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INDEX

Serial number Particulars Page number

1

Introduction

3-6

2

Company profile

7-30

3

Evaluating Financial position by using ratio analysis

31-41

4

Financial ratio analysis the tool kit

42-45

5

Types of ratios

46-68

6

Application of ratio

69-74

7

Conclusion

75-78

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A PROJECT REPORT ON

RATIO ANALYSIS

FOR RAJASTHAN SPINNING AND WEAVING MILLS Ltd. (MAYUR SUITINGS)

BY

TARUN TRIVEDI
In the partial fulfillment of

The requirement of Masters of Business Administration

AT VISHWAKARMA INSTITUTE OF MANAGEMENT (VIM) PUNE *2004 2006*

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ACKNOWLEDGEMENT
It extends my heart-felt gratitude to Mr. Sharad Joshi [Director] and Prof. Mahesh Halale of VIM form their timely assistance.

I would also like to thank Mr.N.K. Srivastav & all staff of RAJASTHAN SPINNING AND WEAVING MILLS Ltd.(MAYUR) .

I would also like to thank Mr. Yuvraj Lahoti and Mahesh Halale [project guide] & Keskar sir [placement coordinator] for their great assistance.

I will always be obliged to them.

TARUN TRIVEDI

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INTRODUCTION
In the current economic situation it is very difficult to survive and only financially sound mills can survive. There are only two ways to survive in the market, one is low margin, high volume and the second one is innovation i.e. launching of new products in the market and for that we have to give continuous attention on research and development

In the last 3-4 months there is a good demand in the export markets and almost all the spinning units are completely booked for export of yarns. It has reduced spinning plants dependence on local markets, hence weavers who were used to take handsome amount for job work was forced to decrease the textile industry is as old as human civilization. Textiles are one of the basic needs of human. There may be ups and downs in the economy, but textile will remain in existence; because it is one of the basic needs. In past few years, it has been said that there is a slump in the textile industry and many textile units were closed down during this phase. All these units, which are mainly sick units and was not due to sluggish market conditions, but poor management, because if we see per capita consumption not only in India, but also in the world, is increased substantially in the past few years. It shows that there is continuously increasing trend in the textile industry. The overall production of fiber, yarn, fabric, garments etc is continuously increasing.

The fashion trend is now changing from fabric to garment and in India also we can see that the major person are wearing the readymade shirting, because trend of fashion are changing to readymade garment. Yarn and the fabric, which is the ultimate product of textile, is the only raw material for manufacture of garment, furnishing fabric of any other use etc consumption of yarn/ fabric will remain in existence.Their job charges; but spinning plants are getting increased rates from the market.

Textile industry s growth is significant looking into the growth of population and growth of economy. Indian economy, which is growing up @ 5% annually and India is the second

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largest country by population in the world have a very good market for textile products in long run. Per orm or Per sh Thus. past success must be continuously questioned as the rules of the game in business environment change. because custom duty has been reduced for textile products and therefore one must have good quality and lower prices . In phased manner from 2002 As per the WTO. Similarly Indian textile market is also opened for other countries. global markets are opening up. realizing the need of the hour various groups and individuals shifted their focus of business rather than continuing in the same manner. We have to accept the fact that no organization is too large or too powerful to be unsinkable . In the world of today change is a norm rather than the exception and companies need more than just incremental change to survive they need revolutionary changes to redefine their business and markets. The future of textile industry in India will be amazing if we continuously improve our quality and give proper attention towards research and development and we can take lead of the world textile market. In the globalize market scenario one can get good price and volume provided if they delivery of quality products are well in time. Change and adaptation is must for growth and prosperity.. 5 . the textile industry had faced very tuff period up to June 02 and thereafter the margin slightly improved in last one year. The slowdown in the market itself has resulted in reduced production volume.the removal of quota after 2004 in US shall results in to plus point for Indian textile industry. The business realities have grown harsher everyday. The fierce competition in the market only grows everyday-therefore the market reality dictate: Perfform or Periish. One amongst them was Shri Laxmi Niwas Jhunjhunwala the founder of LNJ Bhilwara Group. In a rapidly changing business environment companies which do not change disappear without a trace.

2 Group s salient Features At the age of 19.1 About the Group The LNJ Bhilwara Group is committed to satisfy its customers. efficiency. Power Generattiion. partners. Diversifying into iron and steel. The graphite exports constitute about 80% of total sales volume of graphite division. Infformattiion Technollogy and IT Enablled E ec rodes Power Genera on Sponge Iron In orma on Techno ogy and IT Enab ed Serviices. Stakeholders. Headquartered at Noida (near New Delhi).1. suppliers alike. the fact that export earnings comprise as much as 46% of the group s turnover of Rs.. scrap and manganese and iron-ore. by adopting world-class practices in all facets of its businesses.. having business interests in Texttiilles.. To achieve its objectives. innovation and work practices. The RS.1727 crore LNJ Bhilwara Group is a diverse. the next few years saw 3rd largest iron exporter. multi-location and multi-product conglomerate established in1961. customer satisfaction. 1. Graphiitte Tex es Graph e Ellecttrodes.. 6 . 1682 crores during 2001-02 underlines its high quality standards. empowering and involving of people at all levels.000 people Serv ces and has 18 production units spread across the country. the Group employees 20. The Group s goal of achieving Global Standards of productivity. quality. the Group has leveraged its collective resources and capabilities of product designing. Sponge Iron. Shri LNJ started business by setting up a jute export company and within three years it had become one of the India s top ten concerns. creativity.. have together guided its conduct and action both with internal and external interfaces.

. Maral has received the Rajiv Gandhi National Quality Award for 1998 HEG has won CAPEXIL. Lycra. HEG Oil Division has won the International Safety Award for being amongst the three safest operators in the world from International association of Drilling Contractors. 1. for 9 consecutive years. Seven Group Companies has been awarded ISO 9001:2000 certification for their exemplary quality services. The Group has also ventured into international quality Speciialliized Auttomattiic ffabriics and Spec a zed Au oma c abr cs currently supplying to the major automobile companies in India.A. Highest Export Award for polyester/viscose yarn exports.The Group manufactures a complete range of yarns.. La Ittalliia Trousers Mayur Su ngs BSL Su ng La I a a Trousers And Shiirtts and Buddy Daviis Leisurewear s are well respected by the customers. the highest export award for Graphite Electrodes. fabrics. U. HEG-Rishabhdev 7 . Bhilwara Spinners and Bhilwara Processors have also been awarded this certification. the group has come to be identified with quality and world-class technologies. and winner of TEXPROCIL silver trophy in the 100% EOU/EPZ category. for 13 consecutive years. The Group s plants are all state-of-the-art and having the latest technology from the world leaders.3 Pride & Glory of group The group is India s largest producer and exporter of polyester/viscose yarns. RSWM has won SRTEPC. Raj Spin has bagged Rajasthan s prestigious export excellence award for the year 1994-95. RSWM and Maral are India s first composite textile and knitted units to be ISO 9001:2000 certified. The group has been servicing world-class customers and leading several global brands for there knitted garments. And Sh r s and Buddy Dav s In its four-decade long existence. BSL Suiittiing .S. the group has also launched new range of fabrics: flameretardant. Mayur Suiittiings . Maral is fully integrated 100% EOU cotton knitwear unit. HEG. The domestic brands. Polynosic and tencel. In the recent past. knitted fabrics and knitwear s. BSL. HEG has the largest Graphite Electrodes manufacturing plant in South Asia. HEG-Graphite Division bagged the National Export Award for 1997-98.

Su ngs The company set up another spinning unit at Banswara in the year 1989-90. The company has also undertaken various expansion and modernization programs in the above plants time to time and presently the plant and machinery are of state of the art and technology and modernized.. 8 .bagged the National export Award. and shirting s and dress materials. The company had further established weaving facility at Kharigram in the year 1982 in the name of Mayur Mayur Suiittiings . RSWM has been accorded Golden Trading house status. With the objective of manufacturing export quality Grey yarn and started export of PV yarn in a big way. The activities of the company now comprise manufacturing of synthetic yarn. RSWM is one of the largest textile units in the state of Rajasthan and emerged as one of the big players in the textile industry in the country. The company has set up its first plant at Bhilwara and subsequently set up another textile plant at Kharigram (Bhilwara) in 1973. The original Bhilwara mill was later spun off as independent company in the name of Bhilwara Spinners Ltd. The company has also set up a cotton melange yarn project at Bhilwara.4 Company Profile Rajasthan Spinning & Weaving Mills Ltd. 1. Maral and HEG have been accorded Golden Trading House status. cotton mélange yarn. The company is also having ISO 9001:2000 certifications for all its units. Bhilwara Spinners has been accorded Export House Status. Jhunjhunwala Chairman Emeritus. (RSWM) incorporated in 1961 is the Flagship Company of LNJ Bhilwara Group headed by Shri L. which started commercial production in 1994.N. BSL received the National Certificate of Merit for an outstanding export performance. suiting.

d). Bhilwara. P. Rajasthan.O. Rishabhdev 313802 Distt. Gulabpura-311021 Distt. Bhilwara-311001 Rajasthan. Udaipur.O. P. Kharigram. c). which are as follows: a). Mandpam. b). Lodha. And the completion of acquisition formalities this will have four units.Work/Unit Location: The company has four work locations. 9 . Banswara-327001 Rajasthan. Rajasthan In addition to above company are also in the process of accumulating of the Rishabhdev textile mills belonging to HEG ltd.

