1.

1 INTRODUCTION

The project entitled “a study on the financial distress and bankruptcy of Kerala Minerals and
Metals Limited, Chavara”. The success and progress of any firm depends upon the financial
performance. Finance is one of the most integral part of a business and modern management,
obviously depends largely on the efficient management of Kerala Minerals and Metals Limited.

The financial crisis has already thrown many financially strong companies out of the business all
over the world. All these have happened because they were not able to face the challenges and the
unexpected changes in the economy. Financial distress for a company is the ultimate declaration
of its inability to sustain current operations given its current debt obligations. An industrial unit
does not become financially sick overnight, rather it may show symptoms of sickness much before,
and therefore, if proper measures are undertaken from the beginning, it can be avoided. An
industrial unit passes generally through various stages before it becomes ultimately sick and gets
liquidated. In some cases, the sick unit may recover and go into a healthy stage slowly over time.
The sickness may start with short term liquidity crisis, revenue losses, operating hurdles and over
usage of external financing until it reaches a stage where it is overstrained with debt obligations,
and on being unable to generate enough funds to meet its commitments, it becomes financially
sick. So, timely action is required for identification of such symptoms of sickness well in advance.
Such symptoms are often called as the signals of financial distress. The existence of these signals
provides a ground for suspecting that the industrial unit concerned is prone to sickness.

Distress prediction model will assist a manager to keep track of a company’s performance over a
number of years and help in identifying important trends. Financial distress is a condition in which
a company or an individual cannot generate revenue or income because it is unable to meet or
cannot pay its financial obligations. This is generally due to high fixed cost, illiquid assets or
revenues sensitive to economic downturns. Financial distress can be colossal and can cause long
term injury to a firm ‘s financial health. It may result in restriction of investments activities, capital
flows and regular operations of the firm thereby leading to business failure. Thus, it is vital for an
organization to identify the causes of financial distress and take appropriate measures so as to
prevent such a condition from occurring.

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There are a number of reasons behind financial distress. In some cases, the problem is poor
management of assets leading to situations where the revenue generated by the business ultimately
fails to serve the organizational needs. At other times, the distress is caused by an overestimation
of income from operations and functioning with an unrealistic operating budget. Financial distress
may also occur due to some unforeseen events like an unfavorable outcome of some political issues
or the occurrence of a natural disaster which may ruin the value of the business.

The Kerala Minerals and Metals Limited is a pioneer industry in the titanium dioxide pigment in
India. The profit of the company is comparatively low in recent years, so it is a study about the
financial distress and bankruptcy of Kerala Minerals and Metals Limited undertaking located at
Chavara, Kollam.

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1.2 INDUSTRY PROFILE

The Minerals and Metals industry has been flourishing since times.Fr. Williams Gregor in the year
1879 discovered limonite in Konwat in England. He found that the black sand contains some
important metal but he failed to discover it. In 1875 a Hungarian scientist Martin Kein Witch found
the same metal contents in the refine minerals. The metal was named “TITANIUM” after of Greek
methodology. The geographical survey of India funds the presence of monazite in the coastal sands
of Kerala. Besides the mineral’s deposits are found in Tamilnadu, Orissa because of which they
also have well established mineral industries. Industries play a significant role in almost every
economy India but context it is Important as oxygen for breathing. Industrial development has
been accords great importance in Indian planning. On account of industrial development there is
increase in production, employment and national income. India is the second largest growing
economy in the world. This is equally applicable to the Titanium Dioxide industry.

The chemical industry is among the established traditional sectors of the country playing an
integral part in the country’s economic development. This sector, forming part of industry, is a
critical input for industrial and agricultural development. The industry has a weight of 14% in the
index of industrial production, given an indication of importance of the sector holds in the
country’s industrial growth. A robust chemical industry is a harbinger of significant economic and
strategic benefit to the nation.

The chemical industry is the most diversified industrial sectors including basic chemical and its
products, petrochemicals, fertilizers, paints, gases, dyes etc. The sector covers over 70000
commercial products and provides the building block for many downstream industries such as
finished drugs, dyestuffs, paper, synthetic rubber, plastic, paints, pesticides, fertilizers and
detergents.

The industry includes a wide variety of products from basic chemicals to research driven
specialized products at different levels across the industry supply chain. The fundamental nature
and diversity are best understood from the fact that the industry itself is the largest consumer of its
products accounting for around 33% of total consumption.

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The domestic chemical industry contributes about 17.6% to the total output in the manufacturing
sector, 13-14% to total export and 8-9% of total import in the country. The sector has a share of
3% to the total GDP. The domestic industries turnover is estimated to have crossed US dollar 30
billion. This is slightly over 1% of the global production. In world ranking India stands 12th in
terms of production.

1.2.1: International scenario

The world is rapidly shrinking with the advent of communication, transportation and financial
flows and product development in one industry are finding enthusiastic acceptance in another
industry. Industry plays a significant role in every firm. Industry development has been given on
greater importance in Indian planning on account of industry development. Industry is necessary
in productivity, employment and the rate of capital formation witnessed large scale diversification
in India. Now occupies tenth place among the industrial developed country in the world.

Titanium dioxide is vastly using chemical in each and every part of consumer product. From itself
we can guess the regains were it is used. There are different producers for these chemicals. But the
thing that make difference is the way of production. Different producers are using various or the
world’s total installed capacities for the titanium dioxide production is in the order from 4.33to
4.38 million tones per annum. The overall annual capacity utilization of titanium dioxide industry
is 91% to 92%. There is a higher demand in the global market attracts various firms to enter into
titanium dioxide manufacturing.

The credit for recognizing the existence of titanium goes to Rev. William George who found traces
of black magnetic and unfamiliar him in manacine parish (UK) and he named it menacine.
Subsequently Kiwin recovered a new white metallic oxide and called it menacine. But it was
M.K.H. Lap who discovered titanium. He discovered rutile and identified it as an oxide of a metal
and named it as “titanium” after “Titan” of Greek mythology in the year 1775. The first
commercial production of titanium was an alloy addictive to steel. The use of titanium materials
in welding electrode coating gained acceptance in the mid-thirties while titanium metals has been
of commercial importance since 1948.

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Titanium dioxide is far more stable than any other pigment. It is perfect non toxicity and chemical
inertness makes it an ideal choice as white pigment. The chemical inertness makes it an ideal
choice as white pigment. The chemical is available in two crystalline form which are of much
commercial importance. The relative softer anatase is the right material delustering artificial fibers.
Asia notably China, Taiwan and South Korea continued as a path of strong recovery in 2009-2010.
East Asia is presently the most attractive region for titanium dioxide. Titanium dioxide is the
whitest of white pigments and has replaced other less effective pigments such as Zinc oxide,
lithopone etc. This is because of the unique combination of its superior properties of high refractive
index, low specific gravity, high hiding power and capacity and no toxicity. It has also high tinting
strength and desperation properties as well as chemical stability.

The top high procedures of the world now control 78% of the global capacity. They are;
• Dupont (USA)
• Millennium Inorganic Chemicals (Australia)
• Kertmegee (Canada)
• Huntsman (Trioxide)
• Kronos (Germany)
• Ishihara Sangyo Kaichi Ltd (Japan)
Titanium dioxide market is unique in that while it is product approaching 100 years old other is
still no functional alternatives that provides the same value in the use of customers. The industry
has gone through a metamorphosis the past decade. Titanium dioxide ensures a large market share
by any measure. Historically the market has grown in volume at 3.5% annually to reach close to
58 billion production value today. In the last decade the demand has slow down to 3% and is
experienced in the decade growth will be in the range of 2.5-3.5.
Looking over the next 20 years, at least some new titanium dioxide pigment will be made. Though
most of the industries additional capacities will come from pigment consumption raised sharply
Western Europe and Asia/ Pacific (excluding japan) during the year 2012. In East Asia notably
china, Taiwan and South Korea continued as a path of strong recovery and East Asia is presently
the most attractive region in the world for titanium dioxide.

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1.2.2 National Scenario

India is blessed with a lot of natural resources. We can say that India, particularly Kerala is blessed
with a lot of natural resources which can be used for our future generation. India has a wealth of
titanium minerals with very low ratio of resources to utilization. The Indian reserves of ilmenite
and rutile is expected to around crore tones. The most important source of ilmenite is beach sands
of south Maharashtra. There are 20 million tones reserves in Orissa. Hanja (Orissa) and Srikakulam
(Kerala) and Tamilnadu around 20 million tones. There are about 20 million tones reserves in
Orissa.

This information threw right into the possibilities of new manufactures and competitions in
titanium dioxide pigment industry market with the increasing demand for paints, rubber, plastics
and painting inks etc. The arrival of new manufactures will be more in the near future. This will
ultimately result in tight competition. Good titanium dioxide companies are essential for the
sustainability of the nation. A good running stable titanium dioxide industry is to ensure optimum
utilization of these resources as well as to develop a vibrant industry in the field of these strategic
minerals. Though titanium dioxide is a strategic chemical it is very essential for the nation in all
the aspects. Although some technology base is available in the country for both sulfate and chloride
technologies in the country. The Indian raw materials may be upgraded to synthetic rutile and
Titania slag before being exported to fetch better return. Presently synthetic rutile is being
manufactured I the country by IRE, KMML and three other private companies. another major
project is likely to be set up for manufacture of synthetic rutile. However, there is no project to
manufacture titanium slag which can be used for sulfate process, chloride process and for
manufacture of titanium sponge. This gap needs to be bridged at the earliest. Similarly, research
and development in the field of environment friendly process for upgrading ilmenite leads to be
given priority. This process will find ready acceptance to replace venality process being used for
manufacture of synthetic retail since the latter is very energy intensive.

The titanium dioxide industry is growing worldwide. A number of new project sales on the ground.
There is a scope for another 10 major projects worldwide technology at the end of this century.
Considering the wealth of mineral and technology resources, we have must ensure a due share of
this global expansion of titanium dioxide capacity for India. Titanium dioxide is a product which
has be sold basically in the international market in competition with multinationals. Thus, only a

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well-planned technology and financially sound project will succeed. The advantage under the
environment ready availability of good quality feed stock, low labour cost and less stringent
pollution laws. The disadvantages are lack of technology, high power cost and uncertain power
availability.

1909 a German, Dr. Shemberg discovered the presence of monazite in the black beach sand of
Manavalkurichi in East Travancore state. The presence of mineral sand in coir being imported later
led to the discovery of certain other elements. The geological survey conducted later on in India
established the occurrence of Monazite and metals like illuminate, rutile, Leucoxene, Sillimanite,
Zircon, currently there are 40 units in India engaged in the manufacturing of Tio2 pigment (rutile
and anatase) with a total combined capacity of 44560 tones per annum.

1.2.3 State Scenario

At present in Kerala, Travancore Titanium Plant (TTP) and Kerala Minerals and Metals ltd
(KMML) are the only two manufactures that produces titanium dioxide pigment. Indian Rare Earth
ltd (IRE), a government of India undertaking has a mineral separation unit in Chavara which
separates minerals from the beach sands. IRE also operates two mineral separation units which are
located in Manavalkurichi in Tamilnadu and Challapur in Orissa. Firstly, Travancore products
were started by his highness Chithirathirunal in1946 and titanium dioxide and using the sulphate
procures technology. Later the KMML which was situated in Chavara came into existence and
started producing titanium dioxide with the help of HCL acid process technology. In Travancore
titanium plant sulphate process is using for the manufacturing of titanium dioxide. But in KMML
Chavara, chlorination is being used for the manufacturing of titanium dioxide.

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1.3 PROFILE OF KMML

Kerala Minerals and Metals Ltd is an integrated titanium dioxide manufacturing public sector
undertaking in Kollam, Kerala, India. Its operation comprises mining, mineral separation,
synthetic rutile and pigment production plants. Apart from producing rutile grade titanium dioxide
pigment for various types of industries. It also produces other products like ilmenite, rutile, zircon,
sillimanite, synthetic rutile etc.

The company manufactures titanium dioxide through the chloride route. The different grades are
produced by KMML under the brand name KEMOX.

1.3.1 Formation of the company

In the year 1932, a visionary private entrepreneur established by F.X Pereira and sons (Travancore)
private limited, the forerunner to the company. During the course of time, the company changed
hands three times over. In1956, it was taken over by the state government and was placed under
the control of the industries department. The unit was subsequently converted as a limited company
in 1972 by the name of “The Kerala Minerals and Metals Limited” with the following broad
objectives.

➢ Optimum utilization of minerals wealth found the sea coast of Kollam -Alappuzha
Districts.
➢ Large scale generation of employment in the state in general.
➢ Overall growth and development in the local area in particular and the state in general.

Vision

“Be a world class product of mineral sand-based value-added product”

Mission

➢ To become the nodal agency for promoting and establishing mineral based industries in
the state to ensure value addition and effective and controlled exploitation of the mineral
reserve.
➢ To develop adequate supply base for the services and utility for development of the mineral
industry.

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 ➢ To create more awareness about corporate social responsibilities for chemical industries in
the state.
➢ To become leader in controlling Green House Gas Emission so as to promote the concept
of Green House.

1.3.2: Business Focus

Government of Kerala incorporated Kerala Minerals and Metals ltd in the year 1972 by acquiring
the FXP mineral pant (established in 1932) from a private entrepreneur with share capital of Rs
30.93 crore, the plant had a total outlay of Rs 144 crore. This is only the first fully fledged titanium
dioxide plat in the world in the same campus. KMML has made an incredible mark in the field of
mining, mineral processing and manufacturing. The company is the India’s first and only
manufacturer of rutile grade titanium dioxide by chlorine route. KMML also manufactures mineral
sand like ilmenite, natural rutile, zircon and intermediary products like synthetic route
(beneficiated ilmenite). Titanium tetra chloride and converting the waste iron oxide into bricks
(towards zero waste technology) for building purpose. Originally, a rare earth mineral separation
plant till 80’s KMML began its prestigious pigment production with a licensed capacity of 48000
MT per year and the plant had a capacity to produce 22000 MT per year. The effort for
debottlenecking and incremental expansion in the past years became a reality in the year 2005 and
the installed capacity was declared as 40000 MT per annum.

1.3.3: Present Status

It is India’s first and only manufacture of rutile grade titanium dioxide pigments by chloride route.
The KMML products are manufactured under the brand name “KEMOX”. KEMOX RC 822 is a
pigment grade from the company. It is a multiple application pigment, which has a great demand
in the world market. Company also produces six more grades at titanium dioxide pigment namely
RC 800, RC 800 PG, RC 802, RC 804, RC 808, RC 813. Their product range also include
illuminate, TiCl4, Rutile, Leucoxene and Sillimanite, Monazites, Zircon and Iron oxide bricks. It
enjoys a monopolist position in the titanium dioxide pigment manufacturer in India. Though it
controls half the Indian TiO2 pigment market, it faces stiff competition with foreign companies
like DuPont, Ishahra etc.

