriculture of France is the world leader of Tractor manufacturing and was rated
as world number one Tractor Company at the year‟s award in Italy.

INDO – FRANCE COLLABORATION
MAJOR FEATURES:
International tractors Ltd. signed an MOU with Renault Agriculture, a 100 % subsidiary of Renault
Group of France to manufacture and market tractors of the Renault agriculture design in India and
neighboring countries. Renault agriculture has three factories and1833 people working for it and is
represented by 52 countries across the globe. The MOU was signed by Mr. L.D. Mittal (chairman) and
Mr. B. Morange (M.D. Renault Agriculture).

HIGHLIGHTS OF THE AGREEMENT
1. Renault will open European and Asia markets for Sonalika.
2. Joint participation in international marketing strategies.
3 .Renault agriculture will take minority equity stake of 20% in present ITL and that will remain under
its managerial control.


REVIEW OF LITERATURE

A number of studies on this research topic have been conducted but due to time constraints only
following are listed:-

Bergevin (1994) conducted a study and concluded that financial statement analysis often serves as a
capstone course for the accounting and finance curricula. In such a course, students evaluate financial
disclosures of corporations, along with other information, in order to make economic decisions.
Information about a company, the industry in which it operates and macroeconomic conditions that
affect it are critical in generating a thorough analysis. Librarians represent an important link in the
financial analysis conducted by students because of their ability to access and direct the students to
appropriate information sources. This paper examines the primary information needs of students
engaged in financial statement analysis and the role that librarians fulfill in providing the information.
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Sabri (1998) in his study found that small scale firms in Palestinian industry have higher labor
productivity values than large scale firms, while large scale firma accomplished higher net profit
margin compared to small scale industries. Creating an additional job in large scale Palestinian industry
needs less cost than creating a job in small scale industry, and large scale firms have better opportunity
in getting external financing than small firms.

Nissim (2001) in his study distinguished leverage that arises in financing activities from leverage that
arises in operations. The analysis yields two leveraging equations, one for borrowing to finance
operations and one for borrowing in the course of operations. These leveraging ratios describe how the
two types of leverage affect the book rates of return on equity. An empirical analysis shows that the
financial statement analysis explains cross-sectional differences in current and future rates of return as
well as in price to book ratios, which are based on expected rates of return on equity. The paper
therefore concludes that balance sheet line items for operating liabilities are priced differently than
those dealing with financing liabilities. Accordingly financial statement analysis that distinguishes two
types of liabilities aids in the forecasting of future profitability and the evaluation of appropriate price-
to-book ratios.

Muslumov(2002) conducted a study and concluded that the mergers are resulting in the synergy gains,
which is measured by operating cash flows relative to industries. The cash flow increases do not come
from gaining monopoly position and cutting capital investment and labor cost. The cash flow
improvements come from the more productive usage of assets in generating sales. The subsample
studies show that cash flow improvements are particularly strong in high overlap, equity financed,
value and larger merger subsamples.

Nicolaou (2003) conducted a research and found that the successful adoption of information
technology to support business strategy can help organizations gain superior financial performance
versus their competitors. Adopting enterprise-wide resource planning system is considered a strategic
investment decision because it represents a significant commitment of resources and can have a
dramatic effect on business processes. These strategic investments may also influence a firm‟s
performance over a long term time horizon. This study examines the effect of adoption of enterprise
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systems on a firm‟s operational performance. A decomposition of overall performance into profitability
and efficiency financial indicators shows that significant differences attained by ERP adopting firms are
due to higher profitability but not efficiency.

Mohanram (2004) concluded that the excess returns persist after controlling for well documented risk
and anomaly factors such as momentum, book-to-market, accruals and size. The stock market in
general and analysts in particular are much more likely to be positively surprised by firms whose
growth oriented fundamentals are strong indicating that the stock market fails to grasp the future
implications of current fundamentals. Further the results do not support a risk based explanation for the
book-to-market effect as the strategy returns positive returns in all years, and firms that ex-ante appears
less risky have better future returns. To conclude, one can use a modified fundamental analysis strategy
to identify mispricing and earn substantial possible abnormal returns.

