CHAPTER 1- INTRODUCTION

1.1 INTRODUCTION

Financial distress prediction models have been developed and used for more than five decades
for their ability to forecast whether a company will have certain financial problems or even go
bankrupt in the next period, usually one year. Economic consequence of company failure is
great. Therefore, creating a model by which it would be possible to identify financial distress is
of great interest for entrepreneurs, investors, creditors, auditors and other stakeholders. In such a
way it is possible not only to predict a probability that a company will default, but what is more
important to make certain actions in order to prevent more serious consequences.

Making a model with high predictive power is a challenge. In the beginning of the effort for
making distress prediction, financial analysis technique was used. It has evolved from a
qualitative type of information assessing to a development of quantitative measures and various
bankruptcy and financial distress models. In complex business conditions, mathematical and
statistical models have become a necessity.

Financial distress prediction models are usually composed on financial information – financial
ratios of solvency, activity, profitability, investment, and leverage. Despite the fact that many
studies reported high predictive power for their ratios, a unique perfect combination of financial
ratios hasn't been found. Models' composition and precision depend on data sample, data
availability, data quality, methods of analysis.

Besides, financial distress models developed on a specific sample can only be applied to the
firms with the same characteristics as those included in the sample. However, a progress has
been made toward selecting financial ratios that turned out to be significant in multi-ratio
models. Chen and Shimerda (1981) reviewed 26 articles that classified 65 financial ratios
incorporated in predictive studies between 1966 and 1975, and reported 41 financial ratios that
were considered to be important given citation in one or more of the 26 articles. In addition to
that, the authors referenced a study conducted by Pinches, Mingo, and Caruthers (1973) and
classified those useful ratios in seven factors: Return on Investment, Capital Turnover, Financial
Leverage, Short-Term Liquidity, Cash Position, Inventory Turnover, and Receivables Turnover.
Besides separating financial ratios according their usefulness in predicting financial distress,

1
researchers have studied the validity of different methodology used in model development.
Balcean and Ooghe (2004) separated four types of classical statistical methods that have been
applied in corporate failure prediction studies (univariate analysis, risk index models, multi
distriminant analysis, and conditional probability models) and identified several issues related to
the usage of a particular methodology in prediction model development.

Most of the models are composed on financial information for publicly-owned firms from
developed countries in a specific time frame. Although they extracted some common and most
predictive financial ratios, it is the combination of them that makes a difference. All of that
emphasizes the need for developing different models that will fully reflect the changes in internal
and external environment of privately-owned small and medium-sized enterprises (SMEs) for a
specific country, and the ways those changes influence firm’s financial health.

All of this makes us research to what extent the models that were effective during the prosperity
would be useful during the recession. In practice, there is a possibility to change cut-off while
applying model and in such way make sure that default rate will not go up. But, as a researcher
or practitioner you are aware that macroeconomic conditions as well as market dynamic have
been changed over time and financial ratios that were important in one period might become less
important in the next period. So, this paper has two aims.

First, to compare three separate financial distress prediction models developed for three
consecutive years that capture time of prosperity and time of recession. The models are based on
the financial data from 2000 privately-owned small and medium-sized enterprises in Croatia
from 2006 to 2009 and developed by means of logistic regression. Models are compared
according to hit rates and their composition. It is our goal to find out which financial ratios are
stronger predictors during recession and which during times of prosperity.

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 1.2 COMPANY PROFILE

Nippon Photographics (P) Limited is one of the leading photo-chemical manufacturers in India
with a range of hi-quality products including world class Medical X-Ray Liquid and Powder
formulations as well as Color Film and Paper formulations. 

Beginning with technical expertise and licensing from Konica Corporation, Japan and further
acquisition of the brand – Nippon became the first Indian company to manufacture and market
products under the Konica brand name

HISTORY:

Founded in 1995, Nippon Photographics (P) Limited, has evolved over the years to become one
of the leading photochemical manufacturers in India. Our manufacturing standards complement
those set by Konica Corporation, Japan. Konica Corporation, Japan provided their technical
know-how to help us manufacture world class Medical X-Ray Liquid and powder formulations
and Konica’s exclusive CNK-4-52 QA & CPK2-22 SQA Colour Film and Colour Paper
formulations. Konica Corporation then granted us the license to manufacture the same under its
own brand name. We launched Konica’s X-Ray products in June 1998 and Colour Products in
December 1998.

NPPL’s manufacturing facility is exclusively dedicated to the production of world-class

photochemicals. Nippon also has the unique distinction of becoming the first Indian Company to
acquire the KONICA brand name. A privately owned company, NPPL has expanded its range of
operations steadily in India. Our sales and distribution centers, along with an extensive dealer
network across the country allow us to cater to the entire Indian market.