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1.3.4: Technical Collaboration

The company received a letter of intent for 48000 tons of TiO2 pigment using Chloride route
technology in1974. The Kerala Minerals and Metals Ltd entered into technical collaboration with
three multinational corporation’s M/S Ker’s MC Gee Chemical Corporation of USA, M/S
Benedict Corporation of America, M/S Woodall Duckham of UK respectively for the above. The
Metallurgical of Engineering Consultants India ltd (MECON) a government of India undertaking
did the detailed engineering.

1.3.5: Governing Body

Board of Directors (BOD) are the promoters of KMML and the BOD consist of its members, who
were appointed by the government of Kerala. Chairman is the head of BODs and he is the principal
secretary to Industries Department of Kerala government. But he is only a part time chairman since
his position changes. Normally the Board of Directors are appointed for a period of five years but
the government can change them as they wish. The Managing Director is the head of the company.
He is appointed for the period of 3 years. He is entrusted to coordinate all the functions of the
organization on behalf of the government.

1.3.6: Quality Status

In order to make their product move in the foreign market and to make their products achieve the
status of the world class product, company maintains the quality standards as per the ISO 9002-
1994 and got certified in the year 7-7-2000. This had helped the company to successfully overcome
the competition posed by the global rivals. The company’s Quality Policy is:

“We delight the customers with world class products and prompt service at competitive price”

The quality objectives of KMML are as follows:

• Customer driven, continuous development.

• Encouraging innovation and technology update.
• Training and empowering workforce.
• Compliance with documented quality systems.
• Better communication, cost reduction.

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1.3.7: Certifications

KMML achieved ISO 9002 certificate by M/S Bureau virtues quality international (BVQI) and
Holes certification of United Kingdom Accreditations Service. Dutch council for certification
(Holland) and Register Accreditations Board (USA) company has won the 1997 National award
for in- house research and development effort in industry for technology absorption under the
TAAS program. The Kerala Productivity Council award for high productivity standard has also
been won by the company.

ISO 9001:2000 (Quality policy)

KMML was certified for quality management system ISO 9002:9004 in June 2000 and was
rectified and upgraded to ISO 9001:2000 Quality Management System (QMS) in November 2003
for its TP unit.

ISO 14001:2004 (Environment Policy)

The company has been certified an ISO 14001:2004 in the year 2005. As recognition of protecting
and safeguarding the environment by:

• Strictly complying statutory and regulative requirements.

• To control their impact on land, air, water and thus prevent pollution.
• To reduce health and safety risk.
• To optimize the use of resources.

OHSAS 18001:1999 (Occupational Health and Safety)

The manufacturer of synthetic rutile and rutile grade TiO2 are committed to protect health and
safety of employees and everybody involved in this activity of the company. Compliance with
health and safety regulations and other requirements to which they subscribe.

SA 8000: KMML is committed to protect all the personnel within the company’s scope of control
and influence.

KMML has elaborate pollution control system with respect to both water and air pollution. The
waste (acidic) from ilmenite Beneficiation plant is sent to Effluent Neutralization Plant (ENT).
ENP consist of a Primary Neutralization Tank (PNT) AND Secondary Neutralization Plant (SNT)

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where it is treated with caustic soda solution. The totally neutralized slurry from the SNT is
pumped to 50000m3 capacity setting pond provided with impervious clay, polythene lining at
bottom side where the solids are settled. The day solution from setting pond of 25000m3 capacity
were the balance solids are allowed to settle. The clean water from the polishing pond meeting all
specification stipulated by pollution control board authorities is pumped in Arabian sea. All gases
from chlorination, oxidation, ilmenite beneficiation plant and acid regeneration plant are scrubbed
water or line or caustic solution to absorb the toxic gases diluted with enough fresh air and only
let out to the atmosphere through tall slacks.

1.3.8: Distribution Network

Organizations having a tight shit schedule

Domestic Customer

▪ Freedom Enterprises limited, New Delhi

▪ Titanium Technologies Private Limited, New Delhi
▪ Unitech Sales Agency, Chennai
▪ Bharat Solvent and Chemical Corporation, New Delhi
▪ Chemical de Enterprises, New Delhi
▪ Classics Solvent Private Limited, Mumbai
▪ D.B Rana and Company, East Maharashtra
▪ Hero Dye Chemical Industries, Mumbai
▪ KEMCO Corporation, Mumbai
▪ Manorama Sales Corporation, Cochin
▪ Sree Narayana Agencies, Coimbatore
▪ Sri Karthikeya Enterprise, Hyderabad
▪ Surya Color Chemicals, Bangalore
▪ Trade Corporation, Ahmadabad

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Foreign Customers

The foreign customers of KMML from the country like China, Korea, UK, Philippines, South
Africa, Turkey, Mauritius, Dubai and Sri Lanka.

1.3.9: ORGANISATIONAL STRUCTURE

A business organization has to perform a number of activities in order to run itself. Like any
other public sector undertaking KMML MS unit has separate departments and separate executive
heads for each department. Departments are based on the functional basis. The functional form
of departmentation means grouping activities into departments of Production, Marketing, Human
Resource Development and Finance. Each department specializes in its own area of operation.
The Managing Director is the top official in the management of KMML. KMML MS unit has a
separate department head for each department.

. The various departments in the KMML MS unit are: -

• Personnel & Administration

• Commercial
• Finance
• Fire & Safety
• Maintenance (Electrical)
• Maintenance (Mechanical)
• Mining
• Quality control
• Production
• Project
• Stores

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1.3.10: PRODUCTION DEPARTMENT

KMML always maintain high standard of perfection by achieving technical excellence in every
phase of production. Catering to strict guideline, KMML offers a wide range of products for quality
conscious customers. Their product goes into the manufacture of variety of products used in
everyday life. Paint material, facial creams, tablets, rubber products, cosmetics and printing inks
all contain TiO2.

This department undertakes activities and decision regarding the production work. Deputy General
manager (production and maintenance) controls the activities of the department. Production of
TiO2 is carried out in lot wise with specific lot number. Each lot contain 15 MT OF TiO2 samples
are collected from production at specific intervals and examined thoroughly in the laboratory of
the company. If any defect is identified, then the lot is considered as inferior quality.

Mineral Separation Plant (MS unit) and TiO2 Pigment Plant (TP unit) is two independent
production department of KMML. The TP unit is divided into three plants;

➢ Ilmenite Beneficiation Plant

➢ Acid Regeneration Plant
➢ Pigment

Mineral Separation Plant

The MS plant was originally established in 1932 in the private sector. Several machineries were
added in the course of time. This plant situated by the side of the open mines, does the separation
of minerals from the beach sand. The raw sand is first concentrated in spiral separation to enrich
the heavy mineral content. The wet concentrated is then dried in fluidized bed drier and then fed
to the dry separation plant. Magnetic separation and HT separation separate different minerals.
The plant also separates rutile and zircon from the sand.

Titanium Dioxide Pigment Plant

TiO2 Pigment plant manufacturing process of KMML based on chloride route, the process consists
of the following steps;

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 ➢ Reduction and leaching of raw ilmenite of 90-92% TiO2 (Ilmenite Beneficiation).
➢ Regeneration of spent Hydrochloride acid for minimum pollution.
➢ Conversion of beneficiated ilmenite to TiO2 pigment.

Ilmenite Beneficiation Plant

Here the raw ilmenite containing 58-60% TiO2 is beneficiated to 90% TiO2 content. The
beneficiated ilmenite is the raw material for the pigment production plant. The ferric oxide in the
raw ilmenite is subject to high temperature of 8500c. The reduced ilmenite then cooked and then
send to digesters where it is leached with 1820% Hydrochory acid. The spent leach liquor is sent
to storage tanks. The leached ilmenite after washing and filtering is calcined to get beneficiated
ilmenite.

Acid Regeneration Plant

The spend leach liquor from the pre concentrator is processed into the spray roaster in which the
liquid spray entering the furnace is heated by the burning oil. The spend liquor then decomposes
to metallic oxides and hydrochloric acids. The hydrochloric acid vapor is first cooled in pre
concentrator and then absorbed in the wash liquor generated in the IBP to get 18% HCI which is
recycled back to IBP. The unobservable gases are scribbled with the water before venting to the
atmosphere. The metal oxide consisting of mainly iron oxide are slurred with water and routed to
the slurry panel.

Pigment Production Plant

The pigment production plant has three unit;

➢ Chlorination Plant
➢ Oxidation plant
➢ Surface Treatment and Pigment Finishing plant

Chlorination Plant

This unit beneficiated ilmenite from chlorinated as reducing atmosphere to produce titanium
chloride (TiCl4). Chloride react with titanium chloride and other metallic oxides. Beneficiated in
the ilmenite pressure petroleum coke at a temperature of 800-900c in fluidized bed chlorination to

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produce chlorides are condensed and purified to obtain pure TiCl4 liquid, which is stored in the
storage vessel.

Oxidation Unit

In this unit raw pigment grade TiO2 is produced by reacting pure TiCl4 and oxygen with a
temperature of about 1000c in a reactor after preheating the TiCl4 in a pure heater having
suspended in code tubes to carry the titanium chloride vapor. TiO2 raw pigment obtained for this
unit is scurried with water pumped storage tanks for further processing in the pigment-finishing
unit, the chlorine is liberated back to the chlorination unit. Oxygen and chlorine are required for
oxidation and chlorination.

Pigment Finishing Unit

The unit-dispersed slurry from oxidation unit is passed through the different subsections of the
unit via, sound and milling and classification treatment filtration, drying, micronation, scrubbing,
cooling and bagging. In the treatment section chemicals are added. Give a coating to the pigment
is reduced to two microns to be micronation treatment. The hot micronized pigment is cooled and
pneumatically convey to the final storage bin, this product is then bagged in paper bags of 25kg
each slacked on woolen pallets (40 bags per pallet) and dispatched.

Air Separation Plant

This unit has been designated by Miss Lair Linde, France and supplied through M/s BHPV Ltd
Visakhapatnam. The oxygen and nitrogen are required for the process in the oxidation and
chlorination unit. This plant has a capacity to produce the following:

• Gaseous N2-1500Nm/hr. (50 MTD) 98% purity

• Gaseous N2-1800 Nm/hr. (50MTD) 99.5% purity
• Liquid O2- 37.5 Nm/hr. (2.5 MTD) 99.5% purity
• Liquid N2-45Nm/hr. (2.5 MTD)99.5% purity

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Iron Oxide Brick Plant
An iron oxide is a building material product of KMML. The materials used for the production of
iron oxide bricks are:

• Iron oxide
• Lime
• Cement
• River sand
• Sodium silicate

The company has been facing a problem in the waste disposal areas. This problem is mainly
connected with the disposal of iron oxide slurry, which has been coming outside from acid
regeneration units as a waste. In order to dispose the iron oxide, powder the company started to
produce the iron oxide bricks in the plant. At present the company is using this product for its
domestic purpose such as constructing compound wall, floor etc.

1.3.11: PERSONNEL AND ADMINISTRATIVE DEPARTMENT

Personnel department will be directly responsible for the personnel functions of the company to
result in timely action for maintaining smooth industrial relations leading to employee morale and
productivity. This department plays a prominent role in the day –to –day affairs of the company.
Assistant General Manager is the supreme authority in the department. Administrative Officer is
in charge of ‘time keeping section’ and a medical officer is in charge of ‘medical section

This department is one of the most important assets of every organization. Personnel department
is concerned with people’s dimension in the organization. Manager (P&A) is the head of the
department. Regular training and refreshment courses are part of the company life. The courses
which include quality consciousness and safety awareness contribute to personality development
is to ensure the availability of skilled workers.

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THE FUNCTIONS OF P&A DEPARTMENT

The major functions of personnel department are as follows: -

• Recruitment & Selection

• Training & Development
• Promotion & Transfer
• Retirement & Superannuation
• General Administration
• Public Relations
• Labor Welfare Activities
• Disciplinary Proceeding
RECRUITMENT & SELECTION

The company adopts different methods of recruitment of the staffs. For this company give
advertisement in Malayalam and English newspapers publishing from Kerala and other states of
South India.

Procedure for recruitment

• If there is a vacancy in the workman category, it is notified to the concerned employment

exchange.
• In case of officer category, selection is made through Kerala Public Service Commission
(KPSC)
• For requirement of managerial and professional posts, the applications are received with
respect to the advertisements made in the newspaper and the details furnisher by the
technical committee are also considered.
A committee set up by the board of directors with not less than 3 members and at least one of
being government representative makes recruitment to the vacancies.

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SOURCES OF RECRUITMENT

The sources of recruitment of KMML are: -

• Kerala Public Service Commission

• Technical Employment Exchange
• Advertisement in Newspaper
TRAINING AND DEVELOPMENT

This aspect is given top priority by the P&A department .The training and development activities
are taken by personnel department for making their employees at par with the new technology and
to increase their productivity .The training requirements of the employees are designed under the
guidelines of the ISO.As per the ISO norms the annual training schedule is prepared on the basis
of the individual training needs identified by the Head of the department in specific formats
collected from all department heads on or before march 15 every year. If any departmental head
feels that there is an urgent need for training, the matter is forwarded to the administrative officer
who makes arrangements for training program. He accepts the training proposal by taking into
account of the factors such as: -

• Workers current position

• New skill that have to be imparted

• Qualification required
• Motivation or Communication required
PERFORMANCE APPRAISAL SYSTEM

When an employee is transferred in promotion from a post during the course separate performance
report must be prepared for period prior to such promotion or transfer .The performance appraisal
forms in respect of employees in various sections are being separately sent by Human Resource
Development Department to respective head of the department for getting the report completed
and forward the same to the Personnel Manager with remarks of assessing the reviewing officers.

PROMOTION

Promotion is the movement of an employee from a lower position to another position with a better
pay and responsibility. Every organization chances of promotion came up occasionally.

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Employees will consider for promotion only if they have qualification and experience in the
respect field. Grade II worker in the MS unit who completes 8 years of continues service will be
automatically promoted to Grade I. Promotion post will be notified with the plant and the officer
of the unit, giving educational qualifications and experience.

The application received will be screened by the Personnel Department. Every employee promoted
to a higher post will be on probation in that post for a period of one year.

Four factors are considered for promoting an employee: -

• Seniority
• Test/ Interview
• Attendance
• Performance

TRANSFER

There is only interdepartmental transfer in the company.

RETIREMENT AND SUPERANNUATION

KMML being a Kerala Government undertaking company, the retirement or superannuation is

fixed at the age of 58.

WAGES

Wages is carried out by the government wages and safety revision will be made in every 5 years.

SALARY STRUCTURE

The Pay structure , Dearness Allowance, other allowance and other fringe benefits to the
employees in the category of workmen are regulated through long term settlements arrived at the
company and the unions representing majority of the workmen, from time to time .The workers
are given specified amount as basic wages per the agreement .The agreement is valid for 4 years.