Parnitzke (2005) in his study concluded that the Dynamic Financial Analysis models an insurance
company‟s cash flow in order to forecast assets‟ liabilities and ruin probabilities, as well as full balance
sheets for different scenarios. In the last years DFA has become an important tool for the analysis of an
insurance company‟s financial situation. The following article considers three aspects: First, we want to
show the main drivers why DFA is of special importance today. Second , we classify DFA in the
context of asset liability management and analyze its fundamental concepts. However upon taking a
closer look at DFA, we identify several implementation problems that have not yet been adequately
considered in literature. Thus , we finally discuss these areas, in particular the generation of random
numbers and the modeling of nonlinear dependencies in a DFA framework.

Eling(2006) conducted a study and found that Dynamic Financial Analysis(DFA) has become an
important tool in analyzing the financial situation of insurance companies. Constant development and
documentation of DFA tools has occurred during the last years. However , several questions concerning
the implementation of DFA systems have not been answered in the DFA literature to date. One such
important issue is the consideration of management strategies in the DFA context. Therefore, we
develop several management strategies and test them numerically within a DFA simulation study.

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Ravichandran(2009) analyzed the stability of the organization in terms of analyzing and computing
the various ratio analysis from analysis from analysis from the balance sheet and profit and loss
accounts of the organization for 5 consecutive years from 2002 to 2006 with this study he predicted the
financial state of organization. Its strength and weakness and its stages where it has to improve and
giving the overall position of the organization for the management for decision making so that its
resources are used most effectively and efficiently. This study not only help the management, it also
gives a clear view to the owners, shareholders, creditors and investors.

The perusal of review of literature revealed that financial analysis works as an important tool for
analyzing financial position of a company. It finds out the financial strengths and weaknesses of an
organization that may be liquidity, profitability or efficiency and provides with other suggestions to
improve financial position of the organization. The review of literature could not focus on trends during
the different time periods. It could not relate the trends of related items in different period. It could not
provide suggestions for improving performance in the future.





NEED OF STUDY
The study in itself is a problem of how best to manage capital of a company i.e. INTERNATIONAL
TRACTORS LIMITED. Therefore, needs for conducting the study are as follows:

1. Due to time between production and sales, every company has to maintain a substantial portion
of working capital to run its operations smoothly.
2. In case of manufacturing companies it is required to maintain about 40%-505 of their capital as
current and remaining in the form of fixed assets for the large scale production of the product.
So, every manufacturing company needs to arrange required working capital.
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3. Investment in the current assets and the level of current liabilities have to geared quickly to
change in sales. To be sure, fixed assets investment and long-term financial position are also
responsive to variation in sales.











OBJECTIVES OF STUDY
The main objective of the study concluded is:

 To evaluate the performance of the company by using ratios as a yardstick to measure the
efficiency of the company.
 To understand the liquidity, profitability and solvency position of the company during the study
period.
 To make comparisons between the ratios during different periods.
 To study the long term financial position of the company.
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 To understand the efficiency of the company.




















LIMITATIONS OF THE STUDY

Although there were many limitations that come across during this study but the major limitation that
was faced by me was that the major portion of my collected data was from the secondary sources. The
ratio analysis is one of the most powerful tools of the financial analysis. Though ratios are simple to
calculate and easy to understand, they differ from some serious limitations.

1. All the techniques or tools available for financial performance analysis have not been used;
only comparative statement analysis and ratio analysis have been used.
2. Time was the major limitation.
28

3. The ratios have been interpreted by comparing the standard with the actual wherever these
are available in literature. So cent percent accuracy cannot be claimed.
4. It is based upon information supplied by the various persons in the company and they were
not willing to provide detailed information.
5. Different individuals interpret the ratios in different manner.
6. Some information could not be collected as it is confidential.



