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Financial Statement Analysis
Financial Statement Analysis
D E C LAR AT I O N
I, the undersigned, hereby declare that the Project Report entitled Financial
Statement Analysis of ZUARI CEMENTS Ltd. written and submitted by
me to the University of Pune, Pune in partial fulfilment of the requirements for
the award of degree of Master of Business Administration under the guidance
of Mr. Manoj Kumar Sahoo (Deputy Manager Finance)and Mr. Vishnu
Murthy (Manager Finance) is my original work and the conclusions drawn
therein are based on the material collected by myself.
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GUIDES CERTIFICATE
C E R T I F I C AT E
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CONTENT PAGE
CONTENTS
Page No
ACKNOWLEDGMENT 1-2
LIST OF TABLES 4
LIST OF FIGURES 5
BIBLIOGRAPHY: 85-86
ANNEXURE: 87-100
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LIST OF TABLES
LIST OF TABLES
Table No. Title of the Table Page
No.
Table No. 1.1 Cement statistics 30
Table No. 1.2 Regional distribution of cement in 2006 35
Table No. 1.3 Region wise share of consumption 35
Table No. 1.4 Profit before tax 47
Table No. 1.5 Profit after tax 48
Table No. 1.6 Turnover 49
Table No. 1.7 Current ratio 55
Table No. 1.8 Quick ratio 57
Table No. 1.9 Debt equity ratio 59
Table No. 1.10 Proprietary ratio 60
Table No. 1.11 Debt to total assets ratio 61
Table No. 1.12 Interest coverage ratio 62
Table No. 1.13 Stock turnover ratio 63
Table No. 1.14 Inventory holding period 64
Table No. 1.15 Debtor turnover ratio 65
Table No. 1.16 Debtor collection period 66
Table No. 1.17 Working capital turnover ratio 67
Table No. 1.18 Total assets turnover ratio 68
Table No. 1.19 Fixed assets turnover ratio 69
Table No. 1.20 Cash ratio 70
Table No. 1.21 Net profit ratio 71
Table No. 1.22 Gross profit ratio 72
Table No. 1.23 Return on capital employed 74
Table No. 1.24 Return on equity share holder fund 75
Table No. 1.25 Return on total assets 76
Table No. 1.26 Reserve to total capital ratio 77
Table No. 1.27 Debt ratio 78
Table No. 1.28 Capitalization ratio 79
Table No. 1.29 Internal growth ratio 80
Table No. 1.30 Sustainable growth ratio 81
LIST OF & CHARTS
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LIST OF CHARTS
Chart No. Title of the Chart Page No.
Chart No. 2.1 Indian presence of Zuari cement 23
Chart No. 2.2 Market network of Zuari cement 28
Chart No. 2.3 Indias cements scenario 31
Chart No. 2.4 GDP at cost of factor 32
Chart No. 2.5 Growth of the sector 33
Chart No. 2.6 Expected growth 34
Chart No. 2.7 Trend of sales and net income of ZCL 44
Chart No. 2.8 Trend of profit before tax of ZCL 45
Chart No. 2.9 Trend of profit after tax of ZCL 46
Chart No. 2.10 Profit before tax 47
Chart No. 2.11 Profit after tax 48
Chart No. 2.12 Turnover 49
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INTRODUCTION
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INTRODUCTION
The first task of the financial analyst is to select the relevant information to the
decision under consideration from the total information contained in financial
statement. The second step is to arrange the information in a way to highlight
significant relationship. The final step is to interpretation and drawing of
inferences and conclusions.
The traditional financial statements comprising the balance sheet and profit
and loss account is that they do not give all the information related to the
financial operation of a firm. Nevertheless, they provide some extremely
useful information to the extent that the balance sheet mirrors the financial
position on a particulars date in terms of the structure of assets, liabilities and
owners equity, and so on profit and loss account show the result of operations
during a certain period of time in terms of the revenue obtained and the cost
incurred during the year.
Financial statements are the main and often the only source of information to
the lenders and the outside investors regarding a businesss financial
performance and condition. In addition to reading through the financial
statements, they use certain ratios calculated from the figures in the financial
Statement to evaluate the profit performance and financial position of the
business. These key ratios are very important to managers as well, to say the
least. The ratios are part of the language of business. It would be embarrassing
to a manager to display his or her ignorance of any of these financial
specifications for a business.
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FINANCIAL STATEMENT ANALYSIS
http://www.investopedia.com/university/financialstatements/default.asp
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Financial statement is an organised collection of data. Its purpose is to convey
an understanding of various financial aspects of business firm. It may show a
position at a moment as in the case of activities over a given period of time in
the of an income statements.
Balance sheet
Income statement
Balance sheet:
The balance sheet summarizes assets & liabilities owned by a firm value of
assets and mix of financing debt & equity to finance these assets up to a point
of time. It some time, called Statement of financial position or A statement
of financial position of an enterprise as on a particular date.
It should also tell us about the assets held by the company, the proportion of
current assets and the extent to which they may be used to meet current
obligations. An element of caution should be noted in analyzing balance sheet
information. The balance sheet is an historical document. It may have looked
entirely different six months or a year ago, or even one week ago. There is not
always consistency between the information included in one companys
balance sheet with that.