) KEY EXECUTIVES Corporate Office B. Laddha.Gen. C.P. Vice President (Finance) Shri S.N. Joint Managing Director Shri A. Mehta.Garde.Srivastav.Laddha.). DP&IR.Badhwar (Retd. Vice President (Corporate Finance) Shri Umesh Sharma. Director Shri S.Mangal. Vice Chairman & Managing Director B. Sr.A.P. MSc. Director Shri J. Chairman Shri Shekhar Agarwal..Jhunjhunwala. Advisor Shri R. President (Corporate Textiles) Shri Vijay Bakshi. Chairman Emeritus Shri Ravi Jhunjhunwala.Dugar.Com.E.Puri.S. B.S.C.V. Director Shri A.Tech (Chicago) (M.K.A. Chief Executive (Grey Yarn Business) 10 .K.C.A.1.E. Executive Director Shri Kamal Gupta.R. Ph. Thakur. Shri D. DPM Shri J. Vice President (Development) Shri V. Shri Riju Jhunjhunwala. Srivastava. Churiwal. P. Vice President (Technical) Shri V.). PGDBA F. Chief Executive (Dyed Yarn Business) Shri Prakash Maheshwari. Vice President (Corporate HRD) Shri Y.K. Director (Nominee LIC) Shri Ritesh Kumar. Chief Executive (Fabrics & Garments) Shri P.(MET).S. Vice President (Fabric Domestic) Plants C.D.C. Executive Director Maj. F. Bagri.5 Management QUALIFICATION BOARD OF DIRECTORS Shri L. Director (Nominee ICICI Bank Ltd.

Banswara Shri Sanjay Sharma. Syt 11 .N.Gupta. Kharigram Shri V. Employees welfare with infrastructure having good houses for staff and officers along with basic amenities is provided to develop a sense of belonging and also to create a committed work force for the overall development of industry and general area. Vice President. RSWM Ltd. Units had been the unique flag bearer in this direction. ICWA C.C. has Eco friendly perceptions. Kharigram Shri V.6 Socio Economic Development The vision of the group pioneer. apart from the Industrial Growth of the various units.B. President. Vice President. Kharigram Shri S.A Bcom. Banswara Shri M. Vice President (HRD).L.Maloo.Kacholia. Banswara Bcom. Vice President. Khendelwal. B Arora.Jhunjhunuwala. Vice President.Garg. Kharigram Shri R.Shri S. Mumbai Shri R. Mandpam Shri Rajiv Gupta Chief Operating Officer.K. Vice President Corp.A 1. the vision was to ensure a steady economic and social growth of the people around here.N. M.K. Vice President. The management of the Rajspin Ltd. Finance Kharigram Shri Atul Rastogi. Ever since it s inception. is to ensure that the society in general and the masses in the vicinity of the particular industry also share the economic prosperity of the concerned industry. Needless to mention the economic development and the name of Bhilwara to reckon with in the industrial maps of India/abroad had been chastened by the unit at Gulabpura. President.

For the society in large. an ambulance service has been pressed into service for the accident victims partly as a trauma service also in the vicinity of the unit. is contributing for the social and economic developments. The company is also contributing to other charitable institutions working in the area of medical help. Besides above. for the National/ State calamities with full involvement of the employees as well as by the units. public welfare. 12 . RSWM is providing employment to 6000 personnel s and contributing to National and state exchequers of Rs. RSWM Ltd. 60 crores. The Rajspin Shramic Kalyan Kosh also caters to the in house welfare of the workers by providing over and above the recruitment to the deserving members but by a small contribution by the workers the Kosh thus created helps for the following: Sickness benefit Talent scholarship to the deserving wards of the workers Help on accidental death On the marriage of the wards of workers Medical camps / check up / eye camps and provision of employment s to widows etc are also done by the Rajspin from time to time.LNJ was given the first honorarium as the Bhilwara Ratan to commemorate his contribution for the developments of the industries in and around Bhilwara. units employees offered services and clothing s to the needy. RSWM Limited contributions. Cases of donations for Earthquake victims / Prime Minister relief funds can be cited where apart from financial contributions. The different units have dispensary / homeopathic running facilities / doctor on regular basis are carrying to cater to the various medical requirements of the workforce. sports development as well as rural developments.

leaves no stone unturned to ensure economic and social upliftment of the area. Motto of the unit is to provide social upliftment of the down trodden and let them have the taste of the prosperity of the industrial growth by employment. Medical streams. fuelled by the vision of the Group Chairman (Emirates). The lush green environment in 30 years back deserted area speaks volumes about the vision and the attitude of the management.The Vivekanand Kendra School. Electrical and other leading branches. A number of students are selected in the prestigious institutes. 13 . Hurda being run by the RSWM Limited has acquired a State / National prominence and has been producing talented students in the merit of Delhi Board. state Engineering Institutes in Computer. shelter and pollution free water and air. Indian Institute of Technology. the management of the Rajspin Ltd. The school is owned by Ramarpan Education Society. by catering to their basic needs of food. In nutshell. The company as well as the group has taken initiation for executing MLVT (Textile Institute) at Bhilwara and is running perfectly well for providing professionals as well as upgrading of the knowledge. New Delhi and funded by RSWM Limited.

Continuous in house Research and Development cell and also Group R&D centre. Trend setter in the industry for new Plant/Machinery and products. 14 .. Weakness:: Weakness Competition with the local process houses/independent loom units in piece dyed suiting qualities in view of their lower administering and other costs Continuous product development will enable to compete with them.7 SWOT Analysis Sttrengtth:: S reng h RSWM is pioneer Co. Its fabric is marketed with the well-known brand name of MAYUR. of LNJ Bhilwara Group which is the largest exporter of polyester / viscose yarn. It s products known as quality product and bagged the premier in comparison of competitors product. Proportionate lower percentage in the export looking to the over all production although the exports increase compared to the last year. It has won SRTEPC. RSWM is not able compete with local Bhilwara market with the reference of trading channel. highest export award for polyester / viscose yarn exports in year 2001-02. RSWM accorded with certificate of IS/ISO 9001:2000 and weighted for quality commitment and consistence. MAYUR RSWM having high-speed looms for fabric production and more then 90% autocorners for yarn 100% Captive & Standby power generation. Textiles future better after opening of quotas. RSWM has been accorded Golden Trading House since 1998.1.

RSWM introducing the flame-retardant fabric. Threatt:: Threa Opening of the import and duty reduction. production. to assure the quality product to the customers and consumers. ISO 9001:: a ISO 9001 Quality Assurance in design. 1. It basically came into existence because the Europeans were the most Quality conscious class and demanded that the imports from the Third World Countries must have consistent quality. Entering into the highly demanding power sector promoted Malana Power and Allan Duhangen hydro electric power project. Increase trend of the readymade garment and fashion fabrics viz. the nerve was held down the production line and there came into existence the Quality Assurance Mode. installation and servicing. cotton fabric as against individually stitching change.Opporttuniitty:: Oppor un y RSWM has well-established marketing arrangement to sell its yarn all over India and worldwide.. So to lay the stress on the quality assurance i. 15 .e. RSWM marketed its fabric to dealer s network spread throughout the India. Export to USA. Having vision to penetrate in the readymade market RSWM capable to enter into the high profile contract furnishing and decorative fabric and other value added fabric.8 ISO Introduction: The ISO is an organization. a)). Introduced Lycra yarn and fabric in PV yarn. This model is stringent in the product design and after sales service and cannot deviate from the patterns. Competition with the textured yarn being lower production cost and high durability. development. and yarn and in the leading position. which takes care of standardization of various systems all over the world.

which assures that the producers can be lithe in making their designs. This model has an imbibed flexibility in it. c)).. (Mayur Suitings) is the first integrated mill which is the recipient of ISO 9001:2000 in Rajasthan. ISO 9003:: c ISO 9003 Quality Assurance in the final inspection and test. Nylon etc.9 Quality Policy We shall produce yarns and fabrics confirming to internationally acceptable quality standards with consistency. installation and servicing. to the full satisfaction of our customers. Viscose.b)). All the staff members and workers to attain high quality consciousness.. Impllementt IS// ISO 9001::2000:: Imp emen IS ISO 9001 2000 This is the commitment of the company to quality. Rajasthan Spinning & Weaving Mills Ltd. Fiber is the raw material for yarns. Upgrade:: Upgrade Technology and work practices to reach highest quality levels in the country and establish leadership. 1. 1. ISO 9002:: b ISO 9002 Quality Assurance in production. which convert the fiber into yarn. as per their needs. There are various types of fibers like Polyester.10 Insight into Departments Spinning Spinning is the process. productivity and improve their working skills. Acrylic. In order to achieve this we shall: Invollve:: Invo ve All our suppliers of fibers. The inspections so provided are at the elementary shop-floor level. These 16 . yarns and components to obtain incoming material of standard quality.