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REMUNERATION

At present a time wage system is adopted. Workers are paid at hourly, daily and monthly wages.
Permanent workmen who have completed 8 years of service are allowed higher grade.

TRADE UNIONS

Sec 2(h) of trade union act 1926, defines the term trade union as “any combination whether
temporary or permanent formed primarily for the purpose of regulating the relationship between
workmen and employers, between workmen and workmen , or between employers and employers
or for imposing restrictive conditions on the conduct of any trade or business and includes any
federation of 2 or more trade union.” In KMML MS unit there are mainly two trade union have
been recognized through referendum. They are: -

• INTUC
• CITU
COMMITTEES

• Canteen Managing Committee

• Welfare Fund Trust
• Recreation Club
WORKMEN CLASSIFICATION

• Permanent Employees
• Employees engaged on contract Basis
• Temporary or Seasonal Workers
• Casual Labor
• Apprentice

TYPE OF LEAVE

• Annual Leave - 26 day/annum

• Casual Leave - 14 day/annum
• Sick Leave - 16 days with full pay
• Leave without wage

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WELFARE ACTIVITIES

• Bonus: -Employees who are drawing more than Rs. 3500/- per month are eligible for
bonus; almost all the employees working here are eligible for bonus irrespective of
permanent or casual worker.
• Provident fund: -Introduced in 1956 and administered by a trust. Here both the employer
and the employee have to continue 12% each of the basic pay, where eight and one third
percent is transferred to pension fund.
• Gratuity: - Minimum amount payable as gratuity is Rs.3500 employees having continuous
service of the year are eligible for gratuity.
• Employees State Insurance: -All the employees working in the company come under
Employee State Insurance Scheme.
LABOUR WELFARE ACTIVITIES

The allowances provided by the company for its employees are as follows:

• Conveyance Allowances
• Shift Allowance
• House Rent Allowance
• Education Allowance
• Stitching Allowance
• Milk Allowance
• Washing Allowance
BENEFITS

• Retirement Benefit
• Death Relief Fund
• Medical Facility
• Transportation Facility
• Financial Aid to prolonged Treatment
• Subsidized Canteen Facility

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1.3.12: ABOUT KMML MARKETING
KMML have monopolistic in Titanium dioxide (TiO2) industry. KMML is a public limited
company that stands as a leader in production of TiO2. The company has a large number of
customers from all over the world and outside.

The marketing department is engaged in selling of the company’s product. There is no separate
department for sales and marketing management also perform these functions. The marketing
section keeps report about customers product, product group control, dispatch and payment.

Products of KMML always maintain very standard perfection, achieving technical excellence in
every phase of the production to offer a wide range of products for quality conscious customers.

MARKETING MIX

PRODUCT:

The major products of KMML is Titanium dioxide pigment, which is extensively used s the main
raw material by several industries such as paint, plastic, rubber, printing, inks etc.

PRODUCT PROFILE:

Titanium tetra chloride is produced as an intermediary product in the production of rutile grade
titanium dioxide pigment. Titanium tetra chloride is extensively used in the manufacture of
Titanium dioxide pigment, Titanium sponge or metal.

At present KMML produces six grades of Titanium dioxide and they are;

1) Kemox RC 800: It is recommended for printing inks, high gloss coating, industrial coating,
low abrasivity pigment for letter press gravure polyamides and exterior applications where
maximum chalk resistance is not required.
2) Kemox RC-800 PG: It finds application in plastic requiring a blue-white high dispersion
TiO2. Other areas of applications are powder coating, polyethylene films and vinyl sheet
goods. It is used in most other common plastic or rubber floor like applications.
3) Kemox RC -822: It is recommended for interior as well as exterior

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1.3.13: QUALITY CONTROL DEPARTMENT

Quality control emphasizes testing of products to uncover defects, and reporting management who
make the decision to allow or deny the release, whereas quality assurance attempts to improve and
stabilize production, and associated processes, to avoid, issues that led to the defects in the first
place. Quality control is a process by which entities review the quality of all factors involved in
production. Quality control emphasizes testing of products to uncover defects, and reporting to
management who make the decision to allow or deny the release, whereas quality assurance
attempts to improve and stabilize production, and associated processes, to avoid, or at least
minimize, issues that led to the defects in the first place. For contract work, particularly work
awarded by government agencies, quality control issues are among the top reasons for not
renewing a contract.

FUNCTIONS

❖ Raw materials collected

❖ Intermediate products
❖ Final products
❖ Quality evaluation of waste
1.3.14: STORES DEPARTMENT

The store department plays an important role in the proper functioning of a company. Store Section
deals with: -

• Receiving the material

• Inspection of material
• Storage and Presentation
• Proper classification and codification of material
• Material handling
• Issue and dispatch
• Stock records
• Store accounting
• Stock taking

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STORAGE FUNCTIONS

Various documents are prepared by the stock section for the proper functioning of the department
the documents maintained are as follows: -

1. Stores inwards book: - On receiving any material to the store, it is entered in a document
called stores inward book (SIB).
2. Inspection of goods: - On receiving any material and preparation of SIB inspection request
is send to the concerned technical office for technical evaluation and reports are prepared
on this basis.
❖ Store received note: - After the preparation of SIB and inspection of goods or materials,
Stores Received Note (SRN) is prepared. This is the document showing that the, material
received is accepted and payment can be made for it. The SRN is sent to the Finance-
department for payment. Four copies of SRN are maintained in KMML. Usually the
company gets a credit facility for 45 days.
❖ Materials issued note: - Any material is issued from the store only after receiving a
material requisition or Material Issue Note (MIN). MIN contains all the details regarding
the material as well as the indenter.
❖ Stock transfer note: - For transfer of materials between store or contractors, for transfer
of material between store and section prepared, it contains details such as material code,
cost center, material description, unit and quality. It should be mentioned that from which
section and to which section is the transfer-taking place.
❖ Material return note: - Sometimes material issued from the stores may be returned. In
case Material Return Note (MRN) is prepared. It contains details such as the name of the
department from which the material is returned, value, quality, code, unit, balance and
reason for return.
1.3.15: COMMERCIAL DEPARTMENT

Any product moves in the market depends upon the marketing efforts undertaken by the company.
It is said that a good marketer can even sell the worst product available in the market; where as a
bad marketer can make a good product which does not move in the market. Keeping this fact in
mind, KMML has incorporated a good marketing department, with highly talented professionals.
Commercial Officer is the supreme authority as far as commercial department is concerned. The

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commercial department is concerned with sales and purchase. The commercial Officer is
responsible for the entire activities and decision making.

FUNCTIONS

The main objective of the commercial department is to promote, distribute, sell and service the
products of the organization. The activities of commercial department include Sales Management,
Sales Analysis, Market Research and Intelligence, Advertising, New Product Development,
product Pricing and Customer Service.

1.3.16: MAINTANENCE DEPARTMENT (ELECTRICAL)

The maintenance department of KMML MS unit can be grouped into Electrical, Mechanical
section. The Assistant General Manager is the top of the authority. This department is under the
control of Plant Engineer (Electrical). It is the function of the department to ensure the flow of
electricity throughout the company. This department specializing in electrical wiring of buildings,
stationary machines and related equipment in an organization. It may be employed in the
installation of new electrical components or the maintenance and repair of existing electrical
infrastructure. The maintenance department of KMML MS unit can be grouped into Electrical,
Mechanical section. The Assistant General Manager is the top of the authority. This department is
under the control of Plant Engineer (Electrical). It is the function of the department to ensure the
flow of electricity throughout the company.

OBJECTIVES

• Carry out maintenance work in plant

• Types of maintenance
• Take preventive measures to avoid breakdown of Electronic equipment
• Electrical maintenance
1.3.17: MAINTANENCE DEPARTMENT (MECHANICAL)

The maintenance department of KMML MS unit can be grouped into Electrical, Mechanical
section. The Assistant General Manager is the top of the authority. This department is under the
control of Plant Engineer (Mechanical). Function of the department is to ensure the easy working

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of machines. The Company is doing periodical shutdown to carry out necessary maintenance and
servicing of the plant

New mechanical maintenance strategies such as TPM and preventive maintenance are placing new
demands on mechanics, technicians, and other mechanical systems specialists to upgrade their
skills as quickly and efficiently as possible in order to maintain job security and enhance their
chances for career advancement.

The maintenance department of KMML MS unit can be grouped into Electrical, Mechanical
section. The Assistant General Manager is the top of the authority. This department is under the
control of Plant Engineer (Mechanical). Function of the department is to ensure the easy working
of machines. The Company is doing periodical shutdown to carry out necessary maintenance and
servicing of the plant

OBJECTIVES

• Carry out maintenance work in plant

• Types of maintenance
• Take preventive measures to avoid breakdown of machines
• Vehicle maintenance

1.3.18: AREA OF PROJECT: FINANCE DEPARTMENT

Finance is the life blood of every organization. It deals with both the acquisition as well as
allocation of funds. Hence finance department assumes a great role in the organization. A finance
department in an organization is responsible for maintaining fair accounting, working capital
management, long term funding, decision making, costing etc. In KMML a well-organized finance
department is functioning. The finance position of the company can be understood by balance
sheet and profit and loss account, prepared budget report according to the company’s goals is also
an important function of finance department. Finance is the study of funds management. The
general areas of finance are business finance, personal finance (private finance), and public
finance. Finance includes saving money and often includes lending money. The field of finance
deals with the concepts of time, money, risk and how they are interrelated. It also deals with how
money is spent and budgeted.

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The main function of this department is to collect all the receipts and make all the payments and
also to record all the transactions and prepare the final accounts. The major functions of these
departments are as follows: -

• Maintain the accounts as per the provisions of the sec 20 G of the company act 1956.
• Provide depreciation at the rate prescribed in schedule 14 of the company’s act 1956, on
straight line method.
• To account excise duty on goods manufactured when it dispatched
• To ascertain the accrued gratuity, liability of the company on the date of balance sheet.
• To value finished goods at cost or market price whichever is lower.
• Stock of raw materials, spares and chemicals are valued at weighted average method.
• Treat the claims against the company which are not admitted as contingent liability.
The main function of this department is to collect all the receipts and make all the payments and
also to record all the transactions and prepare the final accounts. The major functions of these
departments are as follows: -

• Maintain the accounts as per the provisions of the sec 20 G of the company act 1956.
• Provide depreciation at the rate prescribed in schedule 14 of the company’s act 1956, on
straight line method.
• To account excise duty on goods manufactured when it dispatched
• To ascertain the accrued gratuity, liability of the company on the date of balance sheet.
• To value finished goods at cost or market price whichever is lower.
• Stock of raw materials, spares and chemicals are valued at weighted average method.
• Treat the claims against the company which are not admitted as contingent liability.
AUDITING

Auditors are appointed by the government for a period of one year. There exist an external audit
and internal audit.

Internal Audit: - These are part of the organization. There is an internal auditing sector. They
are in charge of periodical audit.

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Accounting Policy of KMML

➢ Convention
The final statements are prepared under the historical cost convention in accordance with
applicable accounting standard that was relevant to presentational requirements of the companies
Act 1956.

➢ Fixed Assets

Fixed assets are stated at the cost of acquisition and additional if any, less appreciated
depreciation, is provided at rates and methods prescribed in the schedule 14 of the companies Act
on straight line method in respect of plant and machinery and railway sliding belonging to TiO2
pigment unit. And written down value method in respect of all the assets of the company. The
depreciation is calculated on the basis of Companies Act and for the income tax audit is added to
the profit and recalculated as per the audit rules.

➢ Excise Duty

Excise duty on manufactured is accounted as and when goods are dispatched accordingly
no provision is made in respect of duty due on goods manufactured, but not dispatched nor include
in valuation of stock.

➢ Gratuity

Gratuity is valued on the basis of actuarial valuation.

➢ Inventory System
Work in progress is valued at the cost and stock of raw materials, chemicals, fuel and stores
are valued at weighted average cost on monthly basis.

Functions of Accounting Section or Finance Department

The company maintains clear and perfect accounting system. The main activity of finance
department is working capital management, preparation of fund statement, cash flow statement,
balance sheet, profit and loss account etc. Secretarial work relating to Board comes under the
review of finance department. Most of the activities carried out by the finance department are
pertaining to long term and short-term requirements of the operation, closing purchase bill,

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maintaining the account of contractors, sub-contractors, income tax deduction, salary discrepancy,
dealing with financial institutions with imports and exports are also the functions of the financial
department. The major functions are;

➢ Purchase are recorded and analyzed

The finance department of the company keeps the accounts of purchase of spare parts,
chemicals etc. Accounting entries are made in the books of accounts of the company on day to day
basis, on the basis of bills and supporting vouchers of each item. Each voucher is essentially
numbered to avoid discrepancy. The company makes only miscellaneous purchase, as the main
raw material is mineral sand. The department analyze the details of purchases afterwards.

➢ Salary Section and Pay Division

The main function of the department is preparation and disbursement of salary of officers,
members of office staff and workers. The department keeps salary register pertaining to each of
the above sections, which facilitates charges in salary due to granting of annual increments and
deduction due from the salary. The disbursing of salary is crediting the amount to the respective
bank account of the employee. The department is sending a detailed list of salaries they have
arranged an ATM counter of ICICI Bank in the company compound. Certain employees are paid
by cheque. The department is maintaining sub ledgers for deductions made in the salary such as
PF, Insurance premium advance, Income Tax Act etc. Another important function is computation
of Income Tax, Its deductions and prompt remittance to IT department.

➢ Sales and Revenue Accounting

The department is calculating and paying sales ta and central excise duty to the concerned
government every year. The government is earning a total income of Rs.14 crore by way of excise
duty and sales tax duty from the company.

➢ Cash and Bank Transaction

The department does all the matters relating to the day to day cash transactions. They receive and
make payments for purchase and sales. The company is allowed to collect cash up to the limit of
20000/- is carried out by cheque or DD as per the directions of the Tax authority.

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➢ Major Banks of The Company

ICICI, SBI, SBT, Standard Chartered Bank, Canara Bank, Central Bank of India

➢ Costing
Annual budget and cost sheet are prepared at the outset of every year and on the basis of the
department fixes the floor price of each product of the company.

➢ Calculation of Depreciation

The department calculates the depreciation. The depreciation is calculated on the basis of straight-
line method in the case of plant and machinery of titanium pigment unit and written down value
method in case of other assets of the company.

FUNCTIONS

❖ Purchase are recorded and analyzed

❖ Salary section and Pay division
❖ Sales and Revenue accounting
❖ Cash and Bank transactions
❖ Major banks of the company
❖ Costing
❖ Calculation of Depreciation

SWOT ANALYSIS

A critical activity in the strategy formulation process is the evaluation of the fit between the
company’s resource strengths and weakness and the external opportunities and threats. In
achieving this, company’s strengths, weakness, opportunities and threats should be understood
using what is commonly known as the SWOT analysis.