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Balance Sheet Terminology
Fixed Assets Assets held for more than one year. Typically Include:
Other Assets Assets that are not current assets or fixed assets
Patents
Copyrights
Goodwill
Cash
Accounts Receivable
(Payments due from customers who buy on credit)
Inventory
(Raw materials, work in process, and finished goods held for
eventual sale)
Other expenses
(Prepaid expenses are those items paid for in advance)
Debt (Liabilities)
Current Liabilities:
Accounts payable
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Accrued expenses
Short-term notes
Long-Term Debt
Equity
Preferred stock
Common stock
Treasury Stock
stock that was once outstanding and has been re-purchased by the
company
Retained Earnings
cumulative total of all the net income over the life of the firm, less
common stock dividends that have been paid out over the years
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INCOME STATEMENT
Revenue (Sales)
Operating Expenses
Financing Costs
Tax Expenses
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STATEMENT OF CASH FLOW
The statement of cash flows may be the most intuitive of all statements.
We have already shown that, in basic terms, a company raises capital in order to
buy assets that generate a profit. The statement of cash flows "follows the cash"
according to these three core activities:
(1) Cash is raised from the capital suppliers - cash flow from financing,
(2) Cash is used to buy assets - cash flow from investing and
However, for better or worse, the technical classifications of some cash flows
are not intuitive. Below we recast the "natural" order of cash flows into their
technical classifications:
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http://www.investopedia.com/university/financialstatements/default.asp
INVESTMENT DECISIONS
CREDIT DECISIONS
PERFORMANCE
VALUATION (INVESTMENT)
A financial analysis can adopt the following tools for analysis of the
financial statements. These are also found as methods of financial analysis.
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Comparative Financial Statements :
Similarly in the common size balance sheet, the total assets or total
liabilities are assumed to be 100% and other items are expressed as a
percentage of this total.
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Trend percentages :
Comparative the past data over period with a base year is called trend
analysis. Under this method, percentage relationship that each statement
item bears to the same items in the base year is calculated. Any year the
earliest year involved in comparison, or the latest year or any intervening
year may be taken as the base year. The trend percentages are calculated
only for some important items, which can be logically connected with each
other. The concerned item in the base year is taken to be equal to as 100
and then based on this trend percentages for the corresponding items in
other year are calculated.
The funds flow statement is a method by which we study the net funds
flow between two points in time. These positions confirm the beginning
and ending of the dates of financial statements, for whatever period of
examination.
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Ratio Analysis:
There are a number of ratios which can be calculated from the information
given in the financial statements, but the analysis has to select same keeping in
mind the objective of analysis.
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The objectives of study:
3. To find out various assets mix and the capability of the business to meet its
long-term & short-term liabilities.
1. Share holder/investors:
Investor in the company will like to assess the financial position of the
concern where he is going to invest. His first would be security of his
investment and then a return in the form of dividend or interest. So,
investors concentrate on the firms financial structure to the extent in
influences the firms earning ability and risk.
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2. Trade creditors:
They are interested in firms ability to meet their claims over a very
short period of time. So their analysis is confined to evaluation of firms
liquidity position.
They are concerned with the firms long-term future solvency and
survival. They analyze the firms profitability over a period of time, its
ability to generate cash, to be able to pay interest and repay the principle
and relationship between various sources of funds.
4. Employees:
The employees are interested in financial position of the concern
especially profitability. Their wages and amount of fringe benefits are
related to the volume of profits earned by the concern. The employees
make use of information available in financial statements.
5. Government:
6. Management:
Management of the firm require these statements for its own evaluation
and decision making. Moreover, it is responsible for the overall
performances of the firm maintaining its solvency so as to able to meet
short-term and long-term obligations to the creditors and at the same
time ensuring an adequate rate of return, consistent with safety of funds
to its owner. Financial analysis may not provide exact answer to these
questions but it will indicate what can be expresses future.
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COMPANY PROFILE
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COMPANY PROFILE
The company plans to upgrade its clinker production from 2700 tpd to
3400 tpd.
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Indian Presence
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Italcementi invested USD120m since 2001 to acquire 2 plants with 3,2 mt
capacity and a 7%a)- 8%b) share of the South India market...
January 2001:
acquisition of 50% of Zuari Cement
(Yerraguntla)
Sitapuram
Capacity 1.950 kt
Net Sales 2005: USD82,6m
Yerraguntla
January 2002:
acquisition (through Zuari Cement)
of Sri Vishnu Cement (Sitapuram)
Capacity 1.250 kt
Net Sales 2005: USD39,5m
a) on total market
b) on CMA market
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VISION OF ZUARI CEMENT
Main aim of zuari cement to further develop its presence in the country
The high expertise of local human resources allows today to maintain only
one expatriate as General Manager in the organization, and various plans
are underway to capitalize Group wide on Indian resources
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MARKET NETWORK OF ZUARI CEMENT LIMITED
Source: www.Zuaricement.com
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INDIAN CEMENT INDUSTRY CURRENT SCENARIO
Technological Advancements
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Future Outlook
Major Players
Ultratech Cement
Century Cements
Madras Cements
ACC
Gujarat Ambuja Cement Limited
Grasim Industries
India Cements Limited
Jaiprakash Associates and
JK Cements.