.










SCOPE OF THE STUDY

The scope of the study is restricted to International Tractors Ltd, Hoshiarpur, only. The research is
conducted in the finance department of the company. The study comprises of the various financial
aspects related to International Tractors and how it effects the operations of the company.



29















RESEARCH METHODOLOGY
Research is the systematized effort to gain new knowledge. A research methodology defines the
purpose of the research , how it proceeds, how to measure progress and what constitute success with
respect to the objectives determined for carrying out the research study. The appropriate research
design formulated is detailed below. A scientifically carried out research project has a definite
framework for data collection. This framework constitutes the research design. It determines the data
collection method, sources, the field work and so on.

Research Design
30

The research design for the present study is descriptive. It is that type of research which can explain
what had happened and what are happenings, but cannot change the variables.

Data Collection
There are two sources from which data can be collected. For the purpose of study, both primary and
secondary data were required.

Primary Data:
Primary data is the data which is collected for the first time for some specific purpose. The primary
sources consist of the basic information collected from the staff people of various departments, the
officers as well as the managers of the International Tractors Limited. It has been collected by
consulting.



Secondary Data:
Secondary data is the data which is collected already for some other purpose. The secondary sources
consist of the data and information collected from the annual reports, magazines, journals, and balance
sheets of international tractors limited.

Mainly the information collected is from the secondary sources.


Data Analysis Technique:
I have used
31

 Ratios
























DATA ANALYSIS AND INTERPRETATION
CALCULATION OF RATIOS


32





















LIQUIDITY RATIOS
1. CURRENT RATIO: The current ratio is calculated by dividing current assets by liabilities
with the help of following formula:

Current ratio = Current Assets
Current Liabilities
Table No.1. Current Ratio
Year 2009-10 2010-11 2011-12 2012-13
Ratio 1.01 1.02 0.83 1.03

33



Figure 1

An ideal current ratio is 2:1 which shows the sound liquidity position of the company. The current ratio
of the company is satisfactory. The current ratio of the company has increased in 2009-10 as compared
to the last year which shows the improvement in the liquidity position. This is due to increase in the
current assets of the company.

2. LIQUID RATIO or QUICK RATIO: This ratio establishes a relationship between quick or
liquid assets and current liabilities.

Quick Ratio = Quick Assets
Quick Liabilities

Quick Assets = Current Assets – Inventories (i.e. stock) – prepaid expenses
An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of
value. Cash is (the most liquid asset).

Table No. 2 Liquid Ratio
Year 2009-10 2010-11 2011-12 2012-13
Ratio 0.95 1.07 0.71 0.86

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
34



Figure 2

Liquid ratio or quick ratio is complementary to current ratio. It measures the firm‟s capacity to pay off
its current obligations when they become due. The satisfactory norm for the liquid ratio is 1:1. This
ratio on an average has increased which shows a satisfactory liquidity position of the concern. The
increase in the ratio is due to increase in sundry debtors and loans and advances.

EFFICIENCY RATIOS
3. DEBTORS TURNOVER RATIO: The liquidity position to the firm depends upon the quality
of debtors to a great extent.
Debtors Turnover Ratio = Credit Sales
Average debtors

Account Receivable = Sundry Debtors + Bills Receivable

Table No. 3 Debtors Turnover Ratio
Year 2009-10 2010-11 2011-12 2012-13
Ratio 6.22 4.48 5.14 8.35
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
35




Figure 3

The Debtors turnover ratio, shows that the number of times the debtors are turned over during a
year. The debtors turnover ratio of the company is increasing which shows that the company is
properly managing its debtors. There is no rule of thumb, which may be used as a norm to
interpret the ratio, as it may be different from firm to firm depending upon the nature of the
business.
4. AVERAGE COLLECTION PERIOD: This ratio represents the average number of days for
which a firm has to wait before its receivables are converted into cash. The ratio can be
calculated as follows:

Average collection period= No of working days
Debtors Turnover ratio
Table No. 4 Collection Period (in days)

Year 2009-10 2010-11 2011-12 2012-13
Ratio 58.68 81.47 71.01 43.71

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
36


Figure 4
A shorter collection period implies prompt payment by debtors. It measures the quality of debtors. It
reduces the chances of bad debts. The collection period of the company is reducing which shows that
the company gets cash after few days of sales and it improves the liquidity position. There is no rule of
thumb which may be used as a norm while interpreting this ratio as the ratio may be different from firm
to firm depending upon its credit policy, nature of business and business conditions.


5. INVENTORY TURNOVER RATIO: It indicates the number of times the stock has been
turned over during the period and evaluates the efficiency with which a firm is able to manage
its inventory. This ratio is calculated as follows:

Inventory turnover ratio = Cost of goods sold
Average inventory at cost
Table No. 5 Inventory Turnover Ratio
Year 2009-10 2010-11 2011-12 2012-13
Ratio 13.33 11.56 11.99 10.12

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
37


Figure 5
The inventory turnover ratio shows how rapidly the inventory is turning into receivables through sales..
A high inventory turnover indicates the efficient management of inventory because more frequently the
stocks are sold. A low inventory turnover indicates inefficient management of the company and implies
over investment in inventories, dull business, poor quality of goods etc. This ratio shows the fluctuation
during the last four years but still it is satisfactory.


6. CREDITORS TURNOVER RATIO: It indicates the relationship between the net credit
annual purchases and average accounts payable. This ratio is calculated as follows:
Creditors turnover ratio = Net credit annual purchases
Average trade creditors
Table No 6 Creditors Turnover Ratio

Year 2009-10 2010-11 2011-12 2012-13
Ratio 7.56 8.65 5.52 9.41
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
38



Figure 6
This ratio shows the time period of the company to pay its debts. This company‟s creditors ratio is
increasing, which shows the company is efficiently managing its reserves by increasing its time period
to pay its debts. Thus it retains the cash with the company for longer time period increasing the
working capital of the concern.


7. AVERAGE PAYMENT PERIOD: The number of days a company takes to pay credit
purchases. This ratio can be calculated as follows:
Average payment period= No of working days
Creditors turnover ratio

Table No 7 AVERAGE PAYMENT PERIOD
(in days)
Year 2009-10 2010-11 2011-12 2012-13
Ratio 48.28

42.19

66.12

38.79
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
39



Figure 7
Average payment period shows the average number of days taken by the firm to pay its creditors.
Generally lower the ratio, the better is the liquidity position of the firm and higher the ratio, less liquid
is the position of the firm. But a higher payment period implies greater credit period enjoyed by the
firm. This ratio has been fluctuating during the different years

SOLVENCY RATIOS
8. DEBT EQUITY RATIO: It indicates the comparative claims of outsiders and owner in the
concern‟s total equities the claim of depositors, mortgagors, bondholders, suppliers, and other
creditors are matched with those of owner, i.e. shareholders or proprietors.
Debt Equity Ratio = Total Debt
Net worth
Table No 8 Debt Equity Ratio
Year 2009-10 2010-11 2011-12 2012-13
Ratio 0.69 0.59 0.19 0.18

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
40


Figure 8
Debt equity ratio is calculated to measure the extent to which the debt financing has been used
in the business. A ratio of 1:1 may be usually considered to be satisfactory ratio although there
cannot be any rule of thumb for all types of business. Still lesser reliance on outsiders will be
better option. If this ratio is smaller it will be favorable for the firm. Since the ratio is decreasing
we can say that it is under the control.
9. FUNDED DEBT TO CAPITALIZATION RATIO: Funded debt to total capitalization ratio
reveals what portion of total capitalization is provided by founded debt and is formulated as:
Funded debt to total capitalization= Funded debt * 100
Total capitalization
Funded Debt = Debentures + Bonus + Mortgage Loan + Other Loan – Term Loans
Total Capitalization = Proprietor‟s Fund‟s + Funded Debt