Identifying a company’s Resource Strength

A company’s strength is the availability of a particular resource with the firm to leverage it to
performing certain activities better than its competition. It could arise from any of the following
factors: -

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 a) Physical asset, like ownership of building, plant and machinery, financial resources,
strategic location of the plant and distribution of networks.
b) Human asses, like good quality intellectual capital and a pool of talented and qualified
R&D scientists.
Identifying a company’s Resources Weakness

A company’s weakness is the non- availability of a particular resource with the firm, or the
inability of the firm to leverage that resource in performing certain activities better than its
competition. It could arise from any of the following factors: -

a) Lack of physical, human, organizational or intangible assets that are critical to the firm’s
survival and success in that particular industry.
b) Lack of a strategic direction for the company to understand and fulfill the needs of the
specific customer segment.
Identifying a company’s Market Opportunities

A company’s market opportunities are those industry opportunities that the company is equipped
to capture. The market opportunity could arise out of the following factors: -

a) Emergence of new customer segment in the market /opening up of new markets for the
company.
b) Changes in the customer habits and preference and their buying behaviors.
Identifying the company’s Environmental Threats

A company’s environmental threats are those factors in the company environment that the firm is
not equipped to handle. The environmental threats could arise out of the following changes: -

a) Changes in the technological, regulatory, social or economic environment of the industry

that have an impact on the product- market scope of the firm, increase costs and decrease
productivity.
b) Entry of new competitors in the market with new business models, better technology and
superior services.
The SWOT analysis presents an excellent opportunity of a company to evaluate and regulate its
resource strengths with the market position. An analysis of the company’s opportunities and threats
not only indicating the attractiveness of the company’s situation, but also drives the strategic action

32 | P a g e
by capitalizing on the opportunity of the firm can and intend to capture and defending the
company’s impact of threats imposed by the external environment.

SWOT ANALYSIS OF KMML

S-STRENGTHS

❖ KMML is the only company where the separation of minerals like Ilmenite, Rutile,
Leucoxene, Monazite, and Sillimanite
❖ Strong relation between the Management and the different levels of employees is the back
bone for the success of the company.
❖ Raw material is found in nearby areas.
❖ Price leadership.
❖ Constant up gradation technology
❖ Monopolistic nature of business.
❖ The Proximity of infrastructure facilities such as seaport, Railway station and International
Airport is one of the greatest strengths of the company.
W- WEAKNESSES

❖ The inability of management to control effectively the resistance raised by the local people
in some radical issues.
❖ Trade union dominated firm.
❖ Inability to root out the pollution & related issues.
❖ External/ Political / Governmental interference in company’s day-to-day affairs.
❖ Often works undertaken by the company are put off in the middle way.
O-OPPORTUNITIES

❖ Steady growth of clients/ user’s industry such as Paints, Welding products, Electrodes etc.
❖ Faster growth rate of market in Asian countries where separation facility is limited.
❖ Kerala state being made better known to the outside world with the expansion of tourism
and infrastructure technology sector.
❖ Technical collaboration with ISRO
❖ Worldwide deposit of Ilmenite is depleting day by day due to over exploitation, where as
in India only 10% of the total Ilmenite deposit is utilized.

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T-THREATS
❖ Mining policy of central and state government can allow small time entrants to the sector.
❖ Unavailability of minerals
❖ The cost of production will be higher due to the price of raw materials like Petroleum coke,
burning oil. LPG will grow higher in future
❖ Trade unions resistance to change will cause a barrier to bring about necessary changes in
future.

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1.4 STATEMENT OF THE RESEARCH PROBLEM

The study is to identify the financial performance over past 5 years and to study the financial
distress and bankruptcy of Kerala Minerals and Metals limited. Financial distress of a company is
the ultimate declaration of its inability to sustain current operations given its current debts
obligations. Distress prediction model will assist a manager to keep track of a company’s
performance over a number of years and helps in identifying important trends.

1.5 OBJECTIVE OF THE STUDY

PRIMARY OBJECTIVE

➢ To analyze financial performance over past 5 years and study the financial distress and
bankruptcy of KMML.

SECONDARY OBJECTIVE

➢ To analyze the financial figures.

➢ To suggest measures to overcome financial distress based on the findings of the study.

1.6 RESEARCH METHODOLOGY

Research methodology is a way to do systematically solve the research problem. It explains the
various steps that are generally adopted by a researcher in studying the research problem to
evaluate the financial distress and bankruptcy of Kerala Minerals and Metals limited. The research
project is descriptive and analytical in nature. The research project is mainly based on secondary
data.

1.6.1RESEARCH DESIGN
The research design states how an investigation will take place. The type of research used in this
project is descriptive and analytical in nature. The descriptive research gives accurate description
of a specific situation by observing the surroundings and performance of the company and also it
analyses the previous studies conducted at the organization. Through analytical research analyzing
the topic in depth and explaining the concept using tables, graphs, charts etc.

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TOOLS USED:

❖ Altman’s Z score
▪ Working capital to total assets ratio
▪ Retained earnings to total assets ratio
▪ EBIT to total assets ratio
▪ Market value of equity to total liability
▪ Sales to total assets
❖ Gross profit ratio
❖ EBIT margin
❖ Net profit to net worth ratio
❖ Net profit to total assets ratio
❖ Debt equity ratio
❖ Debt to total assets ratio
❖ Fixed assets turnover ratio
❖ Capital turnover ratio
❖ Working capital turnover ratio
❖ Interest coverage ratio
❖ Current ratio
❖ Quick ratio

1.6.2 DATA COLLECTION

Secondary Data Collection

The research is mainly based on the secondary data. The data was collected from;

➢ Annual report
➢ Company website
➢ Internet

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1.7 SCOPE OF THE STUDY

The present study is based upon the financial performance analysis of KMML, Chavara, Kollam.
The study aims to evaluate the financial distress and bankruptcy of KMML ltd produces and
market different grades of titanium dioxide pigment for domestic and international market. The
unit is located at Shankaramangalam Kollam. Due to several reasons the company’s profit and
performance is comparatively low. So, the study is to identify the signs of financial distress and
thereby avoid bankruptcy.

1.8 LIMITATION OF THE STUDY

➢ This project study wholly depends on past financial statements of the company. As the
financial statements are secondary data it has its own limitations.
➢ The does not consider the capital employed, market conditions, government policies etc.
These are important factors for assessing the financial performance.

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2.1 LITERATURE REVIEW
Review of literature is a document of selection available document on the topic which contain
information, ideas, data, and evidence written from a particular stand of point to fulfill certain aims
or express certain views on the nature on the topic and how it is to be investigated and the effective
evaluation of these document. In relation to the research being proposed generally the purpose of
the reviews to analyze critically a segment of a published body of knowledge through summary
classification and comparison of prior research studies review of literature and theoretical articles.

Normally, a firm does not go bankrupt instantaneously, but goes through a failure process which
varies considerably in length. It has been shown that large corporate failures are often characterized
by a very lengthy failure process; whereas, for small to medium enterprises (SMEs), it can emerge
quickly (e.g. Argenti, 1976; Hambrick & D’Aveni, 1988; Laitinen, 1991). Bankruptcy has also
been viewed as the final stage of the decline process.

Weitzel & Jonsson (1989), observes the firm decline process consists of five stages and successful
reorganization/turnaround is not possible only at the very last stage. Still, the failure process can
vary widely depending on the age, industry, size, and national location for similar firms
(Hambrick&D’Aveni, 1988; Laitinen, 1991; Ooghe & de Prijcker, 2008; Laitinen & Lukason,
2014). This study assumes that some failure processes will be more gradual than others, and we
wish to take this process into account in examining the relationship between failure causes and the
onset of bankruptcy.

Abdelsamad, M. H. and A. T. Kindling, 1978 the study seeks to explore the impact of macro-
economic factors on small business mortality. The results suggest that economic factors appear
to be associated with between 30% and 50% of small business failures, depending on the
definition of failure used. As expected, failure rates were positively associated with interest rates
(where failure was defined as bankruptcy) and the rate of unemployment (where failure was
defined as discontinuance of ownership). However, somewhat unexpectedly, failure rates were
found to be positively associated with lagged employment rates (where failure was defined as to
prevent further losses) and with current and lagged retail sales (where failure was defined as
either: failed to "make a go of it"; discontinuance of ownership; or discontinuance of business).
This indicates that a strengthening economy may provide the trigger for an increase in voluntary
business exits as individual proprietors seek to maximize the returns available to them on both
their financial and human capital.

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Dr. RadhaGaneshkumar and Kishore Kumar (2012), ―A COMPARISON OF
BANKRUPTCY MODELS‖ financial analysis can be applied in a wide variety of situations to
give business managers the information they need to make crucial decisions. In Texmo there is a
need for a pragmatic tool to make the prediction of financial distress with a single formula with
implementation of information system. An empirical comparison of Bankruptcy models is done to
obtain it. This study analyses three of the venerable models for assessing the distress of industrial
corporations. These are the so-called Z-Score model, O-score model and Zmijewski ‘s model. Z-
Scores, O-score and Zmijewski ‘s model is used to predict the profitability that a firm will go into
bankruptcy within two years, forecast corporate defaults and an easy- to-calculate control measure
for the financial distress status of companies in academic studies.

Sanobaranjum (2012), “Business bankruptcy prediction models: A significant study of the

Altman ‘s Z-score model‖, Businesses are enterprises which produce goods or render services for
profit motive. To be able to predict the financial soundness of a business has led to many researches
works. Financial ratios are a key indicator of financial soundness of a business. Financial ratios
are a tool to determine the operational & financial efficiency of business undertakings. There exist
a large number of ratios propounded by various authors. Altman developed a Z-score model using
ratios as its foundation. With the help of the Z- Score model, Altman could predict financial
efficiency/Bankruptcy up to 2-3 years in advance. The following research paper describes in detail
the studies carried out by Altman to predict business bankruptcy. Altman made regular changes to
achieve the perfect equation which could predict bankruptcy. The following research paper
summaries the research of Altman that have being made to develop the Altman Z-score model. It
can be safely said that Altman ‘s Z Score Model can be applied to modern economy to predict
distress and bankruptcy one, two & three years in advance.

The Bureau of Business Research (BBR) (1930) published a bulletin with results of a study of
ratios of failing industrial companies. The study analyzed 24 ratios of 29 firms to determine
common characteristics of failing companies. Average ratios were developed based on the ratios
of the 29 firms. The ratios of each firm were then compared with the average ratios to show that
the failing companies displayed certain similar characteristics or trends. The study found eight
ratios that were considered to be good indicators of the “growing weakness” of a firm. These ratios
were Working Capital to Total Assets, Surplus and Reserves to Total Assets, Net Worth to Fixed

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Assets, Fixed Assets to Total Assets, the Current Ratio, Net Worth to Total Assets, Sales to Total
Assets, and Cash to Total Assets. BBR also reported that the Working Capital to Total Assets ratio
appeared to be a more valuable indicator than the Current Ratio, despite the fact both were found
to be good indicators of weakness.

Fitz Patrick (1932) compared 13 ratios of failed and successful companies (19 of each category
companies). He found that, in the overwhelming majority of cases, the successful companies
displayed favorable ratios while the failed companies had unfavorable ratios when compared with
“standard” ratios and ratio trends. He reported that two significant ratios were Net Worth to Debt
and Net Profit to Net Worth. Also, Fitz Patrick suggested that less importance should be placed on
the Current Ratio and Quick Ratio for companies with long-term liabilities.

Smith and Winakor (1935) analyzed ratios of 183 failed firms from a variety of industries in a
follow-up study to the BBR’s 1930 publication. They found that Working Capital to Total Assets
was a far better predictor of financial problems than both Cash to Total Assets and the Current
Ratio. They also found that the Current Assets to Total Assets ratio dropped as the firm approached
bankruptcy.

Merwin (1942) published the findings of his study focusing on small manufacturers. He reported
that when comparing successful with failing firms, the failing firms displayed signs of weakness
as early as four or five years before failure. Also, Merwin found three ratios that were significant
indicators of business failure – Net Working Capital to Total Assets, the Current Ratio, and Net
Worth to Total Debt.

Chudson (1945) studied patterns of financial structure in an effort to be significant to the

development of bankruptcy prediction models. For example, Chudson’s findings indicate that
models developed for general application across industries may not be as appropriate as industry-
specific models.

Jackendoff (1962) compared the ratios of profitable and Unprofitable He reported that the
following two ratios are higher for profitable firms than for unprofitable firms: The Current Ratio
and Net Working Capital to Total Assets. Also, profitable firms had lower Debt-to-Worth ratios
than unprofitable firms.

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Ohlson (1980) found that firm size was a significant negative predictor of bankruptcy, as bankrupt
firms tend to be smaller than non-bankrupt entities. One point of concern raised by Ohlson was
that if one employs predictors derived from statements that were released after the date of
bankruptcy, then the evidence indicates that it will be easier to predict failure.

Scott (1981) opined that although there were quite a number of possible financial variables
available to predict bankruptcy, researchers were neither guided nor constrained by the theory for
the selection of ratios.

Viscione (1985) argued that cash flow from operations could be misleading because of
management’s manipulation of the timing of cash flows, such as not paying bills on time or
reducing inventory below desired levels. These maneuvers increase the measure of cash flows
from operations reported in the income statement. Such an increase is probably not a good sign,
and these distortions arise most often from companies experiencing financial distress.

Watson, (1996) said that regarding the use of cash flows to predict corporate bankruptcy, the
common view is that cash flow information does not contain any significant incremental
information over the accrual accounting information to discriminate between bankrupt and non-
bankrupt enterprises.

McGurr and Devaney (1998) have in fact recommended “that future failure studies use single
industry samples to enhance their predictive accuracy” evaluated the effectiveness of five well-
known models developed with the mixed industry data in classifying bankruptcy for a sample of
retail firms. The findings confirmed the authors’ assertion in that the generic models are likely to
be less successful in discriminating between bankrupt and non-bankrupt firms from the retail
industry, as compared to the classification results reported for the mixed industry samples in the
original studies. They concluded that “… mixed industry failure prediction models appear to have
a limited usefulness in a review of retail firm’s financial health due to the effect of industry,
population, and time biases”.

Shirata (1998) opined that regardless of bankruptcy prediction model’s disadvantages or

shortcomings, the idea of developing such models to attempt to predict financial distress and
failure has been welcomed around the globe. For example, previous empirical studies using
financial ratios as predictors of corporate bankruptcy have been conducted in Japan. However, due

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to the limited sample size, the results are not general. The Japanese study proposed a universal
model that accurately predicts 86% of bankrupt companies, independent of industry type and its
size.