Holcim
Lafarge
Heidelberg Cemex
Italcementi
Cement Statistics
(million tonnes)
2006-07 2007-2008
(Apr-Mar)
(a) Production 155.66 168.31
Despatches
(b) 155.26 167.67
(Including Export)
(c) Export 3.65 5.89
(d) Cap. Uti.(%) 96 94
Table no.1.1
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Source: Cement Manufacturers Association
Policy Initiatives
FDI Policy: the cement sector has been gradually liberalized. 100 per cent FDI is
now permitted in the cement industry.
http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/Cement.htm
Population: 1.080 m
Pop. CAGR '99-'04: 1,5%
GDP per head: 610 US $
GDPa) CAGR 99 - 04: 5,7 %
GFIb) CAGR 99 - 04: 6,9 %
Companies: 55
c)
Plants : 127
Cement Consumption:
million tons:
Kg/inhab: 119,4c)
110
a) Gross Domestic Product
b) Gross Fixed Investment
c) CMA plants with production capacity > 200 kt, 2005
est. 131 mt
Source: macroeconomic data, EIU January 05 cement data, Cement Manufacturers Ass.
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With a construction sector showing solid growth, overcome in recent years only
by the growth of Services...
100
1993-94 1996-97 1999-00 2002-03
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...and is expected to further grow due to high development rates and
infrastructure programs...
Legenda
Infrastructures development Stato avanzamento lavori al 30 novembre 2005
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... with a positive impact on cement demand growth in the
medium and long term
India cement demand, mt/year
Long term
expected growth
CAGR 5,5%
Andhra Pradesh, a south Indian state has a huge reserve of limestone and
these are being exploited by major plants and mini plants. Limestone the prime
raw material for cement industry is available inexhaustible quantities in Andhra
Pradesh. Raw materials required for cement manufacturing are coal, bauxite;
gypsum and fly ash are available in Andhra Pradesh. One fourth of the cement
grade reserves of the country are from Andhra Pradesh.
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REGION WISE CAPACITY, PRODUCTION AND CONSUMPTION:
Capacity Production
Million Share of Million Share of
Tonne Total Tonne Total
North 29.59 18.8 30.17 21.3
East 22.85 14.5 19.54 13.8
South 50.76 32.3 44.88 31.7
West 28.94 18.4 24.93 17.6
Central 25.0 15.9 22.28 15.7
Table no.1.3
http://www.indiabiznews.com/biznews/categoryNewsDesc.jsp?catId=11648Cement Industry 1
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RESEARCH METHODOLOGY
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RESEARCH METHODOLOGY
Research In Common Parlance Refers To Search For Knowledge. Data had been
collected by primary and secondary methods. Research Methodology is a way to
systematically solve the research problem. It may be understood as a science of
studying how research is done scientifically. The study of research methodology
gives the student the necessary training in gathering material and arranging them.
According to Hudson Maxim, All progress is born of inquiry. Doubt is often
better than overconfidence, for it leads to inquiry, and inquiry leads to invention.
Research is an academic activity and as such the term should be used in technical
sense. Research is, thus an original contribution to the existing stock of knowledge
making for its advancement.
DATA COLLECTION
The task of data collection begins after a research problem has been defined and
research design/ plan chalked out. While deciding about the method of
data collection to be used for the study, the researcher should keep in
mind two types of data.
Secondary data
These are those data which have been already collected by someone else
and which have already been passed through the statistical process. When the
researcher utilizes secondary data, then he has to look into various sources from
where they can obtain them. Secondary data may either be published data or
unpublished data.
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d) Reports prepared by research scholars, universities, economist etc, in
different fields.
SWOT ANALYSIS:-
STRENGTH:-
Technology enhancement
WEAKNESS:-
Marginal profits.
Increasing trend in price of major raw material like power and machinery.
OPPORTUNITIES:-
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THREATS:-
Limited market.
Huge competition.
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DATA PRESENTATION, ANALYSIS
AND INTERPRETATION
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Zuari cement had a very little profit in 2002 due to not proper utilization of
fixed cost.
In 2003 it increased its reserve to Rs. 1558.2 lacs, when ZCL had takeover
the Sri Vishnu Cement.
From 2004 it started optimum utilisation of its fixed cost and resultant got
less loss in 2004 & 2005 as compare to 2003.
In 2003 reserve was increased but this reserve had not been used in the
following year 2003, 04, 05 and 2006 in the fixed assets.
In 2003 ZCL had 50% less sundry debtor as compare to 2002 which
increased bad debt for the company. But it again increased 50% in 2004 as
compare to 2003 it resultant decreased in bad debt. The debtor decreased
35% in 2006as compare to 2005.
In 2006 ZCL maintained its finished goods stock that is -72%, which is the
main reason of maximizing its profit.
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Annexure no.3.2 shows the percentage figures that bring out clearly the
relative significance of each group of items in the aggregative position of
the firm for the following year that are as follows.