Spinning department produce only yarn. It gives dyed fiber. Acrylic is purchased from Pashupati (Muradabad). These are dyed by dye house.are purchased from various places like as viscose is purchased from Grasim Company which is in Nagda. Fibers are received in Grey form. Polyester is purchased from Reliance (Hazirapatal) Hndoroma (Nagpur). Yarn is produced by twisting the fibers in Co-axial way. It takes some steps that are as follows: Mixing Blender Blow Room Carding Draw Frame Simplex Frame Ring Frame Winding Packing 17 .

It exports 40% of production in various country. officer it is sent to the particular customer. Toyoda Loom (32). then yarn is prepared and matched with actual sample visually.Production capacity of spinning department is 35 tonnes per day. Keeping stock position of colours and chemicals. Sample preparation is done on breaker dyeing machine. Sulzer Loom (61) The steps are: - 18 . Weaving Department Weaving is the process. Approved by the sr. Its production capacity is 9000000 mtrs per month. After the sample is checked.Ruti C Loom (80). which convert yarn into fabric. the mixing production is sent to the development department here with the help of miniature spinning plant. Preparation of production slips. In this department mainly Polyester and Acrylic fibre is dyed. Three types of looms are available in this department. yarn is prepared and checked on computer. This department produces fabric according to design & development department. Computer performs following three functions in this department: Colour Matching. Dye House It is an integral part of the production department.

material.Warping Sizing Drawing Gaiting / Knotting Fabric Production Mending Folding / Roll Dispatch Desiigniing Des gn ng The most imperative of all the departments is the designing dept. weave and cloth are the things that fluctuate the production the most. The current colour. look. 19 . finish.

The lead bank for working capital is SBBJ and the other member banks are BOB. for that the market demand has to be considered. ICICI. At times these cards are sent to the customers outside India who places the orders for job production for the ultimate approval. EXIM BANK. Then the meeting is held with the marketing personnel who have placed the order. The loans taken from these banks are secured by the way of joint equitable mortgage of all the present and future immovable properties of the company and hypothecation of movable assets (except debt 20 .viscose. BOR.The production is market sensitive and so as to subsists in today s skyrocketing market one has to change according to the consumer sensitive market. The design once passed is experimental in the Blankets then out of these the cards are prepared. At times the designs are also inspired from the foreign magazines and when the job production for exports is undertaken then they also suggest the design and the weave of the fabric. The designer s survey the market and even the feedback from the marketing people is received. Though the company is a profit-making firm. Though the work of the designing dept is to innovate new designs to make the product not just saleable but to invoke in people the tempo to purchase the product. UTI. PNB. The main product attribute is poly. same is true over here also. Considering the market situation the production has to take a U-turn and they ultimately have to resurrect to the production of premium range and job production for RMG. UBI. the company is under debt of loan funds that are both of the kinds secured and TL+W/C. are the ones that have provided the long-term loans. the price is too low and basically focuses on lower market segment hence innovations are not all that frequent. The overall performance of the company during the year under review 2004-05 came with satisfactory repercussions (the details are already provided). and SBI. Finance The finance department is the pillar of any organization.

are: State Bank of Bikaner & Jaipur Bank of Baroda Punjab National Bank Union Bank of India Bank of Rajasthan EXIM BANK United Trust of India ICICI 21 . Minimum duration may be 30 days. The bankers of R. Bank Operations Bank operations form an important domain of the finance department.books). If the limit is saturated then the bill is sent for collection. (Demand Purchase): . first exclusive change by the way of hypothecation of all the equipment s acquired/to be acquired with finance out of the said loans in favour of these banks. against D.This is directly lodged through bank. The company then receives the payment.P. Finally a record known 90 days report is prepared. in this a bill is lodged in the bank and immediate payment is obtained. a) D.M.P.) b) D. Here the company receives payment only after the party has realized the order and has made payment to the Bank. Funds are needed to finance the working capital and other related purpose. First the party accepts the documents and on that basis the nest document is lodged (M.P. Suppose the bank has provided the company a limit of 5Cr.S. Ltd. In bank transactions there are two important documents.The decision of this document varies from 45 days to 180 days.A. (Document Against Acceptance): .D.W.

The banks analyse the requirements and sanction limits. RAJASTHAN SPINING & WEAVING MILLS LIMITED ALLOCATION & STYLE OF WORKING CAPITAL LIMIT FOR 2004-05 (w.f 13/13 with earlier limits) EXISTING PROPOSED With Stand by NATURE OF LIMIT ALLOCATION ALLOCATION limits 2003-04 2004-05 (A) FUND BASED LIMIT (l) ALLOCATION DOMESTIC LIMIT Cash Credit limit 1175 1100 1320 (Overdraft ag cheques) 100 100 120 WCDL/FCNRB/BILLS 5500 4400 5280 Total Domestic Limit 6675 5500 6600 EXPORT LIMIT Packing Limit/PCFC 5300 6000 7200 FBP/FBD 1525 2000 2400 Total Export Limit 6825 8000 9600 TOTAL FUND BASED 13500 STANDBY LIMITS WITH STANDBY LIMITS 13500 FB LIMITS EARLIER 13500 (B) NON FUND BASED LIMIT (ll) ALLOCATION & MAXIMUM RESPECTIVE BANKS Letter of Credit 2250 Bank Guarantee 1550 NFB AFTER 13/12 3800 NFB EARLIER 3800 (C)TOTAL EXPOSURE 3800 WITH STAND BY LIMITS 3800 EARLIER LIMITS FB & 3800 NFB 13500 2700 16200 13500 UTILISATION 2250 1550 3800 3800 17300 20000 17300 OF 2250 1550 3800 3800 3800 20000 17300 16200 2700 16200 13500 22 .e. After the CMA data is submitted. At present the bank limits of the company are as follows.State Bank of India IDBI The company submits a CMA (credit monitoring administration) data to the bank for assessment of its requirements by the bank. Once the limits are sanctioned the branch is authorized to operate and disperse the funds and all other facilities within the sanction.

AINTERCHANGEABLITY I from EPC to CC/WCDL 1765 Ll from CC/WCDL to EPC 200 lll Two-way between 600 EPC & FBP/FBD lV Maximum EPC 5900 V from BG to LC B. The bank charges their commission as prescribed under FEDAI rules (foreign exchange dealers association of India) the non letter or credit are also provided by the banks as per agreed and prescribed by the banks. Advance against Export 600 incentive WW/export limits 2000 1000 1000 7000 500 600 1200 600 2400 1200 1200 8400 600 720 1440 720 The legal documents as prescribed by the bank are to be executed. Other facilities like negotiations of bills for domestic suppliers are availed by way of bills discounting facilities with the bank. Stock hypothecation statement. 1.SUB LIMITS l. After execution of the documents the company is required to file charge with ROC (register of companies) after completing these formalities the funds for day-to-day requirements are drawn from the bank by way of operations in cash credit account and export packing credit account. To regulate the operations within sanction borrower is required to submit various statements namely. On this facility bank charges commission and interest for the period. Monthly operational data 23 . Likewise export bills are negotiated under foreign bills discounting facility. inland bills limit 600 ll. OD against Export bills 1200 in collection WW/FBD lll. 2. After board meeting a resolution for availment of the limits is passed.