3
From its humble beginnings, NPPL has initiated new ventures to serve the needs of the
photochemical industry better and it continues to prosper with its firm commitment to this early
tradition

“At Nippon, quality is a matter of traditional compulsion rather than of choice. Your processing
machines are in the hands of qualified and well trained personnel and are subjected to use only
with the highest quality of chemicals.”

COMPANY NAME – NIPPON PHOTOGRAPIC PVT LTD

ESTABLISHED- 21 JULY 1986

CORPORATE INDENTIFICATION NUMBER - U511102TN1986PTCO3230

REGISTERATION NUMBER – 013230

Nippon Photographic Private Limited currently have 3 Active Directors / Partners: 

Jai Prakash Acharya

,Vijailakshmi Acharya, 

Chetan Acharya, and

There are no other Active Directors / Partners in the company except these 3 officials

Infrastructure :
With the Photographic Chemical manufacturing market expanding in India at an astonishing
rate, Nippon Photographics has emerged as a commendable player with a highly sophisticated
factory producing chemical of world-class quality cost-effectively when compared to equivalent
imported chemicals of the same grade and quality.

The Nippon Chemical Factory is housed at Perungudi, Chennai. The 1.5 acre site has a built-up
area of 20,000 squre feet and is equipped with the most sophisticated powder and liquid chemical
mixing equipment. All the testing equipment is imported from Japan and is approved by Konica

4
Corporation, Japan. Konica’s colour and black & white film and paper processing chemicals are
manufactured in its modern production facility

Only the finest raw materials are used and they conform to ANSI and JIS standards. The quality
Control chemists and production team at NPPL have been trained by Konica’s Processing
Chemical Section Engineers of the Hinoshi plant to ensure that the finished products are
specifically manufactured to satisfy the exacting needs of our customers. NPPL is also able to
expedite rapid shipment of materials to customers in domestic and export markets at highly
competitive prices.
Attention to detail in the manufacturing processing is what makes Konica’s Processing Solutions
longer lasting than those of other competitors in the market

Quality Policy:

Nippon’s technological Quality Control Department is fully equipped to meet the following
international specifications: 
 Testing of all raw materials used, to conform to International Photographic Standards.
 Testing of finished goods batch by batch to pass the specifications of pH and specific
gravity.
 Processing of imported CNK-52 QA and CPK-22 SQA control strips for each batch of
chemicals and ensuring that the process control is within the limits.
 Use of high quality PE and PET bottles and special grade PP caps as per Konica
Corporation’s specifications.
To meet our supply demands on time, we Nippon Photographics have also installed a 200 KVA
diesel generator set as a stand-by to power the entire factory in instances of power failure

The Nippon De-ionised Water Treatment Plant:

Nippon Photographics has installed a state-of-art Deionisation Water Treatment Plant
where the total ohmic resistance of the final output water is 1 million ohm or more, as per the
International Standard of Konica Corporation, Japan. The net result is increased stability and
longer life of processing solutions. This reduces wear and tear of machine parts. When water of
non-photographic standards and commercial grade raw materials are used, the small savings in

5
chemical costs are lost amidst the heavy maintenance costs incurred for the processors.

Total Quality Management:

Nippon’s technological Quality Control Department is fully equipped to meet the following
international specifications:

 Testing of all raw materials used, to conform to International Photographic Standards.

 Testing of finished goods batch by batch to pass the specifications of pH and specific
gravity.
 Processing of imported CNK-52 QA and CPK-22 SQA control strips for each batch of
chemicals and ensuring that the process control is within the limits.
 Use of high quality PE and PET bottles and special grade PP caps as per Konica
Corporation’s specifications.

To meet our supply demands on time, we Nippon Photographics have also installed a 200 KVA
diesel generator set as a stand-by to power the entire factory in instances of power failure.

Safety Standards (MSDS) :

Personnel safety is our greatest concern while manufacturing photochemicals. The Photographic
processing chemicals are harmless when used in the appropriately prescribed manner. However,
exposure to some photographic chemicals and their vapours can cause varying degrees of effects.
In other cases, vapours and liquids may cause eye and skin irritation and could be harmful if
ingested. Inhalation of certain vapours should be avoided, as they may cause slight irritation of
nose and throat mucous included is information on spill control and first aid measures.