In the 2003 the ZCL had loss. This declining can mainly be traced to the
increase of 96.74% in the manufacturing expenses reflecting diminishing
in efficiency of manufacturing operations. The increase in financial
overheads (Interest) by .19% during the 2003 can be traced to the
repayment of a part of long-term loans.
In the 2003 the common size balance sheet show that current assets as a
percentages of total assets have decreased by 17 percent over previous
year. This decrease was shared by debtors 12% and inventory 5%; the
share of cash & bank balance and loan comparatively remained unchanged
at 11%. Fixed assets also decrease as a percentage of total assets by 12%
over the previous year. This decrease was shares by gross block 11%.
In the 2004 the ZCL had improved its loss that is -5.97%in 2004 as
compared to -10.59% in the 2003. This development can mainly be traced
to the decrease manufacturing expenses 91.90%in 2004 as compare to
96.74% in the 2003 reflecting improvement in efficiency of manufacturing
operations. The decrease in financial overheads (Interest) by 1.59% during
the 2004 can be traced to the repayment of a part of long-term loans.
In the 2004 the common size balance sheet show that current assets as a
percentages of total assets have increase by 3% over previous year. This
increase was shared by debtors 3%; the share of cash & bank balance and
loan comparatively slightly changed. Fixed assets also decrease as a
percentage of total assets by 7% over the previous year. This decrease was
shares by gross block 14%.
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In the 2006 the EAT of ZCL improved that was 5.38%in 2006 as compared
to -2.71% in the 2005. This development can mainly be traced to the
decrease manufacturing expenses 90.42%in 2006 as compare to 96.28% in
the 2005 reflecting improvement in efficiency of manufacturing
operations.
In the 2006 the common size balance sheet show that current assets
increase as a percentages of total assets by 19.18% over previous year.
This increase was shared by decrease in debtors by 6.36%; the share of
cash & bank balance and loan comparatively increased by 24.89% as
compare to previous year and some slightly changed in inventory. Fixed
assets also decrease as a percentage of total assets by 4.61% over the
previous year. This decrease was shares by gross block 3.96%.
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TREND PERCENTAGES
Trend of sales and net income of zuari cement limited for the
year2002-03-04-05-06
We can see that ZuariNet income and sales slightly decreased in the year of 2003
but it increased steadily over the 5-year period. The 2006 net income is almost
two times as much as the 2002 amount. This is kind of performance that
management and stockholder seek.
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Trend of Profit & loss before tax of Zuari cement limited for the
year 2002-03-04-05-06
We can see that Zuari Loss Before Tax was in very worst situation in the year
2003 but it continuously improved and in the 2006 profit was 30 times as much as
the 2002 amounts. Now we can say how fast zuari convert its self to loss making
to profit making company by reducing the operating cost and optimum utilization
of fixed cost.
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Trend of manufacturing & other expenses against sales of Zuari
Cement limited for the year of 2002-03-04-05-06
The following chart depict that Zuari cement limited has not control its
manufacturing expenses. We can see that expenses are increasing more than its
sales during the year.
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GRAPHICAL ANALYSIS
The following chart depict that zuari cement had very small profit before
tax in the year of 2002 and It faced continuous losses over next three year. In the
year 2006 it made 30 times profit as much as the 2002 profit amount.
See annexure no. 3.4
Table no.1.4
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Profit/loss after tax
The following chart depict that zuari cement had very small profit after tax in the
year of 2002 and It faced continuous losses over next three year. In the year 2006
it made 30 times profit as much as the 2002 profit amount.
Table no.1.5
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Turnover of ZCL
We can see that turnover of zuari cement are steadily increasing every year from
2003 to 2006 it reduced in 2002 as the 2.23%. it is twice in the year 2006 as
compare to 2002 amounts.
Table no.1.6
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RATIO ANALYSIS
In order to assess how your business is doing, you'll need more than single
numbers extracted from the financial statements. Each number has to be viewed in
the context of the whole picture.
The true meaning of figures from the financial statements emerges only when they
are compared to other figures. Such comparisons are the essence of why business
and financial ratios have been developed.
Various ratios can be established from key figures on the financial statements.
These ratios are very simple to calculate sometimes they are simply expressed
in the format "x:y," and other times they are simply one number divided by
another, with the answer expressed as a percentage. However, these simple ratios
can be a powerful tool because they allow you to immediately grasp the
relationship expressed.
When you routinely calculate and record a group of ratios at the end of every
accounting period, you can assess the performance of your business over time, and
compare your business to others in the same industry or to others of a similar size.
By doing so, you won't be alone banks routinely use business ratios to evaluate
a business that's applying for a loan, and some creditors use them to determine
whether to extend credit to you.
When you compare changes in your business's ratios from period to period, you
can pinpoint improvements in performance or developing problem areas. By
comparing your ratios to those in other businesses, you can see possibilities for
improvement in key areas. A number of sources, including many trade or business
associations and organizations, provide data for comparison purposes; they are
also available from commercial services. Your accountant may be a good source
of information on how your business compares to similar ones in your particular
locale.