ECB. The Government itself has developed the Industrial area. L. The company. Q. The company has also taken long-term loan from ICICI Bank & PNB for modernization and up gradation for a term of 5 years. Hence the Government provide rebates to carry out the business and in exports as well. personal injuries. (Quarterly information system) Form1. Jhunjhunwala set up the company under the purview of Company Act. Law / Audit Law:: Law Mr. 1923. Exciise:: Exc se 24 .3. NCD. Form 3. Form 2. The cases dealing with the workmen are held under the judicature of Workmen s Compensation Act.T. to execute in next financial year. arising out of employment and in the course of employment. accident.N. In the reference if term Loan Company is taking keenly interest in commercial paper. 1956. 1956. The case dealing with revenue and recovery are dealt in the Civil Procedure Court. These statements keep the bank informed of current activities of the unit and fix up the borrowing limits within overall sanction. although established under the licence capacity but is responsible and accountable under the installed capacity. If there is any breach of the act or there is any misconduct in the transportation then the cases so encountered fall under the jurisdiction of Company Act. Which is fully analyzed in this report Working Capital loans from bankers are secured by the way of hypothecation of stock-intrade stores (excluding machinery spares) and book-debts as well as second charge on fixed assets of the company. in fact the subvention is provided to the company.S. all falls under the jurisdiction of workmen s compensation act 1923. The cases of occupational disease. It extends upto 400 acres and has almost 173 rooms in the whole unit.

additional duty is 1. provides subsidies to sell the product.B.Excise is the tax on production that is charged by the Central Government. Audiitt:: Aud This department is to ensure that accounts are prepared according to specified principles. Thus the effective rate is 9. As the company is established in the Government promoted industrial area. The Central Government taxation changes every year.2%.2%. there is an additional excise duty which is 15% of basic duty. In RSWM they have 3 types of auditing: Statutory Auditing (once in year) ISO Auditing (twice in a year) Internal Auditing (everyday) Some other functions performed by this department are: Physiicall Veriiffiicattiion Phys ca Ver ca on Diesel stock / f. the govt. Thus the effective rate is 9.G.P.o.5%. checking of various civil construction works Civil wages & good work checking Sttores & Purchase S ores & Purchase L. The basic excise duty on yarn is 8%. On fabric the basic duty is 8%. stock Copper godown fabric stock Mandi godown fabric stock Tiime Offffiice T m e O ce Salary checking Daily attendance report checking Ciiviill Cv M. gas records checking 25 .

Then the comparative statements are prepared and negotiations are held and the bid with the least of the price. But the problem lies somewhere 26 . all the items are purchased here but the capital equipment s are not purchased until Executive Director or the Vice President permits to do so. the market has extensively declined for poly-viscose so to carve a niche in the market for a major producer of the poly-viscose is really a tough going. job. Marketing Domesttiic Domes c Looking to the present market situation when the market is under recession. The 60% of the procurement is directly through the proprietors and the rest 40% is through anywhere. So the unit is going for all types of production viz.Packing material consumption records checking Fabriic Fabr c Shrinkage statement checking Fabric weaving job work records checking Defective garments records checking Publicity material records checking Otthers O hers Statutory returns records Checking of gate passes at main gate Bill checking of various contractors Commerciiall//Sttores Commerc a S ores As and when the demand for any item is experimented. batch and mass production. better quality and good service is unanimously accepted. Except the raw material. the requisition is sent to the domestic head office and this office in turns delivers the order to the main company that in turn directly contacts the company and sends the material invoice.

they do job production for these selective companies. Madura. Vigyan Bhawan Mumbai . They are catering to all the leading brands. Although the head office is located in New Delhi. the company has promulgation plan. The hiring of SRK gave impetus and tempo to the product sale. polynosic and fabric for RMG. Mayur s advertising media are: Press media Television Films Posters Hoarding 27 . Earlier Shah Rukh Khan was associated with Mayur . The RMG customers for Mayur Fabric are Provogue. NSC Mumbai . which augmented up to 70-80% in 1992-93 because of the celebrity tag. All the meetings held with the agents and the wholesaler s fall under this section to invite their choices of preferences and market s current hot cake. MUL and Treviera. The RSWM has wide network of agents and wholesalers catering to the regions with extreme diversified tastes. They have also started manufacturing fire retardant fabric supplying it to Shriford. In order to retain itself in the market the company has started manufacturing polycotton. attached to it. They are catering to the premium segment of the society by indirect supply of tencel and polynosic.in the cyclical phase of the market as the impulsive purchases are taste bound rather. the marketing of the RSWM product under the banner of Mayur is solely done from the RSWM floors only. Many of the leading companies favour high prices for almost the same product range to skim the market like Grasim. Indian Airlines. Raymond s etc. Arvind and Mohan RMG Maral . which needs high precision stitching. tencel. As for the media-mix. which in fact imbibed by the readymade garment manufacturer.

K for manufacturing and marketing of Tencel blended yarn and fabrics in India and abroad. the company has its Central Exports Dept. Jordan. 28 . Madura Coats. RSWM is also following the same trend in order to establish leadership in global market. Japan. The company has also developed fabric from Lycra. Switzerland. Exporrtts Expo s To take care of Yarn Exports. Italy. South Africa. The company expects to increase the export turnover in next years. UK. Spain. Similarly it has also introduced Fire Retardant fabrics first time in India and having exclusive arrangement with Hoechest. Dubai. Marketing teams also frequently visit the foreign buyers to various Countries predominantly Italy. UK. Polynosic. and Orient Crafts etc. Indonesia. Syria. The Fabric exports are being controlled from plant. polynosic Fibers and polyester cotton yarn that has been well received in domestic as well as export market. Germany. RSWM major markets are European and Middle East countries.Electrical Sign Boards Booklets and Catalogues Gift Novelties Brochures & Folders Window display Interior display Fabric shows etc. at Mumbai. etc. Peru. Brazil. such as Arvind Garments. Egypt. The company has also pushed its products to readymade garment manufacturers. Tencel. Export marketing is generally looked after with the help of overseas agents. As the fashion trend across the world is shifting from polyester viscose to high value added product such as Tensile. and Lycra. Belgium. Company has exclusive arrangement with Tencel U.

Belgium. Malasiya. Australia.In order to sharpen our competitive edge enabling us to face the stiff competition in the quota free global economy they are also taking initiative to strengthen our export operations by establishing strategic alliances with overseas customers.K. Italy. design & marketing consultants. Morocco. salary. The exports of the Company are to countries like U. Netherlands. South Africa. The recruitment and selection of technical personnel and managers is made through placing advertisements in leading newspapers. Rajspin has got its own recruitment. age. Uruguay. This department has ARS (attendance record system). RSWM has also been able to make headway in the European and other markets.. Turkey. Personnel & Human Resource Department Personnel department has whole information about every employee. 29 . Canada. Spain. Portugal. Having obtained IS/ISO9001: 2000 certification. Colombia. Chile. In ERP RAMCO package is related to this deptt. Rajspin has a staff colony with around 110 quarters with all facilities. Oman. A person in the age group of 18-22 years is inducted and imparted training for various specialized fields. The Company has also developed a network of agents for the purpose of exports. Africa and all other Middle and South East countries. Switzerland. Germany. UAE. Employees are provided with HRA to facilitate their requirement. journal. Some functions performed by this department are: Recruitment & Selection: Persons who have passed at least 8th standard are recruited as workers. This package has whole information of every employee like name. Philippines. selection and training system. Greece. sex. address etc. Korea. Egypt. qualification. In this company there are 480 staff member and 3000 workers. When person is selected then this department carries on orientation programme.

USA has given TIM. quality 30 . But it lacked financial up gradation. Juxtaposing these systems there is another counterpart RAMCO looking over the human resource management and the payroll system of the unit as a whole. An Israeli company in collaboration with IBM. The ERP system consists comprises of TIM. Process of folding department is: Grading detection of faults & grading according to the severity of faults. tagging the plastic cover for writing specifications. So the financial counter part came from IBM. which is focused on the Textile Integrated Manufacturing. screening them than by white paints stamping the particulars like meter. Than Folding Tagging Screening Stamping folding of clothes on hard paperboards. BPCS and RAMCO Marshall. BPCS looks to the financial and business process of the unit. uniform has been adopted by the company for the workers as well as members. USA. ERP ERP The company has implemented ERP at various levels of production as well as management and administration.To have a feeling of equality. Implementation of ERP has resulted into: Costt rreducttiion Cos educ on Fastt delliiverry Fas de ve y Check errrrorrs on ttiime Check e o s on me IInventtorry conttrroll nven o y con o Qualliitty prroducttiion Qua y p oduc on Fiinanciiall effffiicacy F na nc a e c a c y Finish folding / Warehouse Both the departments are computerized.

. This department is bridge between marketing department & production department. shade etc. So to come up from these problems the CPPC department was implemented. PR OD. In this process production planning will be at macro level means monthly & production order will be at micro level means daily & weekly. Work processing of this department is as follows. SALES ORDER SALES PLANN. which was creating problems & consuming time. which was. For the better planning representative of every department who were doing planning in their department. M KTG CPPC PROD. which is executed by the production department. Before the implementation of this department every department was doing their planning at individual level. DEPTT. were called under one roof named CPPC. CPPC FOLLOW-UP 31 EXECTION . PLANN.No. grade. CENTERLISED PRODUCTION. PR OD. PLANNING & CONTROL CPPC is a new department in RSWM. establish dated on 1/06/02. ORDER PROD. Banding paper band is used for fabric. CPPC follow up the execution of planning.

Evaluating Financial Position By Using Ratio Analysis 32 .