Nippon provides all new customers and existing customers who are ordering new products with
the customers Material Safety Data Sheets (MSDS). The MSDS lists the ingredients of the
chemical mixture, including water and provides data pertaining to the safe handling and usage of
the mixture. Also included is information on spill control and first aid measures.

In all cases, airborne levels of vapours should be controlled by well maintained general and local
exhaust ventilation (GEV and LEV) systems in addition to the use of appropriate process
6
enclosures. The GEV should be designed such that 10 to 20 filtered fresh air changes per hour is
obtainable in the labs in order to minimize the build-up of vapour.

NPPL provides all new customers and existing customers with a customized Material Safety
Data Sheet (MSDS), that lists the ingredients of the chemical mixture, including water and
provides data pertaining to the safe handling and usage of the mixture. 

In view of the wide variation of conditions which our products may be subjected to, references to
processes and uses are offered for consideration only, and all materials are sold without liability
of any kind whether by status or otherwise.

“A defective print is the result of poor processing chemistry between both the negative and the
paper. It’s time to change the chemistry now. Use Konica CNK 4-52 QA Negative and CPK 2-22
SQA chemicals.”

Chemical Mixing and Deviations:

The Greatest cause of process deviations are produced by errors in the mixing of processing
solutions. Detailed mixing instructions are provided on the labels of the box and or bottles and
these must be adhered to especially with respect to the initial water, temperature and volume
indications, mixing time and proper order addition of the parts. Additional care must be taken to
avoid cross contamination of solutions by ensuring that all equipment and tanks used for mixing
and storing processing chemicals are kept clean. There should be atleast two mixing tanks: one
for developers and one for the secondaries. They should be appropriately labeled and thoroughly
rinsed before and after use.

If the technician is unfamiliar with a chemical, we advice you to first consult the chemical’s
MSDS and HMIS labels, before you commence mixing in order to ascertain the appropriate level
of caution and personnel protection equipment required.

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Powder & Liquid Chemistry :
Nippon’s Black and White Powder and Liquid Chemistry (Approved by International
Standards) 

In a market where powder chemistry is being manufactured by poorly equipped industries,

Nippon Photographics has a completely air-conditioned and dehumidified powder Mixing are
where process conditions are at 23+ or – 2º C and 45% maximum which is a requisite by
International Standards. Most manufacturers use manual methods of powder Mixing, resulting in
a mixture of poor homogeneity and wide variations of quality in batch-to batch preparations. The
sophisticated machinery meeting the standards of Konica Corporation, Japan at the Nippon
factory ensures an evenly mixed homogeneous product that is longer lasting and of the best
quality.
Nippon Graphic Arts Rapid Developer and Fixer are also Konica’s unique formulation with
expensive, imported raw materials to give the best sensitometric results.

Nippon’s technical experts are constantly monitoring process variations arising out of improper
mixing by educating the customer.Konica Corporation, Japan are the only manufacturers of 22”
and 27” sec paper Printer Processors wherein the paper chemical developing time is as low as
27” and 22” sec respectively. Major manufacturers in India are manipulating a 45” sec Rapid
Access chemistry designed for only 45” sec Noritsu 1201 and 1202 machine.

The Konica 53-N2 Bleach Replenisher boasts of super fast bleaching, completely eliminating
any retained silver which would lead to improper fixing. The Konica 53-N3 Fixer Replenished is
also modified to suit faster fixing at optimum contrast. The Konica 52-N1 boasts of a super low
replenishment rate of 30mm/36 exp. The Konica 52-N4 is non-toxic compared to conventional,
cheap, super stabilizers. By using Konica negative chemicals you can see the difference in the
densitometric readings.

It is technically incorrect to judge the density by exposing a part of the colour paper in the
magazine rack just prior to leading in the printer processor. This is because the exposure of such
an operation lacks uniformity and homogeneity thus giving an incorrect result. The performance

8
of any chemistry can only be judged by the use of appropriate control strips, processed
accurately and their density measured on accurate densitometers.

Cost Calculations :

A method is provided for the photo finisher to accurately determine and compare chemical costs
far various chemicals and sources. (Unit sizes, unit prices, replenishment rates, suppliers etc)
The % savings may then be calculated.