There are dozens and dozens of financial ratios that you can look at, but many will
have little or no meaning for your business. In the following sections we'll
concentrate on those that are most commonly considered to have the most value
for making small business decisions. The ratios fall into four categories:
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liquidity ratios
efficiency ratios
profitability ratios
solvency ratios
Financial statement like profit and Loss account and balance sheet are prepared at
the end of the year do not always conveys to the reader the real profitability and
financial health of the business. They contain various facts and figures and it is for
the reader to conclude, whether these facts indicate a good or bad managerial
performance. Ratio analysis is the most important tool of analysis these financial
statements. The figures then speak of liquidity, solvency by a profitability etc. of
the business enterprises. Some important object and advantages derived by a firm
by the use of accounting ratios are:-
Helpful in forecasting
Effective Control
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LIMITATIONS OF RATIO ANALYSIS:-
Ratio analysis is a very important tool of financial analysis. But despite its being
indispensable, the ratio analysis suffers from a number of limitations. These
limitations should be kept in mind while making use of the ratio analysis: -
Window dressing
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CLASSIFICATION OF RATIOS:-
According ratios or financial ratio has been classified in various ways according to
different purposes in view. However, we shall discuss the classification according
to annual financial statement and according to objectives.
Current Ratio
Proprietary Ratio
Operating Ratio
Expenses Ratio
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Statement as well as income statement e.g.
Fixed assets
Liquidity ratios
Solvency ratios
Activity ratios
Profitability ratio
Investment ratio
LIQUIDITY RATIO:-
This ratio explains the relationship between current Assets and current
liabilities of a business. Current assets include those assets, which can be
converted into cash within a years time, and Current liability includes
those liabilities, which are repayable in a years time. The formula for
calculating the ratio is:-
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Current Assets
Current Ratio =
Current Liabilities
Table no.1.7
INTERPRETATION
In 2002 ZCL had .92 paisa to pay Rs 1 which is very worst situation from
the creditor point of view. However, a ratio of less than 1 : 1 would
certainly undesirable in any industry as at least some safety margin is
required to protect the interest of creditors and to provide cushion to the
firm in adverse circumstances.
In 2003 and 04 ZCL had 68 percent more capacity to pay its short term
liabilities that even with a drop-out of 68 percent in the value of current
assets, ZCL can meet its obligation. Company must maintain at least this
percent of liquidity every year.
In 2005 and 06 companys current ratio fell down that is 1.24: 1 and 1.14:
1 that is sufficient to pay its short term liabilities but from the investor
point of view the margin of safety is very less in the both year though
company must increase its liquidity position for paying its short term
obligation.
These low numeric values of ratio do not indicate a good sign from
investors especially for sundry creditors. Company has to concentrate on
companys liquidity problem.
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QUICK RATIO OR ACID-TEST RATIO:-
Quick ratio indicates whether the firm is in a position to pay its current
liabilities within a month or immediately. Liquid assets means those
assets, which will yield cash very shortly. All current assets except stock
and prepaid expenses are included in liquid assets. Stock is excluded from
liquid assets because it has to be sold before it can be converted into cash.
Prepaid expenses are to be excluded from the list of liquid assets because
they are not expected to be converted into cash.
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Liquid assets thus include cash debtors, bill receivable and short-term securities.
As such the Quick ratio is calculated by dividing liquid (Quick current assets) by
current liabilities: -
Liquid Assets
Quick Ratio =
Current Liabilities
Table no.1.8
INTERPRETATION
In 2003 and 04 ZCL had ability to meet their cash demand but in 2002, 05
and 2006 the numeric value of ratio is less than their ideal value which
shows that company was suffering from cash problem. This data of ratio is
not good for those creditors who give short-term loan to company.
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Companies with high fixed costs, after reaching the breakeven point, see a
greater increase in operating revenue when output is increased compared
to companies with high variable costs. The reason for this is that the costs
have already been incurred, so every sale after the breakeven transfers to
the operating income. On the other hand, a high variable cost company
sees little increase in operating income with additional output, because
costs continue to be imputed into the outputs. The degree of operating
leverage is the ratio used to calculate this mix and its effects on operating
income.
DEBT-EQUITY RATIO:-
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ratio is calculated to ascertain the soundness of the long-term financial
policies of the firm.
a) External Equities These include all the long-term and short-term debts
such as, Debenture, Mortgage Loan, Bank Loan, Public Deposits and all
the Current Liabilities.
Total Debt
Debt-Equity Ratio =
Equity& Net worth
See annexure no. 3.4
Table no.1.9
INTERPRETATION
In Zuari Cement Limited., the value of debt-Equity ratio is more than 1.
On the other hand, return to company is not high so that debt become
beneficial for company. It is a burden on company. In 2002 company
shows very high ratio but a high debt equity ratio has serious implications
from the firms point of you.
The high ratio would lead inflexibility in the operations of the firm, as
creditors would be able to borrow funds only under restrictive conditions;
a firm faces difficulty in raising funds in future.
In 2003 ZCL had 1.32:1 ratio between debt and equity which depict that
Company financed its debt in very less proportion to equity.