1 Importance of financial statement analysis in an organization. again with a view to facilitating easy understanding and to place a year results in perspective through comparison with post year results. In our money-oriented economy. 33 . labour. 2. finance. government policies. marketing. Finance may be defined as provision of money at the time it is needed. To every one responsible for provision of funds. environment in general.g. 1. (c) The directors report being quite comprehensive to cover the factors that have been operating and are likely to operate in the near future as regards to the various functions of production. (b) Giving much more information e. There has been increasing emphasis on (a) Giving information to the shareholder in such a manner as to enable them to grasp it easily. it is problem of securing importance to so adjust his resources as to provide for a regular outflow of expenditure in face of an irregular inflow of income. these are the two statements that have been prescribed and there contents have been also been laid down by law in most countries including India. The balance sheet In companies. The profit and loss account (Income Statement). funds flow statement.Introduction Introduction 1.

: . Executives Bankers : .To assess the prospects of the business and to know whether they can get a good return on their investment.To study the statement for comparative purposes.To study from an angle of tax collection duty levee etc. The accounts convert activities in monetary terms to the help know the position. 1. The financial statement is prepared by accounts based on the activities that take place in production and non-production wings in a factory. Government Agencies: . The statement should be sufficiently informative so as to serve as wide a curia as possible. 34 . Governments. Institutions \ Auditors : .Financial statements are being made use of increasingly by parties like Bank.2 Uses of Financial Statement Analysis.To establish basis for Granting Loans.To extend Credit facility to business. Institutions. : .To formulate policies. The main uses of accounting statements for. Investors Accountants : . and Financial Analysis etc.

The accounting records transactions as they effect this entity and regards owners creditors. Accounts are maintained for the entity as distinct from the person who is connected with it.1. Business Entity Concept. principals.4 Accounting concepts Accounting concepts may be considered as basic assumptions or conditions on which the science of accounting is based. suppliers. employees. Accounting is the language of business. Interested in its affairs through the medium of financial statements. A business communicates with the outside world. The accounts all over the world have developed certain rules. conventions that are generally referred to as generally referred to as Generally Accepted Accounting Principles A: B: accounting concepts.3 Principles of Accounting. accounting conventions. Procedures. For accounting purpose the business firm is regarded as a separate entity. The following concepts have received general support. I). 1. customers and government as parties transacting with this entity s 35 .

which can be meaningful compared. Liabilities are carried at value the reflect what business owes and not at values which the creditor would settle for in case of liquidation. The use of monetary yardstick provides a means by which heterogeneous elements such as land. Assets are normally carried in the books at their cast. Plant & equipment. - Accounting is concerned only with those facts.g. This has an important implication for future evaluation of assets and liabilities. This cost is used for all subsequent accounting purpose for e. less depreciation reflects better value of an assets to a business which will remain a going concern.Money Measurement Concept. Securities and goodwill may be expressed in numbers. which are expressible in monetary terms. Cost Concept: - This principle mis related to stable monetary value principle and suffers from its weaknesses Assets acquired by a business are generally recorded at there cost. Going concern concept: Accounting is generally based on a premise that the business entity will remain a going concern for an indefinitely long period and not a concern. 36 . Inventories. the price paid up for acquisition. which is going to be wound up in near future. depreciation is charged on original cost.

income is measured for these periods and the financial position is assessed at the end of an accounting. Objectivity.5 Accounting Conventions Important conventions in accounting practice are :- Consistency Full Disclosure & Relevance. vii) Realization Concept: - According to the realization concept. revenue is deemed to be earned only when it is realized and we normally consider revenue as relished when goods are shipped or delivered to the costomer5 and not when a sales order is received or a contract is signed or goods manufactured. time is divided into segments referred to as accounting periods. 1. Reliability 37 . vi) Accounting Period Concept: - In order to know the results of business operations and financial positions of the firm periodically.V) Dual Aspect Concept: - This may be regarded as the most distinctive and fundamental concept of accounting. It provides the conceptual basis for accounting mechanics and there is a universal agreement among accounts over this concept.

Format of Balance Sheet as prescribed by companies Act. Expenditures & Losses Liabilities: - Liabilities defined very broadly represent what the business entity owes to other.11 The Balance Sheet The Balance sheet shows the financial status of a business. 38 . The registered companies are to follow part 1 of schedule VI of companies \ act 1956 for recording Assets and Liabilities in the Balance Sheet. Liabilities Share Capital Reserve &Surplus Secured loans Unsecured Loans Current Liabilities & provision Assets Fixed Assets Investments Current Assets. Loan Advances Misc.The Balance Sheet The Balance sheet 28.

39 . The major components of unsecured loans are fixed deposits. Inter-Corporate borrowings and unsecured loans from Banks. which are not related to normal business operations. revenue Reserve and Capital Reserve. Capital reserve arises out of gains. loans and advances from promoters. Unsecured Loans: These are borrowing of the firm against which no specific security has been provided. Revenue Reserve represents accumulated retained earnings from the profits of normal business operations. Secured Loans: These denote borrowings of the firm against which specific securities have been provided. which have been retained by the firm reserves. and loans from commercial banks.Share capital: There are two type of share capital: Equity Capital Preference Capital Equity Capital represents the contribution of the owners of the firm. Reserve & Surplus: - Reserve & Surplus are profits. loans from financial institutions. Surplus is the balance in the profit and loss account. The important components of secured loans are debentures. Reserve and surplus along with equity capital represent owner s equity. are two types. Preference capital represents the contribution of preference shareholders and the dividend rate payable on it is fixed. which has not been appropriated to any particular reserve account.

Provisions for taxed. Fixed Assets: These assets have two characteristics. Other investments are short term in nature and are rightly classified under current assets for managerial purpose. Examples for fixed assets are land. Some investments represent long-term commitments of funds. building.Current Liabilities and Provision: - Current Liabilities and Provision as per the classification under the companies Act. patent & Copyrights. Pension etc. Advance payments received. Dividends. plant. Gratuity. Investments: - These are financial securities owned by the firm. Unclaimed dividends. accrued expenses. Consists of the Following amounts due to the suppliers of goods and services brought on credit. Usually those are the equity shares of other firms held for income and control purpose. They are acquired for use over relatively long period for carrying on the operations of the firm and they are ordinarily not meant for resale. 40 . Machinery. Assets: Assets have been acquired at a specific monetary cost by the firm for the conduct of its operation.

which are held for relatively longer periods. The major component of current assets is: cash. which get converted into cash during the operating cycle of the firm current assets. 41 . debtors. which outlays such as preliminary expenses which have not written off loss is shown on the right hand side (Assets side) of the balance sheet. Loans and Advances: - This category consists of cash and other resources. inventories. are held for a short period of time as against fixed assets.Current Assets. loans and advances and pre-paid expenses. Miscellaneous expenditure and losses: - The consist of two items miscellaneous expenditure and losses miscellaneous expenditure represent outlays such as preliminary expenses and pre-operative expenses.

078.480.36 0 FOR S.27 2.957. 2005 Rs.3.565.00 17.811.48 3.656.68 1.26 55.024.388.39 2.83 2.18 708.69 37.36 29.26 5 66.2005 Rs.12 13.967.999.33 7.238.605.2004 SOURCES OF FUNDS Shareholders' Funds Share Capital Reserves and surplus 1 2 2.59 24.CHECHANI & CO.787.388.45 23.670.3.627.706.18 63.20 12.50 6 7 Investments Current Assets Loans & Advances Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances 36.57 29.47 5.005.94 Less: Current Liabilities and Provisions Liabilities Provisions 8 4.991.in Lacs AS AT 31.03 9 Net Current Assets Miscellaneous Expenditure (To the extent not written off or adjusted) Total Accounting Policies and Notes on Accounts As per our report of even date 16 23.40 42.749.858.382.773.03 15.15 984.65 Mibority Interest Loan Funds Secured Loans Unsecured Loans 3 39.871.656.in Lacs SCHEDULE AS AT 31.022.56 6.192.40 15.692.623.455.58 2.44 5.36 22.107.580.852.895.55 921.642.13 32.21 2.896.21 22.630.761.04 2.796.39 63.04 245.48 4.07 3.00 19.44 9.26 2.96 110. BHARGAVA ASSOCIATES Chartered Accountants FOR A.765. Chartered Accountants Chairman 42 .YEAR ENDED RAJASTHAN SPINNING AND WEAVING MILLS LIMITED BALANCE SHEET AS AT 31st MARCH.00 4 Deferred Tax Liability Total APPLICATION OF FUNDS Fixed Assets Gross Block Less : Depreciation and Amortisation Net Block Capital Work in Progress 40.37 20.084.39 1.88 5.025.25 17.470.23 141.304.45 42.199.L.00 362.

Financial Ratio Analysis The Tool Kit 43 .