Shumway’s bankruptcy prediction model (2001) successfully illustrated the benefits of teaming
financial statement-based ratio variables with the market driven variables for the purposes of
predicting bankruptcy. The two market variables in the study exhibited strong segregating ability
along with the two financial ratios, while displaying low correlations among variables. Shumway’s
model reported higher prediction accuracy one year before bankruptcy for a holdout sample, as
compared to the benchmark models, which are solely based on financial statement ratios

Grice & Dugan (2001) said that bankruptcy prediction models deal with potential problems
associated with models inappropriately applied. This could be the case when statistical models
derived for a certain time period, industries, and financial distress situations are applied to
situations other than those originally developed for. It is found that these models are sensitive to
time periods. This means that the accuracy of the model declines when they are applied to time
periods different from those used to develop and build the model. Furthermore, while Ohlson’s
model was sensitive to industry classification, Zmijjewski’s model was not. However, neither
model is sensitive to financial distress situations other than those used to develop the models.
Therefore, it is not only necessary to understand the uses of prediction models, but to comprehend
their limitations as well.

Yihong He, Ravindra Kamath (2006) in their paper, investigated whether generic bankruptcy
prediction models can maintain their validity when applied to firms from an individual industry,
namely, the retail industry. The literature suggests that the classification accuracy of generic
models is reduced considerably when they are applied to samples drawn from an individual
industry. Their study estimates two generic bankruptcy prediction models, one by Ohlson (1980)
and one by Shumway (2001), with a mixed industry sample of 354 over-the-counter (OTC) traded
small firms during the 1990s. Given the limited sample size for the retail industry, both models are
validated with an ex post classification test by reclassifying the sample used to estimate the models.

Edward I. Altman (1968) made an attempt on the assessment of the quality of ratio analysis as
an analytical technique. The prediction of corporate bankruptcy is used as an illustrative case.
Specifically, a set of financial and economic ratios will be investigated in a bankruptcy prediction

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context wherein a multiple discriminant statistical methodology is employed. The data used in the
study are limited to manufacturing corporations. It reviews empirical results obtained from the
initial sample and several secondary samples; the latter being selected to examine the reliability of
the discriminant model as a predictive technique. The discriminant-ratio model appears to have
the potential to ease this problem.

James. A. Ohlson (1980) presented some empirical results of a study predicting corporate failure
as evidenced by the event of bankruptcy. There are two conclusions which should be restated.
First, the predictive power of any model depends upon when the information is financial based.
Second the predictive power help to know the current status of the company.

Ray Ball and George Foster (1982) said that Discriminant analysis-based models have the
potential to provide improvements in several areas over existing procedures used in such contexts;
for example, they can process information quicker and at a lower cost.

Mooradian (1993) who interpreted financial distress as a crucial event, the occurrence of which
separates the time of a company’s financial health from the period of financial illness and requires
corrective actions in order to overcome the troubled situation. The term ‘bankruptcy’ is used in
research studies carried out in USA. Bankruptcy is a legal event taking place at a definite point of
time and is undoubtedly a conclusive evidence of the firm having failed. In practice, bankruptcy
is the culmination of failure. Failure, in the economic sense, occurs prior to bankruptcy
proceedings.

Platt and Platt (2006) found that financial distress and bankruptcy were not same process,
explaining the reason why many financially distressed firms do not ultimately file for bankruptcy
protection.

Srivastava and Yadav (1986) Industrial Sickness may be due to change in government policy,
over spending on essentials, absence of control on borrowings, dishonest practices on the part of
the management. The reasons for such sickness may vary from unit to unit. The business failure
may have been caused by a plethora of reasons. The factors causing industrial sickness could be
internal and external. The external factors usually affect all the industrial units in the same group
and the internal factors affect a particular unit only, not the entire industry.

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Singh and Singh (2011) The internal factors include inadequate management, inappropriate
technology, sub-optimal plant and/or factors external to the organization, like increased
competition, economic condition, input shortages, changes in government policies, or disturbed
industrial relations. The major reasons for industrial sickness are financial reasons, managerial
inability, government laws, technological changes, reduced product demand, and marketing
related problems.

Karami, Hosseini, Attaran and Hosseini (2012) employed independent sample t-test to 18
financial ratios of 45 bankrupted and 45 nonbankrupt firms from various industries and found that
there were significant differences in two groups and those ratios such as liquidity (Current
Assets/Current Liabilities), leverage (Total Liabilities/Total Assets) and profitability (Return On
Assets, Net Income e/Fixed Assets, Operating Income/Total Assets) were appropriate measures
for classifying bankrupt from non-bankrupt.

Leksrisakull and Evans (2005) selected a sample of 89 non-failed and 46 failed firms and
employed 37 financial ratios classified into five categories, namely leverage, profitability,
turnover, liquidity and others. It was found that the significance of the Wilks’ Lambda statistic
indicating that the five variables - market value of equity/ total debt, earnings before interest and
tax/total assets, retained earnings/ total assets, sales/total assets and working capital to total assets
- were significant discriminators.

Samara Koon and Hasan (2003) tested for the difference between the means of the variables
belonging to 13 distressed and 13 non-distressed firms of same size belonging to the same industry,
using the paired t-test. It was found that the means of the variables namely working capital to total
assets, retained earnings to total assets, earnings before interest and taxes to total assets, market
value of equity to book value of total liabilities, book value of equity to book value of total
liabilities and sales to total assets in the distressed sample were vastly lower than the means in the
non-distressed sample. Also, the results of the paired t-test showed that the mean differences in
variables between the two groups were extremely significant.

Gupta (1983) examined a sample containing 20 sick and 21 non sick textile companies during
1962-64 to identify the lead indicators of sickness using 63 financial ratios. Using Discriminant
analysis, it was found that net worth to short- and long-term debt and all outside liabilities to
tangible assets were useful. The study revealed that five ratios were found to have the highest

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predictive value and the least classification error when applied to a homogeneous group. They
were: Earnings Before Depreciation, Interest and Tax (EBDIT)/Net Sales, Operating Cash Flow
(OCF)/Net Sales, EBDIT/Total Gross Assets, OCF/Total gross Assets and EBDIT/Interest + 0.25
(Debt). The study also revealed that in early years of the company, the predictive power of OCF
and EBDIT was more or less the same and in the later years, OCF become important as sick firms
rely more and more on borrowed funds.

Winakor and Smith (1935) analyzed financial ratios of 183 failed firms belonging to different
industries in a follow-up study to the BBR’s 1930 publication. The results of the study indicated
that Working capital to total assets was a better predictor than both cash to total assets and current
ratio. It was found out that current assets to total assets ratio dropped as the firm approached
bankruptcy.

Patrick (1932) the pioneer in the field of corporate failure, examined whether there was significant
difference in the ratios between failed and non-failed firms at least three years prior to failure. The
researcher selected 19 companies randomly which had failed during the period of 1920-1929 and
matched with 19 successful companies using financial soundness, asset size, sales volume, product
line and fiscal year as matching criteria. The study showed that the net worth to debt and net profits
to net worth were the best indicators of failure among the ratios used.

Zulkarnain et al. (2001) Lennox (1999), Ohlson (1980) and Libby (1975) revealed that
profitability was an important determinant of bankruptcy. The companies with large profits
naturally have a lower probability of bankruptcy; hence, the relationship between profitability and
corporate sickness is negative. The company’s short-term solvency must be measured to find out
its ability to meet short term financial obligations.

Kosmidis, Venetaki, Stavropoulos and Terzidis (2011) developed a model for the prediction of
the financial distress using 27 financially distressed and 27 financially viable companies with 41
financial ratios. T-tests and univariate discriminant analysis were employed to identify the most
significant factors for the financial viability of companies. The empirical results of the study
indicated that the Logit model was much more accurate than the MDA model in terms of correct
classification.

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Yap, Yong and Poon (2010) used 32 failed companies with matching 32 non-failed companies
and developed a failure prediction model to improve the predictive abilities for company failures
using 16 financial ratios for 64 companies in Malaysia. A strong discriminant function was
constructed using multi discriminant analysis wherein seven ratios were found to be significant in
its discriminating power and the model had good predictive abilities with accuracy rates of 90%
on average for the analysis sample and 89% on average for the hold-out sample for the five years
prior to actual failure. The results of the study revealed that the ratios measuring liquidity and
profitability were most useful in predicting a company’s success or failure.

Hlahla (2010) developed a bankruptcy prediction model for South African companies listed on
the Johannesburg Stock Exchange. The study used a sample of 14 failed and 14 non-failed firms
and 64 financial ratios as independent variables in a Multi Discriminant Model. Times Interest
Earned, Cash to Debt, and working capital to turnover ratios were identified as significant ratios.
The results of the study showed that the Times Interest Earned had greater discriminating power
followed by cash to debt ratio and working capital turnover ratio. The overall classification
accuracy of the model was found to be 75.3 per cent.

Gerantonis, Vergos and Christopoulos (2009) analyzed whether Altman Z-Score model can
predict correctly company failures for a period of up to three years prior to sickness. The researcher
found that this model was useful in identifying financially troubled companies that may fail up to
2 years before bankruptcy as it matches both accounting data and market value.

Abdullah, Hallim, Ahmad and Rus (2008) considered a sample of 52 distressed and non-
distressed companies. Among ten determinants of corporate performance examined, the ratio of
debt to total assets was found to be a significant predictor of corporate distress regardless of the
methodology used. In addition, net income growth was another significant predictor in MDA,
whereas the return on assets was an important predictor when the logistic regression and hazard
model methodologies were used.

Charitou, Neophytou and Charalambous (2004) examined the incremental information content
of operating cash flows in predicting financial distress and thus developed reliable failure
prediction models for UK public industrial firms. The results of the study indicated that a
parsimonious model that includes three financial variables, a cash flow, a profitability and a
financial leverage variable which yielded an overall correct classification accuracy of 83% one

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year prior to the failure and that the predictive ability of the Altman model did not perform well
when compared to Logit analysis. It was found that operating cash flows possess discriminatory
power when it comes to predicting failure of UK companies.

Grice and Ingram (2001) found that the overall accuracy of the model was significantly higher
for manufacturing firms than nonmanufacturing firms and also that the relation between financial
ratios and financial distress changes over time. The results of the study indicated that those who
employ Altman’s Z-score model should re-estimate the model’s coefficients rather than relying on
those reported by Altman (1968).

Mohamed, Li and Sanda (2001) compared MDA and Logit model in the analysis of bankruptcy.
The sample of 26 distressed companies and 79 no distressed companies were employed and the
results showed that when using MDA, debt ratio and total assets turnover were found to be
significant but when Logit analysis was used, an additional variable, interest coverage was also
found to be significant, emphasizing the importance of leverage ratio as a predictor of failure. The
Logit model predicted 80.7% of the companies in the estimation sample and 74.4% in the hold-
out sample, whereas the MDA model predicted 81.1% of the companies in the estimation sample
and 75.4% in the hold-out sample.

Mossman, Bell, Swartz and Turtle (1998) compared four types of bankruptcy prediction models
Altman’s (1968) Z-score model based on financial ratios; Aziz, Emanuel, and Lawson’s (1988)
model comprised of cash flows; Clark and Weinstein’s (1983) market return model, and Aharony,
Jones, and Swary’s (1980) market return variation model. It was found out that in the year prior to
bankruptcy, the ratio model was the most effective in explaining the likelihood of bankruptcy and
in the three years preceding bankruptcy, the cash flow model most consistently discriminates
between bankrupt and nonbankrupt firms.

Gilbert et al (1990) investigated the predictive abilities of models based on two types of samples:
52 bankrupt and 208 non-bankrupt firms and 52 bankrupt and 208 distressed firms during the
period 1974-83. Holdout sample was used to test accuracy of the model. 14 ratios were employed,
of which three were cash flow ratios. On applying stepwise logit, it was found out that cash flow
from operations to total liabilities was significant in classifying bankrupt and non-bankrupt firms
and cash flow from operations to current liabilities was significant in classifying bankrupt and

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distressed firms. The study concluded that cash flow ratios add significantly to prediction accuracy
of accrual models.

Viscione (1985) carried out trend analysis of 24 bankrupt firms up to five years prior to failure and
compared cash flow from operations with selected accrual ratios. He found out that cash flow from
operations was not a strong indicator of financial distress.

Casey and Bartczak (1985) conducted a study to assess whether operating cash flow data and
related measures lead to more accurate predictions of bankrupt and non-bankrupt firms and
whether operating cash flow data can increase the accuracy of accrual based multiple discriminant
and Logit models to distinguish between bankrupt and non-bankrupt firms. He used 60 bankrupt
and 230 non-bankrupt firms belonging to the same industry during the period 1971-82 and
employed MDA and logit. The results of the study suggested that operating cash flow data do not
provide incremental predictive power over accrual-based ratios.

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2.2 THEORITICAL FRAMEWORK
Financial distress is a situation where a firms operating cash flows are not sufficient to satisfy
current obligations (such as trade credit or interest expense) and the firm is forced to take corrective
action (Wruck 1990).

To analyze the financial distress of a company can be identified through the analysis of its financial
performance for the last few years. For this analysis Altman’s Z score model is an effective tool
which captures the predictive viability of a company’s financial health by using a combination of
financial ratios that ultimately predicts a score which can be used to determine the financial health
of a company. on Multiple Discriminative Analysis (MDA) the model predicts a company’s
financial health based on a discrimination function of the firm.

Z= 0.012X1+ 0.014X2+ 0.033X3+0.006X4+0.999X5

[Where X1=Working Capital/Total Assets
X2=Retained Earnings /Total Assets
X3=Earnings Before Interest and Tax/Total Assets
X4=Market Value of Equity/Book Value of Total Liabilities
X5=Sales/Total Assets]
Table 1: Altman Guidelines

Situation Z score Zone Remarks

1 Below 1.8 Not safe Its failure is certain and extremely

2 Between 1.8 and 2.99
3 3.0 and above
likely and will occur probably within a
period of two years.
Healthy Financial viability is considered to be
healthy and the failure in this situation
is uncertain to predict.
Too Healthy Its financial health is viable and not fall

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Timely action is required for the identification of financial distress. For this we need to analyze
the symptoms which would help as to identify the financial distress of a unit. This can be traced
from the signals that gets displayed by the sick units. The signal may be in the form of financial
distress starting with short term liquidity problems, revenue loses, operating losses and moving in
the direction of over use of external credit unit it reaches a stage where it is overburdened with
debt and not being able to generate sufficient fund to meet its obligations.

In case of large units whose shares are quoted in stock exchanges a signal of sickness is sent when
dividends are skipped and share price sharply declines. This measure therefore will have to be used
very cautiously with other identifiable symptoms to judge whether skipping dividend indicate
temporary downward slide in financial performance.