PROPRIETORY RATIO:-
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This is the ratio, which shows the relationship of internal equity with the
total assets. This ratio indicates the proportion of total funds provided by a
firm from internal sources it is calculated as under:-
Table no.1.10
INTERPRETATION
In Zuari cement limited, proprietary ratio is less than 1 or 50%. This low
value of ratio indicates the unsound financial position of company. It is not
good for long term prospect. Company has to take certain steps to equity
portion of this ratio.
Total debt comprises of long-term debt & current liabilities &Total Asset
comprises of permanent capital & current assets.
While calculating total assets all the intangible assets appearing on the
assets side of the balance sheet should be deducted such as preliminary
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expenses Underwriting Commission, Debt balance of P&L A/c etc. This
ratio indicates the proportion of total funds acquired by a firm by outside
sources.
Total Debt
Debt-asset ratio =
Total Asset
Table no.1.11
INTERPRETATION
It is appreciable ratio for Zuari cement Ltd. that it had less than 1 in all the
five year which shows that ZCL is financially very strong, because this
ratio should be less than 1 or 50%. This shows that company has strong
financial position. If company has more total assets then it is good for their
long-term financing.
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Total interest
Table no.1.12
INTERPRETATION
In 2004 and 05, interest coverage ratio of Zuari Cement Ltd. was .46 and .
18 which is very low below standard for investors point of view. In the
2003 Company has negative interest coverage ratio which shows that
company is not able to pay its interest obligation. It also shows that
company has weak short-term financial health.
In the year 2002, interest coverage ratio of ZCL was 1.04 which also low
below Standard for investors point of view. But in the year 2006, the ratio
was 3.35:1 that is good for both company and investor, because every
investor seek to greater return from a company.
These ratios measure how well the facilities at the disposal of the being
utilized. These ratios are known as turnover ratio as they indicate the
rapidity with which the resources available to the concern are being used
to product sales. In other, words these ratio measure the efficiency and
rapidity of the resources of the company, like stock, fixed assets, working
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capital debtors etc. these ratio are generally calculated on the basis of sales
or cost of sales some of the important activity ratios are discussed below: -
This ratio indicates the relationship between the cost of goods sold
during the year and average stock kept during that year.
Cost of goods sold = (Opening Stock +Purchase +Direct Exp. - Closing Stock)
Or
= Sales Gross Profit
Table no.1.13
12 Months
Inventory holding period =
Inventory turn over ratio
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200 200 200 200
Year 2 3 4 5 2006
Holding 3.7 2.3 1.8 1.4
period(month) 6 2 7 1 1.14
Months 12 12 12 12 12
3.1 5.1 6.4 8.5 10.5
Inv.turnover ratio 9 7 1 1 4
Table no.1.14
INTERPRETATION
Zuari Cement limited had appreciably increased their stock turnover ratio from
2002 to 2006. It was approx. three times more than the 2002. It proves that their
sales increase during this period. Stocks are converted into sells quickly even the
profit margin increases.
We can see that the inventory holding period also continuously decreased every
year. It was 3.76 in the year 2002, reached 1.14 in 2006 then we can assume that
its sales increased every year.
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Bills receivable are added in Debtors for the purpose of calculation of this
ratio. Average debtors are calculated by adding the debtors and B/R at the
beginning of a period as well as at the end of the period and by dividing
the total by 2. While calculating this ratio provision for bad and doubtful
debts is not deducted from total debtors so that it may not give a false
impression that debtors are collected quickly.
If the amount of credit sales is not given in the question, the ratio may be
calculated by taking the figure of total sales.
Table no.1.15
12 Months
Debtor Collection Period =
Debtor Turnover Ratio
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s 0 7 7 1
12 (months) 12 12 12 12 12
Debtor turnover 4.6 5.7 9.4 8.4 12.6
ratio 2 9 6 9 2
Table no.1.16
INTERPRETATION
In Zuari cement Ltd., Debtors turnover ratio was continuously increased
which is good for a company. It indicates that company operate its
functions either on cash basis or collection of account receivable is
efficient. Here company is facing low risk of bad debt.
We can see that the Debtor collection time period of Zuari Cement Ltd.
continuously decreased from 2002 to 2006. It indicates that company give less
credit time to its debtor that is beneficial for the company.
Sales
Working capital turnover =
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Working capital
Table no.1.17
INTERPRETATION
In 2002 ZCL shows negative working capital that is not good for a
company And turnover ratio also negative. It could not convert working
capital in to sales due to which it made very little profit that year.
In 2005 and 2006 the working capital shows improvement that means it
easily converted its W.C. in to sales. We can see the ratio was also
increase. It indicates that company started proper use of its working capital
for making profit.
These ratios concerned with the effective use of working capital & indicate
the number of time capital was changed into sales. It can be seen in the
year 2004 and 2006.
This ratio expresses the relationship between total assets (fixed assets less
depreciation & current assets) and net sales. It is calculated using the following
formula:
Net Sales
Total Assets Turnover Ratio =
Total Assets
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See annexure no. 3.4
Table no.1.18
INTERPRETATION
In 2003 and 2004 ZCL did not utilise its resources to increasing profit
margin and sales of company and presence of idle capacity, but in 2002
and 2005 it slightly increase and show the efficiently utilization of fixed
assets.