Financial analysis employee these fools to explain financial statements and performance of a company. Cost of goods sold as percentage of sales. For Ex. A ratio is a statically yard stick that provides a measure of the relationship between variables and figures. Ration are simple to calculate and easy to understand.Financial Ration Analysis The Tool Kit 3. Percentages. It is defined as the systematic use of ratio to interpret the financial statement so that the strength and weakness of a firm as well as its historical performance and current financial conditions can be determined. The relationship between variables or figures can be expressed in fractions.1 Ration Analysis: Ration Analysis is the process of determining and interpreting numerical relationship based on financial statement. These alternative methods establish a relationship among variables for the purposes of financial analysis referred to as Ration Analysis. 44 . Proportion of numbers: For Ex. For Rs. Double the Turnover in last one year. Quotient of current assets by current Liabilities.

3. for a single ratio. The ration analysis thus as a quantitative tool helps the Analyst to draw answers to questions such as Are the Net Profits Adequate Are the assets being use efficiently is the firm solvent Can the firm meet its current obligation and so on Thus the Ratio Analysis help the Owner or Investors: For estimating earning capacity.liquidity and profitability.- Ratio are relative figures reflecting the relationship between variables. Basis of comparison . 45 .2 Objectives of Ratio Analysis: - The main objective of Ration Analysis technique is to reveal the relationship in more meaningful way so as to enable us to draw conclusion from them.Interested in evaluating analytical tool that will measure costs efficiency . For ex. P /E ratio (price /earning ratio for a particular scrip) should be compared over a period of time to get a true picture of company performance. Financial Executive: . This enables the analysis to draw conclusion regarding financial operations The use of ratio as a tool of financial analysis involves their comparison. with a view to making intelligent decisions. like absolute figures. Creditors: Concerned primarily with liquidity and ability to pay interest and redeem loan within specified period. fails to reveal the true position.

Inter firm comparisons :Comparisons of the ratios of a firm with those of other in the same line of business or with the industry reflects its performances in relations to its competitor. The other type of comparisons may relate to comparisons of items with in a single year financial statement of a firm and comparisons with standard or plans. 46 . Trend ratios indicate the direction of change in performance improvement deterioration or consistency over the years.e. present ratios are compared with past ratios. 1 2 3 4 Trend Ratio Inter firm comparisons Comparisons of items within a single years financial statement of a firm. Comparisons with standard or plans Trend ratios :- Comparison of firm over time i.Thus comparisons with related facts is the basis of ratio analysis s In ratio analysis. four types of comparisons are involved.

.. Types of Ratio 47 .

3. which indicate the liquidity of a firm. 2. 48 . Liquidity ratios are based on the relationship between current assets the sources for meeting short-term obligation and current liabilities. 4. Acid test Ratio. 2. The ratios. Net working capital. 4.1 Types of Ratios: 1. 3.Types of Ratio 4. A proper balance between liquidly and profitability is required for efficient Financial Management. 4. usually one year or when the become duration for payment. 5 Liquidity ratios Leverage Ratios Turnover Ratios Profitability Ratios Valuation Ratios. Fund-Flow Ratio.2 Liquidity Ratio: Liquidity refers of the ability of a firm to meet its obligation in the short run. are: - 1. Current Ratio.

Marketable securities. 49 . The higher the ratio. bills payable bank overdraft short-term loans. Te current ratio measures the ability of the firm to meet its current liabilities. It is calculated as Quick assets Acid Test Ratio = Current liabilities The term quick asset refers to current assets that can be converted into cash immediately. Acid Test Ratio: The acid test ratio is the ratio between quick current assets and current liabilities. The current assets get converted into cash into the operational cycle of the firm and provide the fund needed to pay current liabilities. Inventories.---------------Current Liabilities Current ratio = The current assets include cash and Bank Balance. The current liabilities include creditors.Current Ratio The current Ratio is the ratio of current liabilities it is calculated as: Current assets -. Advances Payment and prepaid expenses. unclaimed divided and proposed dividend. to ward off. outstanding expense & income tax payable. Bills. Receivable. Loan sand advances.

Quick assets current assets (inventories + prepaid expenses) It is based on current asset. The tondon committee report suggest the this ratio should not exceed 0. Generally.75 even under most liberal scheme of financing. Quick assets Internal measure = Average daily flow of operational cash expenditure 50 . which are highly liquid. Fund flow ratio : - A dynamic analysis of liquidity call for examination of cash inflow and cash outflow in addition to the size of the liquid asset balances at a given point of time. This also called quick ratio. The current ratio and acid test ratio are static in nature. an acid test ration of 1:1 considered satisfactory as a firm can easily meet all current claims Bank to working capital Gap Ratio: - This ratio establishes a relationship between short-term bank borrowing and working capital gap It is calculated as Short term bank Borrowing Bank Finance to working Gap Ratio = Working capital gap Working capital equal to current assets less current liabilities other than bank borrowing.

It is calculated as follows 51 . 2. The leverage ratio or capital structure ratio can be defined as the financial ratios which throw light on the long term solvency of a firm reflected in its ability to assure the long term creditors with regards to. 1. Two type of ration that is commonly use to analyze financial ration are. 2. The ratio indicates the relative proportions of debt and equity in financing the assets of the firm. debt equity ratios establishment relation ship between borrowed funds and owner capital to measure the long term financial solvency of the firm. Periodic payment of interest during the period of loan. Repayment of Principe on maturity or in predetermined installments at due dates. Leverage ratio help in assessing the risk arising from the use debt capital.3 leverage of capital structure ratios: These ratios refer to the use of debt finance long term solvency of the firm can be examined by using leverage or capital ratios. two important coverage ratios are interest converge ratios and fixed charge coverage ratio 5:3:1 Structural ratios Debt equity ratio This ratio reflects the relative claims of creditors and share holders against the assets of the firm. Coverage ratios Structural ratios: - Structural ratios are based on the proportion of debt and equality in the financial structure of the firm.4. 1. Structural ratios.

Debt Debt equity ratio = Equity

The debts side consist of all liabilities ( that include short term and long term liabilities) of the firm. The equity side consists of new worth (plus) preference capital. The lower the debt equity ratio the higher in the degree of protection enjoyed by the creditors.

The debt equity ratio defined by the controller of capital issue, debt is defined as long term debt plus preference capital which is redeemable before 12 years and equity is defined as paid up equity capital plus preference capital which is redeemable after 12 years.

The general norm for this ratio is 2:1. on case of capital intensive industries as norms of 4:1 is used for fertilizer and cement industry and a norms of 6:1 is used for shipping units.

Debt asset ratio

The debit asset ratio establishes a relationship between borrowed funds and the assets of firm. It is calculated as: Debt Debt Asset Ratio = ------------------------------Asset

Debt includes all liabilities. short term as well as long term and the assets include the total of all the assets (the balance sheet total )

52

This ratio is related to the debt equity as follow . Debt ----------------------Equity Debt asset ratio = -- -----------------------------------------1+ Debt ---------Equity

4.3.2

Coverage Ratios.

These ratios are computed from the information available in the profit and loss account. The coverage ratios measure the relation ship between what is normally available from operations of the firm and the claims of the outsider.

The various coverage ratios are 1) 2) 3) Interest coverage ratio Fixed charges average ratio Dividend coverage ratio

Interest coverage Ratio

This ratio is also know as Time interested Earned ratio This ratio measures the debt servicing of capacity of a firm in so far as fixed interest on long term loan is concerned. Interest coverage ratio determined by dividing the operating profits or earning before interest and taxes by fixed interest charges on loans

It is calculated as Earning Before Interest &Taxes (EBIT) = ---------------------------Debt Interest

Interestest coverage Ratio

53

The EBIT is used in the numerator of this ratio because the ability of a firm to pay interest is not affected by tax payment as interest on debt fund in a tax deductible expenses.

The ratio apparently measure the margin of safety the firm enjoys with the respect to its interest burden. A high interest coverage ratio implies that the firm can easily meet its interest burden even if EBIT decline.

A low interest coverage ratio results in financial embarrassment when EBIT declines. This ratio is not appropriate measures of interest coverage because the source of interest payment is cash flow before interest and taxes ,not EBIT.

In this view, we may use the modified interest coverage ratio. EBIT +depreciation coverage ratio Modified Interest Coverage Ratio = ----------------------------Debt Interest

Fixed charges coverage Ratio:

This ratio help in measuring the debt servicing ability adequately because it considers both interest and the principal repayment obligations. It is calculated as :

Fixed charges coverage Ratio :

-

EBIT +depreciation --------------------------------------Repayment of Loan

Debt Interest + 1 - Tax Ratio

------------------------------------

54

If the denominator of this ratio only the repayment of loan is adjusted upwards for the tax factor because the loan repayment amount un like interest, is not tax deductible.

This ratio may be amplified to include other fixed charges like lease payment and preference dividend.

Thus,

Dividend Coverage Ratio =

Earning After Tax (EST) ------------------------------------------------Preference Dividend

This ratio like the interest coverage ratio , reveals the safety margin available to the preference share holder . The higher the coverage the better it is from their point of view.