The existence of these signals and symptoms provides a ground for suspecting that the industrial
unit concerned is prone to sickness we can say pertaining to the factors which are within the control
of management. This financial distress arises due to internal disorder in the areas justified as
following;

a) Lack of finance: This including weak equity base, poor utilization of assets, inefficient
working capital management, absence of costing and pricing, absence of pricing and
costing, absence of planning and budgeting and inappropriate utilization of diversion of
funds.
b) Bad production policies: The another very important reason for financial distress is wrong
selection of sites which is related to production, inappropriate plant and machinery, bad
maintenance of plant and machinery, lack of quality control, lack of standard research and
developing and so on.
c) Marketing: This is another part which always affects the health of any sectors as well as
SSI. This including wrong demand forecasting, selection of inappropriate product mix,
absence of product planning, wrong market research method, and bad sales promotions.
d) Inappropriate personnel management: Another internal reason for the sickness of SSIs is
inappropriate personnel management policies which include bad wages and salary
administration, bad labour relations, lack of behavioral approach causes dissatisfaction
among the employees and workers.

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 The Z-score is composite credit score for manufactures involving measures of firm ‘s
performance including measures of corporate liquidity, cumulative and current profitability,
leverage and sales productivity. Each measure is assigned a compute determined weighting
such, that when an analyst multiplies the weights lines the financial performance and sums up
of these five factors, the result is the overall Z-score. The Z-score have gained acceptance by
auditor’s management accountants, courts and data base system for evaluation. It has been
used in variety of context and countries but was designed originally for publicly held
manufacturing companies with assets of more than$01 million. The latter published Altman
modification model called Z1-score which can be applied to privately hold manufacturing
companies and Z2-soore for nonmanufacturing companies.

Table no: 2 Other Financial Ratios Used in The Study

Sl No: Parameters of company Ratio
performance
1 Profitability • Gross Profit Margin
• EBIT Margin
• Net Profit to Net
Worth
• Net Profit to Total
Assets
2 Solvency • Debt Equity
• Interest coverage
• Debt to Total Assets
3 Efficiency • Fixed Asset Turn
Over
• Capital Turn Over
• Working Capital Turn
Over
4 Liquidity • Current Ratio
• Quick Ratio

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Each of the above group along with the formulae used to calculate the ratios is discussed in the
following paragraphs:

2.2.1 Profitability

Profitability implies the company’s efficiency in generating profits. It is an important indicator

of company’s performance. Profitability reflects the final results of the business operations.
Analysis of profit is of vital importance to stockholders and creditors as they are source of funds
for debt coverage. Profitability and retention of profits affects the growth of the company. Ratios
selected to measure profitability are:

1. Gross Profit Margin (GPM):

= Gross Profit
Net Sales

Gross Profit is the difference between Sales and Cost of Goods sold. It indicates the efficiency
of production as well as pricing. It is a measure of profits left after meeting manufacturing costs.
Gross Profit is influenced by direct costs viz materials, labour and overheads as well as fixed
component of these costs. A high GPM indicates efficient Pricing and Sales strategy as well as
cost control.
2. EBIT Margin (EBITM):
= Earnings before Interest and Taxes
Net sales
Operating Profit, also termed as Earnings before Interest and Taxes (EBIT), is a measure of
operational profitability of the company. It is the profit available after meeting Administrative,
Selling, Distribution and other sundry expenses incurred to operate the business. It is the profit
available to all stakeholders after meeting all normal business expenses. It is a very good indicator
of the expense management strategies adopted by the company. This profit is not influenced by
the capital structure of the company.

3. Net Profit to Net Worth (NPNW):

= Reported Net Profit

Equity Shareholders Funds

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Net Profit to Net Worth measures the return to shareholders in relation to their investment. It is a
very good indicator of profitability for the shareholders. Its summaries the impact of all decisions
taken in the business for the shareholders. Reported Net Profit is the residual profit after meeting
all expenses including interest and taxes. This is the profit available for shareholders of the
company. Equity Shareholders’ Funds includes equity capital and reserves. NPNW determines
the profitability of shareholders investments.

4. Net Profit to Total Assets (NPTA):

= Reported Net Profit ∗ Total Assets

Net Profit to Total Assets measures the net profit available in relation to its total investment in
fixed assets and current assets. It is a measure of capital productivity indicating the returns on its
gross investments. Investment in Assets is funded by retained earnings and Capital. NPTA
determines the profitability of total investments.

2.2.2 Solvency

Solvency means the ability of the company to meet its debts. The presence of long-term debt in
the capital indicates financial risks. Debt to Total Assets, Interest coverage ratios etc. helps to
evaluate long term risks and return prospects. A company with long term debt can give excess
returns to their shareholders by leveraging debt. However, if the profits decline, the returns to
shareholders are compromised. Moreover, long term debt and interest have priority over other
claims. The inability of a company to meet these obligations can lead to distress and bankruptcy.

Ratios used to measure solvency are:

5. Debt to Equity (D/E):

= Long Term Debts

Equity Shareholders Funds

Debt to equity ratio is a measure of capital structure of a company. Here the long-term debt
includes long term loans, debentures and preference share capital and Equity Shareholders Funds
refers to Equity Share Capital + Reserves and Surplus. A high D/E ratio indicates leverage as well

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as financial risks. It explains the level of risk borne by the company. Low D/E ratio implies greater
protection for lenders and hence more solvency.

6. Interest Coverage (OPI):

= Earnings before Interest and Taxes

Annual Interest
This ratio measures the coverage available for interest in terms of profits. This is a direct measure
to examine a company’s ability to generate profits to meet its fixed obligations in terms of interest
on long term debts. A high interest coverage means that the company has sufficient profits to meet
its fixed interest obligations. A decline in the profits may not affect interest payments whereas a
low interest coverage can be an indicator of distress. This ratio is widely used by lenders to assess
a company’s debt capacity, (Chandra, 2008).

7. Debt to Total Assets (DTA):

= Total Debt
Total Assets
This ratio is a very good indicator of long-term solvency. It measures the extent to which the
assets are financed by debt both long term and short term. A high DTA implies high financial risks.
In the event of low profitability, this situation can mean financial distress.

2.2.3 Efficiency/ Activity

A company’s survival depends upon its efficiency in utilizing the assets employed in the business.
Assets employed in the business can be classified into two groups – Fixed Assets and Current
Assets. Investment in fixed assets ensures revenue generation for a business. The more efficiently
and productively a company uses its assets, the more is the profitability and its long-term survival.
Efficient management of current assets ensures immediate capital to meet its short-term needs.
Efficiency ratios compares the level of activity represented by Sales with the amount of assets
held. Fixed Asset Turnover ratio, Debtors Turnover ratio, Inventory Turnover ratio, Working
Capital Turnover ratio are the ratios which can help determine the efficiency levels of the business.

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8. Fixed Asset Turnover (FATO):

= Net Sales
Net Block of Fixed Assets
Fixed Assets form one of the largest investments in manufacturing business. Fixed Assets are
acquired with an intention to generate revenues. Effective utilization of fixed assets leads to greater
revenues thereby ensuring long term survival of the business. FATO compares revenues
represented by Sales with the level of fixed assets invested in the business. A high FATO means
that the company is using fixed assets efficiently to generate Sales.

9. Capital Turnover (CTO):

=Net Sales
Total Capital Employed
Capital Turnover is a very good indicator of company’s efficiency. It measures the extent of sales
generated in relation to total funding. Liabilities are company’s funding sources. A high CTO
reflects efficiency in operations. Since total liabilities i.e. funding is invested in Fixed Assets and
Current Assets, this ratio also indicates the revenue generated by the company by virtue of its total
investments in assets.

10. Working Capital Turnover (WCTO):

= Net Sales
Net Current Assets
Working capital is the operating capital required to conduct the day to day operating activities.
This ratio reflects the amount of operating capital needed to maintain a given level of Sales. Higher
WCTO implies low amount of capital requirement for generating sales, i.e. lesser burden on
business and higher chances of survival. A low WCTO means a larger amount of working capital
required to maintain a given level of sales thereby indicating higher burden on business.

2.2.4 Liquidity

Liquidity in a business refers to short term solvency. Liquidity ratios checks the availability of
funds to meet the short-term obligations of the business-like payment to suppliers, payment for
short term loans, outstanding expenses, unexpected cash outlays etc. The ability of a company to
meet its short- term liabilities indicates good working capital management. Suppliers and short-
term lenders review liquidity ratios to get assurance about the repayment capacity of the company.
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Liquidity ratios compare the level of currents assets with current liabilities. Current Assets includes
inventories, receivables, short term loans and advances given, marketable securities and cash and
bank balances. Current liabilities refer to creditors, outstanding expenses, short term provisions.
Current ratio, Quick ratio and Working capital to Total Asset ratio are the most popular ratios to
evaluate liquidity.

13. Current Ratio (CR):

Current Assets
Current Liabilities

Current ratio compares the level of current assets available to meet the current liabilities. It
evaluates the capacity of the business in terms of assets to pay its immediate liabilities. Higher the
ratio, stronger is the company’s short-term liquidity or solvency. A company which can pay off its
current liabilities with its current assets is financially healthy as it does not have to resort to long
term debts to meet its short-term obligations. A low current ratio may mean a weak liquidity
position leading to financial distress.

14. Quick ratio (QR):

= Current Assets – Inventories

Current Liabilities
A quick ratio complements the current ratio by providing a better metric of evaluating the short-
term solvency position. Current ratio provides an overall picture of a company’s liquidity. It does
not, however, take into account the composition of current assets. A quick ratio is a more
conservative test of a firm’s solvency. In calculating quick ratio, current assets which are quickly
convertible into cash viz. cash and cash equivalents, marketable securities and receivables are
compared with the amount of current liabilities held. A high quick ratio indicates a very good
solvency position of the business.

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 ALTMANS MULTIPLE MODEL

TABLE NO. 3.1 WORKING CAPITAL TO TOTAL ASSETS

Year Working Capital Total Assets Ratio
2013-14 24548.25 82066.04 0.2991
2014-15 18255.98 77491.56 0.2355
2015-16 19756.45 83155.37 0.2375
2016-17 25097.00 81551.06 0.3077
2017-18 36698.49 96776.76 0.3792
Source: Secondary data

CHART NO: 3.1 WORKING CAPITAL TO TOTAL ASSETS

Working capital to total assets

0.4
0.35
0.3
0.25
Ratio

0.2
0.15
0.1
0.05
0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
The above table shows working capital to total assets ratio. In the year 2014 the firm had 29% of
working capital in the total assets. After the ratio between working capital to total asset moves
down to 23% in the year 2015 and 2016, which indicates that in that year the firm doesn’t have
sufficient fund to meet its credit worthiness. Later on, it gradually increasing in the year 2018 with
37% of working capital to total assets. This indicates the firm’s ability to meet its maturing short-
term obligations.

Calculation Method:
Working capital to total assets =Working capital
Total Assets
Where, Working capital = current assets – current liabilities

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 ALTMANS MULTIPLE MODEL
TABLE NO.3.2 RETAINED EARNINGS TO TOTAL ASSETS
Year Retained Earnings Total Assets Ratio
2013-14 5823.30 82069.04 0.7095
2014-15 54118.44 77491.56 0.6983
2015-16 52707.88 83155.37 0.6338
2016-17 53759.24 81551.06 0.6592
2017-18 64294.37 96776.76 0.6643
Source: Secondary data

CHART NO: 3.2 RETAINED EARNINGS TO TOTAL ASSETS

Retained Earnings To Total Assets

0.72
0.7
0.68
0.66
Ratio

0.64
0.62
0.6
0.58
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
The retained earnings to total assets ratio are an indicator of the “cumulative profitability” of the
firms over time. This ratio of the firm is comparatively high in the year 2014 and 2015. But in
2016 it moves down, which indicates that the firm does not have much profit to kept aside retained
earnings which are being utilized for the future like expansion purpose. In 2017 and 18 there is a
gradual increase in the retained earnings to total assets ratio.

Calculation Method:

Retained Earnings to total assets ratio= Retained earnings

Total assets

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 ALTMANS MULTIPLE MODEL
TABLE NO. 3.3 EBIT TO TOTAL ASSETS
Year EBIT Total Assets Ratio
2013-14 2641.18 82069.04 0.0321
2014-15 (2478.34) 77491.56 -0.0319
2015-16 (1244.71) 83155.37 -0.0149
2016-17 2882.12 81551.06 0.0353
2017-18 18110.85 96776.76 0.1871
Source: Secondary data

CHART NO: 3.3 EBIT TO TOTAL ASSETS

EBIT to total assets

0.2

0.15

0.1
Ratio

0.05

0
2013-14 2014-15 2015-16 2016-17 2017-18
-0.05
Year

Interpretation:
The Earnings before interest and tax to total assets ratio measures the managements overall
effectiveness as shown by the returns generated on sales and investment. The ratio shows a
negative figure in the year 2015 and16which means that the firm fails to utilize its total asset of
the firm efficiently. But in 2018 EBIT to total assets shows a huge increase i.e. it shows a positive
figure.

Calculation method:

EBIT to total assets = EBIT

Total assets

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 ALTMANS MULTIPLE MODEL
TABLE NO. 3.4 MARKET VALUE OF EQUITY TO TOTAL LIABILITIES
Year Market value of Book value of total Ratio
equity liability
2013-14 3093.27 20742.47 0.1491
2014-15 3093.27 20279.85 0.1525
2015-16 3093.27 27354.22 0.1130
2016-17 3093.27 24698.55 0.1252
2017-18 3093.27 29339.12 0.1054
Source: Secondary data

CHART NO: 3.4 MARKET VALUE OF EQUITY TO TOTAL LIABILITIES

Market value of equity to total liabilities

0.18
0.16
0.14
0.12
0.1
Ratio

0.08
0.06
0.04
0.02
0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
The Market value of equity to total liability shows how much of an asset can decline in value
before liabilities exceed the assets and the concerns become insolvent. It measures the extent to
which the firm has been financed by debts. In the year 2014 and 15 the market value of equity to
total liability is comparatively high, which indicates that the profitability of the firm has been
financed by debts. But in 2016 and 18 the ratio moves down.

Calculation method:
Market value of equity to total liabilities= Market value of equity
Total liabilities

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 ALTMANS MULTIPLE MODEL
TABLE NO. 3.5 SALES TO TOTAL ASSETS

Year Sales Total Assets Ratio

2013-14 65219.73 82069.04 0.7946
2014-15 53801.11 77491.56 0.6942
2015-16 53079.77 83155.37 0.6469
2016-17 72704.13 81551.06 0.8915
2017-18 74058.36 96776.76 0.7652
Source: Secondary Data

CHART NO: 3.5 SALES TO TOTAL ASSETS

Sales to total aasets

1

0.8

0.6
Ratio

0.4

0.2

0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
The sales to total assets ratio show a company’s sales generating capacity. The ratio is high in the
year 2017 since the sales generating capacity of the company’s asset for that year is high and the
ratio shows an increasing tendency. From 2014 to 2016 the sales to total asset ratio shows a
decreasing tendency.