Table No. 9 Funded Debt To Total Capitalization
Year 2009-10 2010-11 2011-12 2012-13
Ratio 39.78 36.34 18.29 17.18

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
41


Figure 9
This ratio depicts the extent of dependence on outside sources for providing long term finance. There is
no rule of thumb but still the lesser the reliance on outsiders the better it will be. If the ratio is smaller,
better it will be up to 50% to 55% this ratio may be tolerable and not beyond. This ratio is less than the
prescribed limit so it is under the firm‟s control.

10. EQUITY RATIO: It establishes relationship between the proprietor or shareholder‟s funds
and the total assets. It may be expressed as:

Equity ratio = Proprietor‟s funds
Total Assets

Table No. 10 Equity Ratio
Year 2009-10 2010-11 2011-12 2012-13
Ratio 0.71 0.73 0.84 0.85

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
42


Figure 10
Equity ratio is the proprietary ratio of the company, which shows the relationship between the
shareholders fund to total assets of the company. It is an important tool for determining the long term
solvency position of the company. In the company this ratio is increasing each year. So we can say that
the firm is strengthening year by year.




11. INTEREST COVERAGE RATIO: It is also known as debt service ratio. This is used to test
the debt servicing capacity of the debtors. It can be used to calculated as follows:
Interest coverage ratio = Net profit (before interest and taxes)
Fixed Interest charges

Table No. 11 Interest Coverage Ratio

Year 2009-10 2010-11 2011-12 2012-13
Ratio 1.30 1.19 3.34 5.52

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
43




Figure 11

The lower the ratio, the more the company is burdened by debt expense. When a company's interest
coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest
coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest
expenses. But in this company this ratio is increasing which shows that it is not burdened by any debt
expense.

12. FIXED ASSET TO NET WORTH RATIO: The ratio establishes the relationship between
fixed assets and shareholder‟s funds i.e. share capital plus reserves, surpluses and retained
earnings. The ratio can be calculated as follows:
Fixed asset to net worth ratio = Fixed assets (after depreciation)
Shareholders funds

Table No. 12 Fixed Asset To Net worth Ratio
Year 2009-10 2010-11 2011-12 2012-13
Ratio 1.17 1.06 1.18 1.06
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
44




Figure 12

This ratio established the relationship between the fixed assets and shareholders‟ funds to the company.
This ratio has decreases heavily in the last year. There is no rule of thumb to interpret this ratio but up
to 75% is considered to be satisfactory ratio. A ratio higher than 0.75 indicates that the firm is
vulnerable to unexpected events and changes in the business climate. In this company this ratio is more
than 75% which is not favorable for the company.


13. FIXED ASSET TURNOVER RATIO: It is also known as sales to fixed asset ratio. This
ratio measures the efficiency and profit earning capacity of the firm. It is calculated as follows:
Fixed asset turnover ratio = Cost of sales
Net fixed assets

Table No. 13. Fixed Asset Turnover Ratio
Year 2009-10 2010-11 2011-12 2012-13
Ratio 5.44 1.44 1.07 1.33
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
45



Figure 13
This ratio shows the firm‟s ability in generating sales from all financial resources committed to total
assets. This ratio indicates the account of one rupee investment in the fixed assets. But this ratio is
declining in this company. It means either the sales of the company are low or the investment made in
fixed asset is large. But this may not be a serious problem.