4.4

Turnover Ratio

Turnover Ratios are also referred to as Activity ratio or Assets. Management ratios. This ratio establishes relationship between the level of activity represented by sales or cost of good sold and levels of various assets.

The important turnover ratios are: Inventory Turnover ratio Average collection period ratio Receivable Turnover ratios Fixed Asset Turnover ratios

55

This ratio is deemed to reflect the efficient the management of inventories and vice versa. Net sales = ---------------Inventory Inventory Turnover ratio The numerator of this ratio is the net sales for the year and the denominator is the Inventory balance at the end of the year. This statement need not be always true.Debtors Turnover ratios Creditors Turnover ratios Inventory Turnover ratio: - This Ratio is computed by dividing net sales by inventory Thus. It might be argued that the inventory turnover ratio may be Cost of goods sold = -------------------------------------------Average Inventory Inventory Turnover ratio 56 . A low level of inventory may cause a higher inventory turnover ratio.

Average collection period. As a rule of thumb. It is expressed in two forms Receivable Turnover ratios = Net Sales ----------------Receivables 57 . = The receivable figure of the ratio generally represents the receivables balance at the end of the year. Receivable -----------------------------Average sales per day Average collection period. average sales per day in the denominator is simply the sales of the year divided by 365. Receivable Turnover ratios The Receivable Turnover ratio measure the relationship between credit sales during a particular accounting period and the average receivables (sundry debtors) outstanding during the period. the average collection period should be not exceed 1½ times the credit period. When sales the highly seasonal. the average of receivable figure at the and of each month or each season can be used and when sales growth is high the average of the beginning and ending receivables balances are to be used . The average collection period should be compared with firm credit terms to judge the efficiency of receivables management.Cost of Goods Sold Average Inventory = sales -Gross Profit = Average of (Opening +Closing Stock) This ratio also indicates how fast inventory is sold A high ratio is good from the viewpoint of liquidity and vice versa.

2 Average collection period after calculating daily sales (sales day )and dividing accounts receivable by sales per day. the fixed turnover ratio tens to be high because the denominator ratio is very low. Similarly if the ratio is low if reflects in efficient use of assets. 360 = -----------------------------ReceivablesTturnoverRratio Average Collection Period The shorter the average collection period the higher the receivables turnover ratio. 58 . It is important to note that when the fixed assets of the firm are old and substantially depreciated. The The receivables figures used is the receivables figures at the end of the period. This ratio measures the efficiency with which fixed assets are employed. receivables turnover ratio and the average collection period are a follows. Net Sales ---------------------Fixed Assets Fixed Assets Turnover Ratio = The net sales indicate the net sales for the period and fixed assets is the balance in the net fixed assets account at the end of the year. If the fixed assets turnover ratio is high it indicates the there is a high degree of efficiency in assets utilization.

59 . A high ratio is indicative of shorter time lag between credit sales and cash collection/ A low ratio indicates that debts are not being collected rapidly. Debtor s turnover ratio: - The debtor s turnover ratio is determined by dividing the net credit sales by average debtors outstanding during the year. Therefore Debtors turnover ratio = Net credit sales Average debtors Here net sales consist of gross credit less returns. Average debtors are simply average of debtors at the beginning and at end of the year. It is a kind to the out capital ratio in economic analysis. The main objectives of the total assets turnover ratio are to measure how efficiency assets are employed. The main function of this ratio is to measure how rapidly debts are collected. If the total assets turnover ratio is high it implies that there is high degree of efficiency in assets utilization and vice-versa. Net Sales ---------------------Fixed Assets Fixed Assets Turnover Ratio = Total assets simply the balance sheet total at the end of year.Total assets turnover ratio.

Creditors turnover ratio creditors turnover ratio is a rate between net purchase and average amount of creditor out standing during the year. 4.5 Profitability Ratio Profitability is measured of efficiency and the search for its provides an incentive to achieve efficiency. The creditors turnover ratio is an important tool as a firm can reduce its requirement of current assets by relying on suppliers creditors. Profitability the final results of business operations mainly the owners and management are in the financial soundness of the firm. 60 . while a high turnover ratio shown that accounts are settled rapidly. Creditors turnover ratio = net credit purchases Average of creditors Net credit purchase = gross credit Purchase less returns to supplier Average creditors = Beginning and at the end of the year. Average of creditors outstanding at the A low turnover ratio reflects liberal terms granted by suppliers. The intent to which trade creditors are willing to wait for payment can be approximated by the creditors turnover ratio.

Thus it all depends on the profit for the ensure operating efficiency to the management and ensure reasonable return to the owners. Net income to total assets ratio. Similarly the owners invest their funds with the expectation of reasonable return. 1. is eager to measure its acting efficient. Return on capital employed.The management of the firm. Expenses ration or operating ratio profitability ratios in relation to investment are. 61 . Profit margin ratio (gross and net) 2. Return on equity 6. Return on assets 5. 7. 3. Return on investment 4.

The gross profit margin ration shows the margin left after meeting manufacturing cost. The Gross profit to sales is a sign of good management s as it implies that the cost of production of the firm is relatively low. The efficiency of production as well as pricing.5. Gross margin ratio 2. The ratio also measures. A high ratio may also imply of a higher sales rise without a corresponding increase in the cost of goods sold. Net margin ratio Gross profit margin ratio: - Gross profit can be defined as the difference between net sales and cost of goods sold. Gross margin profit ratio is also known as gross margin gross profit margin ratio is calculated by dividing gross profit by sales.1 Profit margin ration Profit margin ratio measures the relationship between profit and sales. 62 . Whereas a low gross profit margin in a danger signals. there are two profit margin ratios 1. warranting a careful and detailed analysis of the factors responsible for the same.4. Gross profit margin ratio = gross profit Net sales Net sales-cost of goods sold.

This relationship is also known as net margin. A firm with low net profit margin can earn a high rate of return on investment it has a higher inventory turnover. This ratio shows the earning left for shareholder (both equity and preference) as percentage of Net sales.The main contributing factors responsible for low ratio maybe high cost of production as will as inefficient utilization of fixed as well as current assets a low selling price resulting from severe competition. Net Profit Net profit Margin Ratio: ------------------Net Sales A high Net profit Margin indicates adequate return to the owners as will as enable a firm to withstand adverse economic conditions when selling price is decanting. Net Margin Ratio measures the over all efficiency of production. 63 . Net Profit Margin Ratio: The Net Profit Margin Ration determines the between Net profit and sales of business firm. inferior quality. cost of production is rising and demand for product is falling. Thus. Financing. Lock of demand etc . Jointly considering gross and net profit margin provides a valuable understanding of the cost and profit structure of the firm and enables the analyst to identity the source of business efficiency of inefficiency. pricing and Tase Management. Administration selling. A low Net Profit Margin has opposite implications.

64 . Net Profit after Taxes plus Interest Net Profit after Taxes plus Interest minus Tax Saving. Based on each of the above there are three board categories of ROI s They are Return on Assets Return on Capital Employed Return on Shareholders Equity. The concept of Net profit may be Net Profit after Taxes.4.2 Profitable Ratios in regard to Investment The profitable ratios can also be computed by relating the profits of a firm to its investments. These ratios are popularly termed return on investment (ROI). There are three different concept of investment in vogue assets. There are various approaches possible to define net profit and Assets.5. Capital employed and Shareholders Equity. Return on Assets: - Return on Assets ration measure the profitability ratio in terms of relationship between Net Profit and Assets.

Assets may be variants of return on assets are Return on Assets = Net Profit after Taxes --------------------------------Average Total Assets The Return on Assets based ration would be an under estimate as the interest paid to the creditor is excluded from the Net Profit. 65 . The main purpose of return on assets is to measure the profitability of the total funds Investment of a firm. In this ratio the term capital employed refers to the long term funds supplied by the creditors and owners of the firms. As a measure of operating performance. Return on Capital Employed (ROCE) :Return on capital employed is same as return on assets except for the difference that the profit are related to the capital employed. the above equations should be substituted by the following: Net Profit after Taxes +Interest Tax Advantage on Interest -------------------------------------------------------------------Average Total \ Fixed Tangible Assets Return on Assets = This equation correctly reports about the operating efficiency of firms if they all are equity financed. Return on Assets = Net Profit after Taxes +Interest --------------------------------Average Fixed Assets Net Profit after Taxes +Interest Return on Assets = --------------------------------Average Tangible Assets The above may not provide correct results for inter firm comparison.

the more efficient in used of the capital employed.The return on capital employed can be computed \calculated in two ways firstly it is equal to non-current liabilities (Long Term Liabilities) plus owners equity. secondly it is equivalent to net working capital plus fixed assets. ROCE = Net profit After Taxes +Interest ----------------------------------------------------Average Total Capital Employed ROCE = Net profit After Taxes +Interest Tax Advantage on Interest ----------------------------------------------------Average Total Capital Employed ROCE = Net profit After Taxes +Interest ----------------------------------------------------Average Total Capital Employed-Average Intangible Assets In the ratio is compared with similar firms. Return on Equity :The return on equity the profitability of equity funds invested in the firm. Return on equity is regarded as very important measures because it reflects the productivity of the ownership (or risk capital employed in the firm) Thus Equity Earning Return on Equity = ------------------Net Worth 66 . The higher the ratio. with industry average and over time would provide sufficient insight into how efficiently the long term funds of owners and creditors are being used.