In 2006 the assets turnover ratio appreciable increased that indicates how
efficiently ZCL utilised its assets to making a good profit as compare over
the previous year.
This ratio expresses the relationship between fixed assets less depreciation
and net sales or cost of goods sold. The formula used for calculating this
ratio is as follows:
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Ratio 2.42 2.67 3.00 4.16 6.52
Net 12304.3 12030.0 13231.6 16476.7 24280.2
Sales 4 7 6 9 3
11339.1 11265.9 11461.1 11606.2
Fixed Assets 6 8 1 2 11771.2
Depreciation 6250.59 6763.18 7055.19 7642.64 8045.84
Net fixed Assets 5088.57 4502.8 4405.92 3963.58 3725.36
Table no.1.19
INTERPRETATION
This ratio indicates that ZCL is efficiently utilising its fixed assets that is
good signed for the company. The ratio is continuously increasing every
year which indicates that sales are also increasing according to fixed
assets.
The ratio reached two and half time more in 2006 as compare the 2002. By
which we can see that, how management took excellent steps for
utilization of fixed assets.
Cash Ratio
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Ratio 0.036 0.186 0.217 0.184 0.097
Cash 148.14 296.54 418.27 543.39 477.23
4157.8 1595.2 1923.2 2954.1 4904.1
C.L. 2 2 5 9 8
Table no.1.20
INTERPRETATION
Very few companies will have enough cash and cash equivalents to
fully cover current liabilities, which isn't necessarily a bad thing, so
don't focus on this ratio being above 1:1.
PROFITABLITY RATIO:-
The main object of every business concern is to earn profits. A business must be
able to earn adequate profits in relation to the capital invested in it. The efficiency
and the success of a business can be measured with the help of profitability ratios.
We can understand more about these ratios by categorized it into the following
two:-
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NET PROFIT RATIO:-
This ratio measured the relationship net profits and sales of a firm. Net
profit is the excess of revenue over expenses during a particular
accounting period. The net profit ratio is determined by dividing the net
profit by sales and expressed as percentage. The formula used is as
follows:-
Table no.1.21
INTERPRETATION
In ZUARI Cement limited net sales do not show appreciable rise &cost of
production is continuously increases in the year 2002, 2003 and 2004 due
to which there was slight profit margin in 2002 and considerable loss in
2003 and 04 but after that company shows some improvement in sales by
which it had recovered loss in 2005 and 2006 it made it converted in
profit. It is not good from shareholders point of view.
The ratio clearly indicate that ZCLs selling and operating expenses is
quite high in the year 2002 to 2005 thats why it made loss during the year.
ZCL must concentrate on these expenses.
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GROSS PROFIT RATIO:-
Gross Profit
Gross profit ratio =
Net sales
Table no.1.22
INTERPRETATION
The gross profit ratio indicate that in 2002 Zuari cement efficiently used raw
material, labour and other manufacturing assets for generating profit. But in 2003,
04 and 2005 it was very less that means it was not able to proper uses of its
resources.
In 2006 the margin of gross profit was 9.14% that is quit high compare than
previous three year. Company should consider of using raw material, labour and
other manufacturing assets.
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II. Ratio calculated on basis of Capital These are as follows:
Where,
Capital Employed = Total Assets Current Liabilities
Table no.1.23
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Source: compiled from the annual report of zuari cement limited.
INTERPRETATION
In Zuari cement limited the return on capital employed was negative in the
year 2003 and very less return in 2002, 04 and 05. This indicates that there
is not effective & efficient utilization of capital. This shows that effective
utilization of long term fund is not takes place.
But in 2006 management of ZCL Shows effective used of debt and equity
that is good for the company because many investment analysts think that
factoring debt into a company's total capital provides a more
comprehensive evaluation of how well management using the debt and
equity it has at its disposal.
This ratio expresses the percentage relationship between net profit after
interest and tax and proprietors funds or shareholders investment. This is
also known as Return on proprietors funds. It is used to ascertain the
earning power of shareholders investment. Proprietors or shareholders
funds include preference share capital as well as equity shareholders funds
which in turn comprises equity shares capital share premium, and reserves
and surplus. The shareholders equity also refers to the Net worth of a
company. The net profits are after deducting interest and tax but before
deducting dividend on preference shares. It is the final income that is
available for distribution as dividend to shareholders. The ratio is
calculated by using the following formula:-
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Net Profit after Interest and Tax
Table no.1.24
INTERPRETATION
In Zuari cement ltd. profitability on share capital & and long term fund is in
negative in the year 2003 to 2005due to loss after tax i.e. shareholders loss their
amount from principal. This decreases the value of company in market which
may create finance problem in future. Investors move away from doing
investment in company. In 2006 it give 32% return on equity that may be good
sign for investor point of view.
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See annexure no. 3.4
Table no.1.25
INTERPRETATION
In Zuari cement Ltd. return on total assets are very pathetic in the 2003 to
2005. Company invests money in various operation but do not able to get
back return from it. Here also company is continuously loosing. But in
2006 company quietly improved its position that break the standard form.