PROFITABILITY RATIOS
14. NET PROFIT RATIO: Net Profit is obtained when operating expenses; interest and taxes are
subtracted from the gross profit. The net profit margin ratio is measured as follows:

Net Profit Ratio = Profit After Tax * 100
Sales

Table No. 14 Net Profit Ratio
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
46

Year 2009-10 2010-11 2011-12 2012-13
Ratio -0.30 0.58 4.10 4.90


Figure 14
This ratio indicates the firm‟s capacity to face the adverse economic conditions. Higher the ratio, the
better is the profitability. Net profit ratio of the company is increasing which is a healthy sign for the
company. This ratio is increased due to the liberal credit policy of the company and increase in the sales
of the company.

15. GROSS PROFIT RATIO: This ratio measures the relationship of gross profit to net sales and
is calculated as follows:
Gross Profit Ratio = Gross Profit * 100
Sales

Gross Profit = Sales – Cost of Goods
Cost of Goods = (Opening Stock + Net Purchase + Procurement Expenses + Production
Expenses – Closing Stock)

Table No. 15 Gross Profit Ratio
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
47

Year 2009-10 2010-11 2011-12 2012-13
Ratio 3.30 3.17 7.42 6.94


Figure 15
Gross profit ratio measures the relationship of gross profit to net sales. There are no standard norms for
gross profit, but it should be adequate to cover the operating expenses. A lower ratio indicates high cost
of goods sold due to due to unfavorable purchasing policies. G. P. ratio of the company shows the
fluctuating trend in the profits. So the company needs to take necessary action to control it.

OVERALL PROFITABILITY RATIOS
16. EARNINGS PER SHARE: Earning per share is a small variation of return on equity share
capital and is calculated as follows:
Earnings per share = Net profit after tax- Preference Dividend
No. of Equity Shares
Table No. 16 Earnings Per Share Ratio
Year 2009-10 2010-11 2011-12 2012-13
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
48

Ratio -0.77 1.31 9.89 13.02


Figure 16
Earnings per share is good measure of profitability in this company. This ratio is increasing every year
in this company, which shows the earning capacity of the invertors. It means that the company has
excellent profitability and is satisfactory.




17. DIVIDEND PAYOUT RATIO: This ratio is calculated to find the extent to which earnings
per share have been retained in the business. This is calculated as follows:
Dividend payout ratio = Dividend per equity share
Earnings per share

Table No. 17 Dividend Payout Ratio

Year 2009-10 2010-11 2011-12 2012-13
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
49

Ratio 0 0. 11.82 13.73



Figure 17

This ratio is calculated to know the relationship between dividend per share paid and the market value
of the share. This company has been paying dividend from the year 2008-09 and it has increased in the
next year. This shows that it is a mature company.




18. RETURN ON CAPITAL EMPLOYED: Return on capital employed is considered to be the
prime or principal ratio. It throws the light on the over – all profitability of the business, which
means how much, earning the amount investment in the business, is yielding.
The Ratio is computed as = Net Profit (adjusted) * 100
Capital Employed

1. Gross Capital Employed: Comprises fixed assets plus current assets.
2. Net Capital Employed: Comprises fixed assets plus current assets less current liabilities.

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
50

Table No. 18 Return On Capital Employed

Year 2009-10 2010-11 2011-12 2012-13
Ratio 8.57 6.30 10.29 11.74



Figure 18

Return on capital employed established the relationship between the profits and the capital employed.
This ratio shows the overall profitability of the company. This ratio is increasing which shows that the
company is very well using the investment made by the owners and creditors in the business.

LEVERAGE RATIOS
19. CAPITAL GEARING RATIO: The term „capital gearing‟ is used to describe the relationship
between equity share capital including reserves and surpluses to preference share capital and
other fixed interest bearing loans.
Capital Gearing Ratio = Equity Share Capital + Reserves & Surpluses
Preference Capital + Long Term debt bearing fixed interest

Table No. 19 Capital Gearing Ratio
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
51

Year 2009-10 2010-11 2011-12 2012-13
Ratio 1.45 1.68 5.18 5.60


Figure 19
This ratio shows the relationship between the equity share capital and the other fixed interest bearing
loans. This company is low-geared company because long-term debt was less than the equity and
reserves. So the company is in good position according to this ratio.