Equity earning of this ratio is equal to profit after tax less preference divided Net worth includes all contribution made by equity shareholder ( paid up capital + reserve & surplus) This ratio is called as return on net worth. debt equity ratio average cost of Debt. Return on investment The return on investment is a measure of business performance. This ratio focuses on operation performance and obstructs away the effect of financial structure and tax rate. total assets represent total financing. This ratio is influenced by several factors return on investment. Thus Return on investment = EBIT Total assets Numerator represent pre-earning belonging to all sources of finance. which is not affected by interest charges and tax payments. Funds and tax rate. This ratio is internally consistent. It is eminently suited for inter firm comparisons. 67 .

corporate image and degree of liquidity. The PE ratio is a summary measures & which primarily reflects the following factors growth.Net income to total assets ratio: - The main purpose of net income to total assets ratio is measure how efficiency the capital is employed. prospects. orientation. The earning per share (EPS) is simply profit after tax divided by number of outstanding equity shares. risk characteristics. Net income of total assets ratio = net income profit Earning per share The market price per share may be the price prevailing on a certain day or preferably the average price over a period of time. share holders. Yield: - Yield: - Divided + price change Initial price This may be split into two parts Divided + Initial yield divided yield price change Initial price capital gain/loss yield 68 .

If the ratio is say 2 the firm has created a net wealth of one rupee for every rupees invested in it. Market value to book value ratio: Market value per share Market value to book value ratio = Book value per share This ratio reflects the contribution of a firm to the net wealth of the society. earnings per share (which is inverse to PE ratio) and total yield are equal.Generally companies with low growth prospects after a high divided yield and low capital gains yield. If the ratio is equal to 1 it implies that the firm has neither contribution nor detracted from the net wealth of the society. If the market value to book value ratio is equal to 1. All the three ratios return on equity. companies with superior growth prospects after a low divided yield nd high capital gains yield. 69 .

Application of Ratio Analysis Techniques 70 .

08 1.77 6.21 4.11 1.1 Liquidity ratio 1.69 5.13 1.22 1. 3.32 1.19 2.03 1.09 1.18 2.17 1.06 1. 2.current ratio = current assets current liabilities 2.39 2.2 Leverage ratio 1.22 3.45 1. Acid test ratio = quick assets Current liabilities Financial year 1994-95 1995-96 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Current ratio 1.12 Acid test ratio 1.68 1.Application on ratio analysis technique 6.57 1. Debt Equity Ratio = Debt Asset Ratio = Total debt to total capital employed Total Debt = Total capital employed 71 Debt/Equity Debt/Assets .

61 0.3 Debt Equity Ratio 1.61 0. Debtors turnover ratio = Total Debtors 72 .EBIT + Depreciation Interest coverage ratio = Debt interest Financial year 1995-96 1996.21 1.62 Total Debt to total capital employed 0.17 1.27 1.38 2.97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 6.15 1.16 1.43 0.56 0.42 0.52 0.67 0.60 0.17 1.25 1.63 0.15 1.77 Turnover Ratio Net sales 1.12 Debt Assets Ratio 0.65 0.41 0.41 0.47 0.43 0.60 0.43 0. Inventory turnover ratio = Average Inventory Net Sales 2.68 0.49 0.

93 11.51 3. Fixed assets turnover ratio = Fixed assets Net Sales 4 current assets turnover ratio = Current assets Net sales 5.22 73 .97 1.53 3.42 1.76 Debtors turnover ratio 7.64 1.05 1.85 7.93 1.03 0.06 1.57 2.50 6.81 5.22 11.58 1.07 8.28 3.32 0.33 2.62 1995-96 1996.29 1.61 12.31 5.67 7.89 6.03 1.68 2.61 Net capital employed (AVG) 1.96 5.Net Sales 3.38 2.96 2.55 7.71 2.36 2.) = Capital Employed Financial year Inventory turnover ratio 5.32 1.97 1.97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Fixed asset Current turnover assets ratio turnover ratio 1.93 9.51 2.51 1.88 6.86 7.56 1.59 2. Net Capital employed (Avg.55 8.32 13.71 1.06 8.

33 2.86 2. Net profit on Fixed Assets = Fixed Assets Financial year 1995-96 1996.41 Net profit on fixed assets 2.18 8.23 9.56 3.81 4.60 profit to Net profit to sales 1.39 1.63 7.19 2.4 Profitability Ratio: Gross profit 1.98 2.43 2.63 10.74 2. Gross profit to sales = Turnover-Excise Net profit (PAT) 2.279 3.97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Gross sales 8. Net Profit to sales = Net sales Net profit 3.88 2.89 6.6.12 7.66 7.81 1.54 11.83 6.91 11.99 11.70 74 .29 6.36 4.90 4.93 10.

75 14.89 3.69 75 .90 4.20 12.37 on net Return on assets 1.98 6.99 2.97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Return on total capital employed 12.29 14.59 2. Return on Assets = Total Assets Financial year 1995-96 1996.82 16.65 5.29 9.25 7.25 9.68 11.4 Return on Investments Net profit (before tax)-Interest 1. Return on net worth = Net worth Net Profit (after Tax) 3.23 1.89 Return worth 3.08 5.61 17.47 3.63 10.25 11. Return on total capital employed = Total capital employed Net profit after tax 2.26 8.23 16.56 2.6.56 9.29 3.51 10.23 11.

Conclusion 76 .

1 Return on Investment Rajasthan Spg. 77 .2 Turnover Ratios The turnover ratios show fairly good performance by the company. Hindustan Lever Ltd who are active in the consumer product business Rajasthan Spg. The average collection period (varies between 50-70 days with an expectation in year 2004-05 indicate a liberal credit contract.Conclusion The conclusion drawn from the analysis of ratio is the previous chapter is presented in the following section 6. Mills ltd return on assets (ROA) return on total capital employed and return on shareholders equity have increased considerably from 1995-96 to 2004-05. 2 times) the capital employed to turnover ratio indicates fair utilization of capital employed. It does not border a cash and carry system. Return on assets (ROA) return on total capital employed and return on shareholders equity how increased by about 35% from 1995-96 to 2004-05 indicating an excellent overall performance by the management. Wvg. & Wvg. The inventory turnover ratio (approx. 4 times) indicates good inventory management. Mills is into highly specialized industrial products hence their achievement in return on investment should set up example for other to follow: 6. This ROA is comparable to some highly profitable companies like the Colgate Palmolive Ltd. The fixed asset turnover ratio indicates a low profitable deployment of fixed assets (approx.

Rajasthan Spg. These figures and during the last three financial years are truly remarkable. Mills Gross profit Margin ratio and the net profit margin ratio on an average of is about 35% and 10% respectively. & Wvg. A high current and quick ratio indicates that the company can meets its current obligation liabilities. Mills should maintain current assets in the form of receivables and cash rather than in inventory so as to meet its current obligation efficiency. The company should concentrate on profitable deployment of fixed assets.5) and quick ratio (approx. 6.5 times the credit period companies like Colgate Palmolive has a average collection period of 15 days compared to this Rajasthan Spg.5 Profitability Ratio Rajasthan Spg. It may by noted as Net profit Margin has Been around 15%in the last three financial years reflecting a better earning for the shareholders. The gross profit margin ratio and the net profit margin ratio have increased during 1995-96 to 2004-05 in spite to low profit suffered by the company during 1995-96 which indicates that company heavy capital expenditure for expansions of spindles and looms by the company. 1.The average collection period should to exceed1. 6. 1. & Wvg. 78 .3) indicates an effective liquidity management by Rajasthan Spg. Mills should bring its average collection period. & Wvg. The high liquidity ratios reflect a very strong short term financial structure.3 Liquidity Ratio The current ratio (approx. &Wvg.

Mills is able to maintain an average interest coverage ratio indicating that the firm enjoys the margins of safety with the respect to this interest burden. 79 . & Wvg.6. it is clear that Rajasthan Spg. Considering the above ratios for a period of time during 1995-96 and 2004-05. Pricing and Tax Management. debt assets and debt to total capital ratio indicates a moderate existence of equity and capital employed these ratio indicate that the company has a low geared capital structure Rajasthan Spg. Financing. The company maintains a modest interest coverage ratio so that it can easily meet its interest burden even if EBIT suffers a decline.6 Leverage Ratio The high Debt equity. & Wvg. Mills has achieved an overall efficiency in production Administration Selling.

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