Calculation method:
Sales to total assets= Sales
Total assets

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 ALTMANS MULTIPLE MODEL
TABLE NO:3.6 Z SCORE TEST

Year X1 X2 X3 X4 X5 Z Score

2013-14 0.2991 0.7095 0.0336 0.1491 0.7946 2.34716

2014-15 0.2355 0.6983 -0.0109 0.1525 0.6942 2.00995
2015-16 0.2375 0.6338 -0.0259 0.1130 0.6469 1.80155
2016-17 0.3077 0.6592 0.0362 0.1252 0.8915 2.3782
2017-18 0.3792 0.6643 0.1879 0.1054 0.7652 2.83357
CHART NO: 3.6 Z SCORE TEST

Z Score
3
2.5
2
Ratio

1.5
1
0.5
0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
The Altman Z-score is the output of a credit-strength test that gauges a publicly traded
manufacturing company's likelihood of bankruptcy. In 2016 the company’s Z score is 1.8% which
means that the company was in distress zone at that time. But from 2017 onwards the ratio began
to increase and was in the grey zone which means that the company had a healthy financial
position.

Calculation method:

Z= 1.2*X1+1.4*X2+3.3*3+0.6*X4+1.0*X5

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 TABLE NO:3.7
GROSS PROFIT RATIO

Year Gross Profit Net Sales Ratio

2013-14 2562.57 65219.73 0.0392
2014-15 1200.73 53801.11 0.0223
2015-16 1159.75 53079.77 0.0218
2016-17 6178.73 72704.13 0.0849
2017-18 18445.74 74058.36 0.2490
Source: Secondary data

CHART NO:3.7 GROSS PROFIT RATIO

Gross profit ratio

0.3

0.25

0.2
Ratio

0.15

0.1

0.05

0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
The gross profit ratio is important because it shows management and investors how profitable the
core business activities are without taking into consideration the indirect costs. The gross profit
ratio shows a steady growth during the period of the project. In 2018 it shows an increase of 24%

Calculation method:
Gross profit ratio= Gross profit
Net sales

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 TABLE NO:3.8
EBIT MARGIN

Year EBIT Net Sales Ratio

2013-14 2641.18 65219.73 0.0404
2014-15 (2478.34) 53801.11 -0.0460
2015-16 (1244.71) 53079.77 -0.0234
2016-17 2882.12 72704.13 0.0396
2017-18 18110.85 74058.36 0.2445
Source: secondary data

CHART NO:3.8 EBIT MARGIN

EBIT margin
0.3
0.25
0.2
0.15
Ratio

0.1
0.05
0
-0.05 2013-14 2014-15 2015-16 2016-17 2017-18
-0.1
Year

Interpretation:
EBIT margin is an indicator which gives information on a company's earnings ability. The higher
EBIT margin reflects the more efficient cost management or the more profitable business. The
EBIT margin is high in the year 2018. In the year 2015 and 16 EBIT margin shows a negative
figure. It means that the company isn’t selling enough to cover its fixed costs. But in the year 2017
the company was able to generate profit.

Calculation method:

EBIT Margin= EBIT

Net sales

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 TABLE NO:3.9
NET PROFIT TO NET WORTH
Year Reported net profit Equity shareholders Ratio
fund
2013-14 1410.99 61326.57 0.023008
2014-15 (2489.62) 57211.71 -0.04352
2015-16 (1371.84) 55801.15 -0.02458
2016-17 1134.94 56852.51 0.019963
2017-18 11746.16 67387.64 0.174307
Source: Secondary data

CHART NO:3.9 NET PROFIT TO NET WORTH

Net profit to net worth

0.2

0.15

0.1

0.05

0
2013-14 2014-15 2015-16 2016-17 2017-18
-0.05

-0.1 Year

Interpretation:
Net profit to net worth ratio determines the profitability of shareholders investments. In 2015 and
16 the net profit to net worth ratio shows a negative figure and gradually it began to increase. The
company was able to maintain an adequate amount of net profit and shareholders fund. As the net
profit to net worth show a low ratio it indicates to investors that there may be low risk in investing
in the company.

Calculation method:
Net profit to net worth= Net profit
Equity shareholders fund

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 TABLE NO:3.10
NET PROFIT TO TOTAL ASSETS
Year Reported Net Profit Total Assets Ratio
2013-14 1410.99 82069.04 0.0171
2014-15 (2489.62) 77491.56 -0.0321
2015-16 (1371.84) 83155.37 -0.0164
2016-17 1134.94 81551.06 0.0139
2017-18 11746.16 96776.76 0.1213
Source: Secondary data

CHART NO:3.10 NET PROFIT TO TOTAL ASSETS

Net profit to total assets

0.14
0.12
0.1
0.08
0.06
Ratio

0.04
0.02
0
-0.02 2013-14 2014-15 2015-16 2016-17 2017-18
-0.04
Year

Interpretation:
Net profit to total asset is a measure of capital productivity indicating the returns on its gross
investments. The net profit to total assets show a negative figure in the year 2015 and 16 because
of the lower net profit. But the ratio began to increase in the year 2017 and 18 which shows the
efficiency of the company to generate earnings.

Calculation method:
Net profit to total assets ratio= Net profit
Total assets

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 TABLE NO:3.11
DEBT EQUITY
Year Long Term Debts Equity Share Holders Ratio
Fund
2013-14 65188.03 61326.57 1.063
2014-15 5934.74 57211.71 0.1037
2015-16 7980.85 55801.15 1.43
2016-17 12374.30 56852.51 0.2177
2017-18 14331.70 67387.64 0.2127
Source: Secondary data

CHART NO:3.11 DEBT EQUITY RATIO

Debt equity ratio

1.6
1.4
1.2
1
Ratio

0.8
0.6
0.4
0.2
0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
Debt equity ratio reflects the ability of shareholder equity to cover all outstanding debts in the
event of a business downturn. A high debt to equity ratio shows that the company has a relatively
heavy debt load. In the year 2014 and 16 the debt equity ratio is 1.0 and 1.4 which means that
more assets are financed by debt that those financed by money of shareholders.

Calculation method:
Debt equity ratio= Long term debts
Equity shareholders fund

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 TABLE NO:3.12
DEBT TO TOTAL ASSETS
Year Total Debt Total Assets Ratio
2013-14 77675.17 82069.04 0.946461
2014-15 20244.22 77491.56 0.261244
2015-16 27312.44 83155.37 0.328451
2016-17 24603.46 81551.06 0.301694
2017-18 29204.76 96776.78 0.301774
Source: Secondary data

CHART NO:3.12 DEBT TO TOTAL ASSETS

Debt to total assets

1

0.8

0.6
Ratio

0.4

0.2

0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
The total debt to total assets ratio shows the degree to which a company has used debt to finance
its assets. A ratio greater than 1 shows that a considerable portion of the debt is funded by assets.
In other words, the company has more liabilities than assets. The debt to total assets ratio is high
in the year 2014 i.e. 94%. The company is able to maintain an adequate ratio of debt to total assets
as the ratio is less than 1.

Calculation method:

Debt to total assets= Total debts

Total assets

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 TABLE NO:3.13
FIXED ASSET TURN OVER
Year Net Sales Net Block of Fixed Ratio
Assets
2013-14 65219.73 40639.78 1.6171
2014-15 53801.11 44890.47 1.1984
2015-16 53079.77 44025.55 1.2056
2016-17 72704.13 44129.81 1.6475
2017-18 74058.36 45070.85 1.6431
Source: Secondary data

CHART NO:3.13 FIXED ASSET TURN OVER

Fixed asset turn over

1.8
1.6
1.4
1.2
1
Ratio

0.8
0.6
0.4
0.2
0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
Fixed asset turnover ratio calculates how efficiently a company is a producing sale with its
machines and equipment. A high turnover indicates that assets are being utilized efficiently and
large amount of sales are generated using a small amount of assets. The fixed asset turnover ratio
is comparatively good in whole the years.

Calculation method:
Fixed asset turnover = Net sales
Net block of fixed assets

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 TABLE NO:16
CAPITAL TURN OVER
Year Net Sales Total Capital Ratio
Employed
2013-14 65219.73 65188.03 1.000486
2014-15 53801.11 63146.45 0.852005
2015-16 53079.77 63782 0.832206
2016-17 72704.13 69226.81 1.050231
2017-18 74058.36 81769.34 0.905698
Source: Secondary data

CHART NO: CAPITAL TURN OVER

Capital turn over

1.2
1
0.8
Ratio

0.6
0.4
0.2
0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
Capital Turnover Ratio indicates the efficiency of the organization with which the capital
employed is being utilized. A high capital turnover ratio indicates the capability of the organization
to achieve maximum sales with minimum amount of capital employed. The capital turnover ratio
is equal to one in the year 2014 and 17 which shows the company’s operational efficiency. But it
doesn’t show a steady growth.

Calculation method:

Capital turnover ratio= Net sales

Total capital employed

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 TABLE NO:17
WORKING CAPITAL TURN OVER
Year Net Sales Working capital Ratio
2013-14 65219.73 24548.25 2.65679
2014-15 53801.11 18255.98 2.94704
2015-16 53079.77 19756.45 2.68670
2016-17 72704.13 25097 2.89692
2017-18 74058.36 36699.49 2.01796
Source: Secondary data

CHART NO: 15 WORKING CAPITAL TURNOVER

Working capital turn over

3.5
3
2.5
2
Ratio

1.5
1
0.5
0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
Working capital turnover is a ratio that measures how efficiently a company is using its working
capital to support a given level of sales. A high turnover ratio shows that management is being
very efficient in using a company’s short-term assets and liabilities for supporting sales. The
working capital turnover ratio shows a steady growth during the period of the study which shows
that the company is using its working capital to support a given level of sales.

Calculation method:
Working capital turnover ratio= Net sales
Working capital

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 TABLE NO:18
INTEREST COVERAGE RATIO
Year EBIT Annual interest Ratio
2013-14 2641.18 78.61 33.59852
2014-15 (2478.34) 72.41 -34.2265
2015-16 (1244.71) 2404.46 -0.51767
2016-17 2882.12 2150.00 1.340521
2017-18 18110.85 334.89 54.08
Source: Secondary data

CHART NO:16 INTEREST COVERAGE RATIO

Interest coverage ratio

60

40

20
Ratio

0
2013-14 2014-15 2015-16 2016-17 2017-18
-20

-40
Year

Interpretation:
The interest coverage ratio is a financial ratio that measures a company’s ability to make interest
payments on its debt in a timely manner. In the year 2015 and 16 the interest coverage ratio shows
a negative figure which means that the company isn’t make enough money to pay its interest
payments. In the year 2017 the ratio moves up and in 2018 it shows a huge increase which means
that the company is making enough money to pay its interest obligations with some extra earnings
left over to make the principle payments.

Calculation method:
Interest coverage ratio= Earnings before interest and tax
Annual interest

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 TABLE NO:19
CURRENT RATIO
Year Current Assets Current Liability Ratio
2013-14 41429.26 16881.01 2.4541
2014-15 32601.09 14636.62 2.2726
2015-16 39129.82 19373.37 2.0197
2016-17 37421.25 12324.25 3.0363
2017-18 51706.91 15007.42 3.4454
Source: Secondary data

CHART NO:17 CURRENT RATIO

Current ratio
4
3.5
3
2.5
Ratio

2
1.5
1
0.5
0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
The current ratio is an indication of a firm's liquidity. Commonly acceptable current ratio is 2. If
the current ratio computation results in an amount greater than 1, it means that the company has
adequate current assets to settle its current liabilities. The current ratio shows a figure greater than
2, so the company was able to settle its current liabilities by using its current assets.

Calculation method:

Current ratio= Current ratio

Current liability

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 TABLE NO:20
QUICK RATIO
Year Current Asset - Current Liability Ratio
Inventories
2013-14 22023.61 16881.01 1.3046
2014-15 10347.63 14345.11 0.7213
2015-16 9986.45 19373.37 0.5154
2016-17 18995.07 12324.25 1.5412
2017-18 30243.91 15007.42 2.0152
Source: Secondary data

CHART NO:18 QUICK RATIO

Quick ratio
2.5

1.5
Ratio

0.5

0
2013-14 2014-15 2015-16 2016-17 2017-18
Year

Interpretation:
Quick ratio is a measure of a company's ability to settle its current liabilities on a very short notice.
A quick ratio that is greater than 1 means that the company has enough quick assets to pay for its
current liabilities. Quick ratio shows a comparatively low rate in the year 2015 and 16 which means
that the company doesn’t have enough quick assets to pay of its current liabilities. But in 2017 and
18 the quick ratio began to increase gradually.

Calculation method:

Quick ratio= Current assets

Current liability

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FINDINGS

❖ The firm is able to meet its short-term obligations.

❖ The firm was able to keep much profit as retained earnings which are being utilized for the
future use like expansion purpose.
❖ During the period of the study, the profit shows a decreasing tendency.
❖ The market value of equity to total liabilities are moving down which indicates that the
profitability of the firm has not been financed by its debts.
❖ The sales generating capacity of the company’s assets show an increasing tendency.
❖ During the period of study, the company was in grey zone which means that the company
had a healthy financial position.
❖ During the period of the study the gross profit shows a steady growth which shows
management and investors how efficiently the business can produce and sell products and
how profitable its products are.
❖ The company was able to sell enough to cover its fixed cost as it was able to generate profit.
❖ The net profit to net worth shows a low rate which indicates that investing in the company
is of low risky in nature.
❖ The company was able to generate profit during the end of the period of study.
❖ The company has lower debt to equity ratio which implies that the company was financially
stable.
❖ The debt to total assets ratio shows a figure less than one which means that the company
was able to maintain an adequate amount of debts and assets.
❖ The company was able to utilize its assets efficiently as the fixed asset turnover ratio is
comparatively good during the period of the study.
❖ The company has an average operational efficiency which indicates the capability of the
organization to achieve maximum sales with minimum amount of capital employed.
❖ The working capital turnover ratio shows a steady growth during the period of the study
which shows that the company is using its working capital to support a given level of sales.
❖ The interest coverage ratio shows huge increase in the year 2018 which indicates that the
company is making more than enough money to pay its interest obligations with some extra
earnings left over to make the principle payment.

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 ❖ The company was able to settle its current liabilities by using its current assets as the current
ratio shows a figure greater than 2.
❖ The company has enough quick to pay for its current liabilities.
❖ From the study it is found that the company is in non -failed category.

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SUGGESTIONS
❖ Improve managements ability to control and anticipate negative economic effects on the
firm’s profitability and future prosperity.
❖ The company can sell its assets and then lease them back, this will induce a cash flow that
can be used to pay off some debts.
❖ For the effective use of fixed assets, the company should increase the working capital base
from long term fund.
❖ The company should take necessary steps to reduce the cost of goods sold without changing
the selling price. A decrease in cost of goods sold will result in increase in gross profit.
❖ The company should analyze how the assets are used and ways to improve the productivity
of each asset.