20. RATIO OF RESERVE TO EQUITY: This ratio indicates how much profits are retained by
the firm for future growth.
Ratio of reserve to equity = Reserves
Equity Share Capital


Table No. 20 Ratio Of Reserve To Equity Capital

0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
52

Year 2009-10 2010-11 2011-12 2012-13
Ratio 1237.04 1225.82 1492.09 1599.09



Figure 20

The ratio establishes relationship between the reserves and the equity capital. This ratio is important to
know how much profits are retained by the company. This ratio shows the better position of the
company, which is highly increasing every year. This means the company has been able to build very
large amount of reserves, which are much more than its equity share capital.


FINDINGS

After conducting the whole research on the Financial Analysis of International Tractors Ltd., we found:

 Overall profitability of the company is excellent.
 The liquidity position of the form is good.
 The long term solvency position of the company is good.
0
0.2
0.4
0.6
0.8
1
1.2
2009-10 2010-11 2011-12 2012-13
Ratio
Ratio
53

 The profitability position of the company is average but the company is adopting liberal credit
policy.
 The company is having better short-term financial position.




















RECOMMENDATIONS

On the basis of my study, following are some suggestions that might prove helpful in future.

 The ratio like current ratio and quick ratio should be improved through the efficient working
and effective policies so as to facilitate the lower investment in working capital.
54


 Creditors should be paid on the last day and the debtor collection period should be reduced.

 The proper follow up procedure for making the collection from debtors should be undertaken by
the company.

 On an average the current ratio of the company is increasing which shows that the company is
in good position but, the increase in current ratio may not be favorable for the company in the
long run. It means that excessive investments have been made in the current assets.
















CONCLUSION

The conclusion derived from the study of financial analysis of international tractors limited shows that
the overall financial strength of the company is extremely good because the current assets exceeds the
current liabilities in all the financial years of the company. But current assets of the company are
heavily increased during the year 2009-2010 which boosted the current ratio of the company. The
55

working capital position of the company is better in the financial year 2009-2010 as compared to the
previous years. The overall profitability of the company is good.
Suggestions:

1. Liquidity Ratios:
Liquidity refers to the ability of the concern to meet its current obligations as and when these become
due. The short-term obligations are met by realizing amounts from current floating or circulating assets.
The liquidity position of the company is better as compared to the previous years. The ratios such as
current ratio and liquid ratio has been increased in the last year as compared to the previous year . This
increases due to the sundry debtors, loan and advances and heavy cash and bank balances maintained
by the company. Although company is having better liquidity position, but there is still a scope to
improve it.

2. Solvency Ratios:
The term solvency refers to the ability of a concern to meet its long-term obligations due to the heavy
liquidity position maintained by the company. On an average the long-term position is good. All the ratios
including equity ratio, debt equity, interest coverage are increasing which means the company is not
burdened by any debt expense. But there is decrease in fixed asset turnover ratio and fixed asset to net
worth ratio which may prove bad for the company. So the company is recommended to make the balance
between liquidity and solvency position of the company.

3. Profitability Ratios:
The primary objective of the business undertaking is to earn profits. Profit earning is considered
essential for the survival of the business. The net profits of the company is increased as compared to the
previous years but this is due to the increase in the credit sales of the company which shows that the
company is adopting liberal credit policy to increase its profits but the company is also suffered from
the decrease in average days of payment. So the company should try to make the payments on last day
so that it can help in using the money for short periods and the firm can make use of cash discount also.

4.Efficient utilization of resources:
56

The company is having better short-term financial position. It has more current assets as compared to
the current liabilities, which will affect the overall profitability position of the company so the company
should manage its current assets properly.

5.Management of debtors:
The increase in the current assets is due to the increase in the debtors of the company. So the company
is recommended to manage its debtors properly. Increase in debtors may create certain problems in the
long-term run of the company.