The thumb rule say that company ROA may not come less than 5%. That
can be seen in the year 2002 and 2006. When company got better return on
its assets.
INVESTMENT ANALYSIS:-
RESERVE-CAPITAL RATIO:-
Reserve
Reserve to Capital Ratio =
Equity Share Capital
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Year 2002 2003 2004 2005 2006
Ratio 0.01 0.63 0.63 0.63 0.63
Reserve 1573.2 1573.2 1573.2 1573.2
s 15.00 2 2 2 2
Equity Share
2371.9 2485.4 2485.4 2485.4 2485.4
Capital 2 1 2 2 2
Table no.1.26
INTERPRETATION
This data find out equity share is no more than different in three years. So
company is not dealing or trading in share. Company didnt have good reserves in
2002. But from 2002 it increased its reserve that was more than 50% of share
capital which proves that company could face out from any financial problem.
Now it maintained its reserve more than 50% in every year till 2006. It seems that
company is now financially sound full.
DEBT RATIO
The debt ratio compares a company's total debt to its total assets,
which is used to gain a general idea as to the amount of leverage
being used by a company. A low percentage means that the
company is less dependent on leverage, i.e., money borrowed from
and/or owed to others. The lower the percentage, the less leverage
a company is using and the stronger its equity position. In general,
the higher the ratio, the more risk that company is considered to
have taken on.
Formula:
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See annexure no. 3.4
Table no.1.27
INTERPRETATION
The easy-to-calculate debt ratio is helpful to investors looking for a quick take on
a company's leverage. The debt ratio gives users a quick measure of the amount of
debt that the company has on its balance sheets compared to its assets.
The use of leverage, as displayed by the debt ratio, can be a double-edged sword
for companies. If the company manages to generate returns above their cost of
capital, investors will benefit. However, with the added risk of the debt on its
books, a company can be easily hurt by this leverage if it is unable to generate
returns above the cost of capital. Basically, any gains or losses are magnified by
the use of leverage in the company's capital structure.
Capitalization Ratio
Formula:
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See annexure no. 3.4
Table no.1.28
INTERPRETATION
The company capitalization ratio shows the ZCLs healthy financial condition
because ZCL has more equity than its long term debts in the year 2002 to 2005 but
it reduced in 2006 so company should concentrate on this.
Growth Ratio
These ratio measure the rate at which a firm should grow. Growth rate in sales
need additional investment support incremental sales both in terms of current
assets (such as inventory and debtor) and productive capacity/long-term assets
(such as plant and machinery). The firms growth rate is higher when external
finance is used. It is lower when it used internally generated funds (retained
earning) only finance to its assets.
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There are two types of growth rates:
The IGR is the maximum rate at which a firm can grow (in terms of sales or
assets) without external financing of any kind. To determine the IGR the
following assumption are made:
The firm has a target dividend payout ratio (retention ratio) which it
wants to maintain,
Formula
ROA*b
IGR =
1-(ROA*b)
Table no.1.29
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INTERPRETATION
The following table shows the ZCL had negative internal growth rate, because
firm has 100% retained earning. It is not registered company in the stock market.
The SGR is the maximum rate at which the firm can grow by using internal
sources (retained earnings) as well as additional external debt but without
increasing its financial leverage (debt equity ratio). To determine SGR, the
two additional assumptions are made:
The firm has a target capital structure (D/E ratio) which it wants to maintain,
The firm does not intend to sell new equity shares as it is a source of finance.
Formula
ROE*b
SGR =
1-(ROE*b)
Table no.1.30
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INTERPRETATION
The following table shows the ZCL had negative Sustainable growth rate,
because firm has 100% retained earning. It is not registered company in the stock
market.
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RECOMMENDATIONS
RECOMMENDATIONS
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ZCL must increase its liquidity position for paying its short term
obligation, because its margin of safety is very less from investor point of
view during the year 2005 and 2006.
In 2005 and 2006 company was suffered from cash problem. So ZCL
should consider in this area also.
The high leverage ratio would lead inflexibility in the operations of the
firm, as creditors would be able to borrow funds only under restrictive
conditions; a firm faces difficulty in raising funds in future.
The proprietary ratio is less than 1 or 50%. This low value of ratio
indicates the unsound financial position of company. It is not good for long
term prospect. Company has to take certain steps to equity portion of this
ratio.
ZCL has more equity than its long term debts in the year 2002 to 2005 but
it reduced in 2006 so company should concentrate on this.
The company should be moving ahead with strong performance and well
conceived strategies for expansion, diversification and corporate
transformation.
ZCL should raise its market share for establishing new plant in western
region. There is also ample quantity of lime stone.
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BIBLIOGRAPHY
Bibliography
BOOKS
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KHAN & JAIN and I. M. PANDEY
(Financial management)
WEBSITES
www.zuaricement.com
www.italcementgroups.com
www.investopedia.com
www.indiainfoline.com
www.wikipedia.com
www.indiabiznews.com
www.bnet.com etc
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