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CONCLUSIONS
The project entitled “A Study on The Financial Distress and Bankruptcy of Kerala Minerals and
Metals Limited (KMML) was conducted at Kerala Minerals and Metals ltd (a Government of
Kerala undertaking) located at Chavara, Kollam.

Here, the analysis conducted through a systematic study of the financial statements i.e. Balance
sheet and profit and loss account published by the company over the last five years. The study was
conducted by taking the required items of those statements.

The study reveals that the closure of the firm in the near future does not arise, managing its
receivables, maintain a healthy liquidity position, reducing high dependency on short term debts,
reducing the overall cost, use of long term funds etc. are the trust areas which the company needs
to focus so that it increase the shareholders return which is relatively low. During the period of the
study the company was in grey zone which reveals that the company was in non- failed category.

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5.1 BIBLOIGRAPHY
➢ Cost and management accounting (9th edition)
Author- Dr. S.N. Maheshwari
➢ Cost accounting (13th revised edition)
Author- Jain Narang

WEBSITES:

➢ https://accountingexplained.com/financial/ratios/debt-ratio
➢ https://en.wikipedia.org/wiki/Kerala_Minerals_and_Metals
➢ https://www.investopedia.com/terms/f/fixed-asset-turnover.asp
➢ https://www.creditguru.com/index.php/bankruptcy-and-insolvency/altman-z score
➢ https://www.accountingverse.com/managerial-accounting/fs-analysis/financial-
ratios.html

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5.2 ANNEXTURE
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH 2014

Particulars Note No: 2013-14

(Rs: in lakhs)
INCOME
Revenue from operations
Gross sales 19 72547.34
Less: Excise duty 7327.61
Net sales 65219.73
Other operating income 20 12.78
Other income 21 1093.02
Total Revenue 66325.53
EXPENSES
Cost of materials consumed 22 9443.75
Changes in inventories of finished goods 23 4499.04
Employee benefit expenses 24 14757.69
Finance cost 25 120.29
Depreciation and amortization expense 10.1 1925.81
Other expenses 26 33016.38
Total Expenses 63762.96
Profit before exceptional and extra ordinary items 2562.57
Prior period income/(expenses)-(net) 26.6 78.61
Exceptional items
Provision for diminution in the value of land 28.5 0
Profit before extraordinary items and tax 2641.18
Extraordinary items
Profit before tax 2641.18
Tax expenses
1) Current taxation 1150
2) Deferred tax (Net) 4 80.19
3) Excess/(short) provision for taxation in earlier years 26.7 0
Net profit for the year 1410.99
Earnings per share (basic and diluted) (in rupees) 26.8 45.61
Significant accounting policy 1

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 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH 2015
Particulars Note No: 2014-15
Rs. In lakhs
INCOME
Revenue from operations
Gross sales 19 60091.20
Less: Excise duty 6290.09
Net sales 53801.11
Other operating income 20 37.51
Other income 21 934.27
Total Revenue 54772.89
EXPENSES
Cost of materials consumed 22 9244.25
Changes in inventories of finished goods 23 (1561.78)
Employee benefit expenses 24 15827.46
Finance cost 25 318.70
Depreciation and amortization expense 10.1 1455.62
Other expenses 26 30689.38
Total Expenses 55973.63
Profit before exceptional and extra ordinary items (1200.73)
Prior period income/(expenses)-(net) 26.6 72.41
Exceptional items 32.1 950.89
Provision for diminution in the value of land 28.5 254.31
Profit before extraordinary items and tax (2478.34)
Extraordinary items
Profit before tax
Tax expenses
4) Current taxation 0.00
5) Deferred tax (Net) 4 (11.28)
6) Excess/(short) provision for taxation in earlier 26.7
years
Net profit for the year (2489.62)
Earnings per share (basic and diluted) (in rupees) 26.8 (80.49)
Significant accounting policy 1

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 PROFIT AND LOSS ACCOUNT FOR THE YAR ENDED 31ST MARCH 2016
Particulars Note No: 2015-16
Rs. In lakhs
Continuing operations
A. Income
Revenue from operations 25 53079.77
Other Income 26 446.68
Total Income 53526.45
B. Expenses
Cost of materials consumed 27 11743.28
Changes in inventories of W-I- P, Stock in trade and finished 28 (7770.68)
goods
Excise duty expenses 5375.42
Employee benefit expenses 29 17514.70
Depreciation and amortization expenses 30 1255.60
Other expenses 31 23851.55
Finance cost 32 396.83
Total Expenses 52366.70
C. Profit before exceptional items and tax 1159.75
Exceptional items 33 (2404.46)
D. Profit and loss before tax from continuing (1244.71)
operations
Income tax expenses 34
Current tax -
Deferred tax credit /charge 127.13
Profit or loss for the year 1371.84
E. Other comprehensive income
Items that will not be reclassified to profit and loss (59.21)
remeasurement of post -employment benefit obligations
Income tax relating to these items 20.49
Other comprehensive income for the year, net of tax (38.72)
Total comprehensive income /loss for the year (1410.56)
Earnings per share 35
Basic earnings per share (in Rs.) (44.35)
Diluted earnings per share (44.35)

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PROFIT AND LOSS ACCONT FOR THE YEAR ENDED MARCH 2017
Particulars Note No: 2016-17
Rs. In lakhs
Continuing operations
A. Income
Revenue from operations 25 72704.13
Other Income 26 1083.49
Total Income 73787.62
B. Expenses
Cost of materials consumed 27 10373.12
Changes in inventories of W-I- P, Stock in trade and finished 28 8441.65
goods
Excise duty expenses 7312.42
Employee benefit expenses 29 18155.29
Depreciation and amortization expenses 30 1059.71
Other expenses 31 22193.33
Finance cost 32 73.37
Total Expenses 67608.89
C. Profit before exceptional items and tax 6178.73
Exceptional items 33 (3296.61)
D. Profit and loss before tax from continuing 2882.12
operations
Income tax expenses 34
Current tax (2150.00)
Deferred tax credit /charge 402.82
Profit or loss for the year 1134.94
E. Other comprehensive income
Items that will not be reclassified to profit and loss (127.82)
remeasurement of post -employment benefit obligations
Income tax relating to these items 44.24
Other comprehensive income for the year, net of tax (83.58)
Total comprehensive income /loss for the year (1051.36)
Earnings per share 35
Basic earnings per share (in Rs.) (36.69)
Diluted earnings per share (36.69)

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PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 2018
Particulars Note No: 2017-18
Rs. In lakhs
Continuing operations
A. Income
Revenue from operations 25 74058.36
Other Income 26 1998.38
Total Income 76056.74
B. Expenses
Cost of materials consumed 27 11270.35
Changes in inventories of W-I- P, Stock in trade and finished 28 (3537.28)
goods
Excise duty expenses 1791.84
Employee benefit expenses 29 19363.32
Depreciation and amortization expenses 30 1209.85
Other expenses 31 27433.00
Finance cost 32 79.92
Total Expenses 57611.00
C. Profit before exceptional items and tax 18445.74
Exceptional items 33 (334.89)
D. Profit and loss before tax from continuing 18110.85
operations
Income tax expenses 34
Current tax (7142.65)
Deferred tax credit /charge 777.96
Profit or loss for the year 11746.16
E. Other comprehensive income
Items that will not be reclassified to profit and loss (1853.12)
remeasurement of post -employment benefit obligations
Income tax relating to these items 642.12
Other comprehensive income for the year, net of tax (1211.00)
Total comprehensive income /loss for the year 10535.16
Earnings per share 35
Basic earnings per share (in Rs.) 379.77
Diluted earnings per share 379.77

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BALANCESHEET AS AT 31ST MARCH 2014
Particulars Note No: As at 31st
march 2014(Rs.
In lakhs)
EQUITY AND LIABILITIES
Shareholders fund
Share capital 2 3093.27
Reserves and surplus 3 58233.30
Non- current liabilities
Deferred tax liability(net) 4 3054.69
Long term provisions 5 806.77
Current liabilities
Short term borrowings 6 1546.68
Trade payables 7 7093.95
Other current liabilities 8 6755.32
Short term provisions 9 1485.06
TOTAL 82069.04
ASSETS
Non- current assets
Fixed assets
a) Tangible assets 10.1 25428.08
b) Tangible assets- titanium sponge plant 10.11 12900.39
Less: Fund received from VSSC
Net block 0.00
Capital work in progress 10.111 4279.04
Non- current investment 11 3518.10
Long term loans and advances 12 7414.56
CURRENT ASSETS
Inventories 13 19405.65
Trade receivables 14 10434.64
Cash and cash equivalents 15 4393.87
Short term loans and advances 16 6261.97

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 Other current assets 17 933.13
Miscellaneous expenditure 18
Preliminary and pre- operative expenses 322.87
Less: Fund received from VSSC 322.87
TOTAL 82069.04

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BALANCESHEET AS AT 31ST MARCH 2015
Particulars Note No: As at 31st march
2015
ASSETS
Non- current assets
Property, Plant and equipment 4 26320.41
Intangible assets 4 -
Capital work in progress 5 837.44
Financial assets
Investment 6 531.49
Loans 7 5774.09
Other non- current assets financial assets 8 5261.09
Other non- current assets 9 6165.95
TOTAL NON- CURRENT ASSETS 44890.47
Current assets
Inventories 10 22253.46
Financial assets
Trade receivable 11 7087.53
Cash and cash equivalents 12 35.63
Bank balances other than above 13 351.26
Other current financial assets 14 -
Other current assets 15 2873.21
TOTAL CURRENT ASSETS 32601.09
TOTAL ASSETS 77491.56
EQUITY AND LIABILITIES
Equity
Equity share capital 16 3093.27
Other equity 17 54118.44
TOTAL EQUITY 57211.71
LIABILITIES
Non- current liabilities
Financial liabilities
Provisions 18 4025.58
Deferred tax liabilities(net) 19 1909.16
TOTAL NON- CURRENT LIABILITIES 5934.74

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 Current liabilities
Financial liabilities
Borrowings 20 2434.23
Trade payables 21 7012.65
Other financial liabilities 22 1062.79
Short term provisions 23 596.86
Other current liabilities 24 3238.58
TOTAL CURRENT LIABILITIES 14345.11
TOTAL LIABILITIES 20279.85
TOTAL EQUITY AND LIABILITIES 77491.56

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BALANCE SHEET AS AT 31ST MARCH 2016
Particulars Note No: As at 31st march
2016
ASSETS
Non- current assets
Property, Plant and equipment 4 25472.67
Intangible assets 4 -
Capital work in progress 5 743.70
Financial assets
Investment 6 524.36
Loans 7 5726.06
Other non- current assets financial assets 8 5152.50
Other non- current assets 9 6406.26
TOTAL NON- CURRENT ASSETS 44025.55
Current assets
Inventories 10 29143.37
Financial assets
Trade receivable 11 8287.97
Cash and cash equivalents 12 41.78
Bank balances other than above 13 24.52
Other current financial assets 14 -
Other current assets 15 1632.18
TOTAL CURRENT ASSETS 39129.82
TOTAL ASSETS 83155.37
EQUITY AND LIABILITIES
Equity
Equity share capital 16 3093.27
Other equity 17 52707.88
TOTAL EQUITY 55801.15
LIABILITIES
Non- current liabilities
Financial liabilities
Provisions 18 6039.34
Deferred tax liabilities(net) 19 1941.51
TOTAL NON- CURRENT LIABILITIES 7980.85

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 Current liabilities
Financial liabilities
Borrowings 20 3964.13
Trade payables 21 7968.48
Other financial liabilities 22 1136.82
Short term provisions 23 408.47
Other current liabilities 24 5895.47
TOTAL CURRENT LIABILITIES 19373.37
TOTAL LIABILITIES 27354.22
TOTAL EQUITY AND LIABILITIES 83155.37

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BALANCE SHEET AS AT 31ST MARCH 2017
Particulars Note No: As at 31st march
2017
ASSETS
Non- current assets
Property, Plant and equipment 4 25994.39
Intangible assets 4 4.16
Capital work in progress 5 371.17
Financial assets
Investment 6 522.87
Loans 7 5685.95
Other non- current assets financial assets 8 4638.20
Other non- current assets 9 6913.07
TOTAL NON- CURRENT ASSETS 44129.81
Current assets
Inventories 10 18426.18
Financial assets
Trade receivable 11 9951.65
Cash and cash equivalents 12 95.09
Bank balances other than above 13 6762.85
Other current financial assets 14 -
Other current assets 15 2185.48
TOTAL CURRENT ASSETS 37421.25
TOTAL ASSETS 81551.06
EQUITY AND LIABILITIES
Equity
Equity share capital 16 3093.27
Other equity 17 53759.24
TOTAL EQUITY 56852.51
LIABILITIES
Non- current liabilities
Financial liabilities
Provisions 18 10805.56
Deferred tax liabilities(net) 19 1568.74
TOTAL NON- CURRENT LIABILITIES 12374.30

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 Current liabilities
Financial liabilities
Borrowings 20 204.13
Trade payables 21 5399.64
Other financial liabilities 22 1122.15
Short term provisions 23 576.42
Other current liabilities 24 5021.91
TOTAL CURRENT LIABILITIES 12324.25
TOTAL LIABILITIES 24698.55
TOTAL EQUITY AND LIABILITIES 81551.06

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BALANCESHEET AS AT 31ST MARCH 2018
Particulars Note No: As at 31st march
2018(Rs. In lakhs)
ASSETS
Non- current assets
Property, Plant and equipment 4 26156.93
Intangible assets 4 3.95
Capital work in progress 5 1034.67
Financial assets
Investment 6 520.25
Loans 7 5749.79
Other non- current assets financial assets 8 5171.79
Other non- current assets 9 6433.47
TOTAL NON- CURRENT ASSETS 45070.85
Current assets
Inventories 10 21463.00
Financial assets
Trade receivable 11 7790.46
Cash and cash equivalents 12 134.36
Bank balances other than above 13 18932.65
Other current financial assets 14 570.70
Other current assets 15 2815.74
TOTAL CURRENT ASSETS 51706.91
TOTAL ASSETS 96776.76
EQUITY AND LIABILITIES
Equity
Equity share capital 16 3093.27
Other equity 17 64294.37
TOTAL EQUITY 67387.64
LIABILITIES
Non- current liabilities
Financial liabilities
Provisions 18 1367.83
Deferred tax liabilities(net) 19 707.87
TOTAL NON- CURRENT LIABILITIES 14331.70

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 Current liabilities
Financial liabilities
Borrowings 20 91.15
Trade payables 21 6258.41
Other financial liabilities 22 1263.68
Short term provisions 23 2185.34
Other current liabilities 24 5258.84
TOTAL CURRENT LIABILITIES 15007.42
TOTAL LIABILITIES 29389.12
TOTAL EQUITY AND LIABILITIES 96776.76

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