FILM

Unit Price of Chemical

Rep. Rate ml/Roll
Cost to Process one roll of= (Rs) X
Film 135-36 Exp (Rs)
  Unit Size ( Litres)   1000

PAPER

Unit Price of Chemical

Rep.Rate ml/Sq.m
Cost to process one = (Rs) X
Sq.m. (Rs)
  Unit Size ( Litres)   1000

9
 Unit Price of Rep.Rate Print Print
Costto
Chemical(Rs) X ml/Sq.m  X /width(cms) x height(cms)
processone =
Print (Rs)
      Unit Size ( Litres)   1000   100   1000

Conversions :

1 In = 2.54 cm 1 cm = 0.3937 in
1 Ft = 0.3048 m 1m= 3.2808 ft
1 Mile = 1.6093 km 1 Km = 0.6214 mile
1 In² = 6.4516 cm² 1 cm² = 0.155 In²
1 Ft² = 0.0929 m² 1 m² = 10.7642 Ft²
1 US oz = 29.574 ml 1 ml = 0.0338 US oz
1 US gal 3.7854 litre 1 litre = 0.2642 US gal
=
1 lb = 0.4536 kg 1 kg = 2.2046 lbs
1 Oz = 28.35 g  1g =  0.0353 Oz
ºF to ºC = (º F-32)/1.8 ºC to ºF = 1.8º C +32

1.3 PRODUCT PROFILE

10
NPPL offers a broad range of quality products and services in the photochemical industry. These
products are manufactured exceeding the specifications laid down by the photo finishing industry

with regards to consistency, performance, ease of use, compatibility, safety and environmental
acceptability.

The range of Konica Chemicals include

CNK - 4-52-LR Colour Negative Chemicals (N1 to N4, N1S and N2S)

CPK - 2-22 LR Colour Paper Chemicals (P1 to P3, P1S)

C-41 / CNK - 4-40 Colour Negative Film Chemicals (N1 to N5, N1S and N2S)

Colour development replenisher and Colour developer fresh working or tank solution are
supplied as concentrated liquids and can be directly used after dilution and then mixed to any
other chemical systems at the same replenishment rate

Konica Control Strips:

NPPL supplies the following Control Strips that are available as under:

PRE EXPOSED PAPER CONTROL STRIPS CPA9AE-G-1 carton box of 3x10 strips each.

Our other products include:

Medical X-Ray Film Chemistry:

Konica Minolta X-Ray Powder Chemicals for Manual Processing – KM Dol X & KM
Fix.Konica Minolta X-Ray Liquid Chemicals for Automatic Processing (KM XD-90 Developer,
KM XF-SR Fixer & KM XD-90S Starter)

Graphic Arts Rapid Access Film Liquid Chemistry:-

PCR-846 RA Developer.

11
CFL-871 RA Fixer.

CFL-871-H Hardener.

X-RAY POWDER CHEMICALS:

CONTROL STRIPS:

X RAY POWDERCHEMICALSFOR MANUAL PROCESSING:

12
X RAY LIQUID CHEMICALS FOR AUTOMATIC PROCESSING:

Pack size of Konica Minolta Chemicals:

Konica Minolta LR color paper chemical:

13
CODE. DESCRIPTION KIT
NO. SIZE

20015 22 P-1 LR KONICA MINOLTA COLOR QA PAPER DEVELOPER 4 x 10L

REPLENISHER

20016 22 P-2 LR KONICA MINOLTA COLOR QA PAPER BLEACH FIX 2 x 7.5L

& REPLENISHER

20027 22P-3 (2) KONICA MINOLTA QA PAPER SUPER STABILISER & 8 x 9.5L
REPLENISHER

20018 KP-1S-11 KONICA MINOLTA COLOR QA PAPER DEVELOPER 2 x 1L

STARTER

20025 32 P-1 KONICA MINOLTA COLOR QA PAPER DEVELOPER 4 x 10L

REPLENISHER

20023 32 P-2 KONICA MINOLTA COLOR QA PAPER BLEACH FIX 2 x 10L

REPLENISHER

20026 32 P-2S KONICA MINOLTA COLOUR QA PAPER BLEACH FIX 2 x 1L

STARTER

Konica Minolta LR color negative chemicals

CODE. DESCRIPTION KIT

NO. SIZE

19007 52 N-1R-11 LR KONICA MINOLTA COLOR NEGATIVE FILM 4 x 10L

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 DEVELOPER REPLENISHER

19008 N-1S-11 KONICA MINOLTA COLOR NEGATIVE FILM 2 x 1L

DEVELOPER STARTER

19009 52 N-2R-11 LR KONICA MINOLTA COLOR NEGATIVE FILM 2 x 5L

BLEACH REPLENISHER

19010 N-2S-11 KONICA MINOLTA COLOR NEGATIVE FILM BLEACH 2 x 1L

STARTER

19011 52 N-3R-11 LR KONICA MINOLTA COLOR NEGATIVE FILM 2 x 10L

FIXER & REPLENISHER

19012 52 N-4R-12 LR KONICA MINILTA COLOR NEGATIVE FILM 12 x 10L

SUPER STABILISER & REPLENISHER

SR COLOUR CHEMICALS:

CODE. DESCRIPTION KIT

NO. SIZE

01001 N1 DEVELOPER REPLENISHER 40-N1-CNK4-40 1 x 9.9L

01002 N1S DEVELOPER STARTER 40-N1S-CNK-4-40 4 x 12.9L

01003 N2 BLEACH REPLENISHER 40-N2-CNK-4-40 2 x 4.4L

15
01004 N2S BLEACH STARTER 40-N2S-CNK-4-40 6 x 4.4L

01005 N3 FIXER REPLENISHER 40-N3-CNK-4-40 2 x 6.12L

01006 N4 SUPER STABILISER REPLENISHER 40-N4-CNK-4-40 4 x 9L

KONICA MEDICAL X-RAY CHEMICALS:

CODE. DESCRIPTION KIT

NO. SIZE

16016 KONICA MINOLTA DOL-X X-RAY FILM DEVELOPER 9.0L

16017 KONICA MINOLTA DOL-X X-RAY FILM DEVELOPER 13.5L

16018 KONICA MINOLTA DOL-X X-RAY FILM DEVELOPER 22.5L

16
16019 KONICA MINOLTA FIX ACID HARDENING FIXER 9.0L

16020 KONICA MINOLTA FIX ACID HARDENING FIXER 13.5L

16021 KONICA MINOLTA FIX ACID HARDENING FIXER 22.5L

16022 KONICA MINOLTA XD-90 DEVELOPER REPLENISHER FOR X- 2 x 20L

RAY FILM AUTOMATIC PROCESSOR

16023 KONICA MINOLTA XF-SR FIXER FOR X-RAY FILM 2 x 20L

AUTOMATIC PROCESSOR

16024 KONICA MINOLTA XD-90S DEVELOPER STARTER FOR X-RAY 1 X 1L

FILM AUTOMATIC PROCESSOR

KONICA MINOLTAGRAPHIC ARTS CHEMICALS:

CODE. DESCRIPTION KIT

NO. SIZE

KONICA MINOLTA PCR-846 – GRAPHIC ARTS RAPID ACCESS

09012 DEVELOPER FOR FILM & PAPER 1 x 5L

09015 KONICA MINOLTA CFL-871 –GRAPHIC ARTS RAPID ACCESS 1 x 4.91L

FIXER FOR FILM & PAPER

09016 KONICA MINOLTA CFL-871-H – HARDENER FOR GRAPHIC 1x0.972L

ARTS RAPID ACCESS FILM & PAPER

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STANDARD PROCESSING CONDITION

A – COLOUR PAPER CHEMISTRY

1. COLOR PAPER CHEMICALS CPK-2-22 LR (SQA)

Processing Processing  Processing Replenishment

Step Time Temperature (°C) Rate

ml/m2 ml/ft2

22P1 LR Colour 22” (27”) 39.8±0.3 80 7.4

Developer (38.0+0.3)

18
22P-2 LR Bleach-Fixer 22” (27”) 38±3.0 100 9.3

22P3 (2) Super Stabilizer 66” (81”) 38.0±3.0 200 18.6

2.QA PAPER CHEMICALS CPK -2-32

Processing Processing  Processing Replenishment

Step Time Temperature (°C) Rate

ml/m2 ml/ft2

32P1 Colour Developer 45” 37.5±0.3 60 5.6

32P-2 Bleach-Fixer 45: 37.0±2.0 54 5

22P3 (2) Super more than 90” 38.0±3.0 180 16.7

Stabilizer

A1 – COLOUR NEGATIVE CHEMISTRY 

COLOR NEGATIVE FILM CHEMICALS CNK-4-52 LR

Processing Processing  Processing Replenishment

Step Time Temperature (°C) Rate

ml/m2 ml/ft2

52N-1 LR Colour 3’15” 38.0±0.3 13.6 21.9

Developer

52N-2 LR Bleach 45” 38.0±3.0 3.6 5.84

52N-3 LR Fixer 1’30” 38.0±3.0 19.1 30.7

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52N-4 LR Super Stabilizer 1’00” 38.0±3.0 30.0 48.2

B – MEDICAL X-RAY FILM CHEMISTRY

B1 POWDER CHEMISTRY FOR MANUAL PROCESSING

Processing Processing  Processing

Step Time Temperature (°C)

KM Dol-X 4’ - 5’ 20 (68F)

KM Fix –Films 10’ 20 (68F)

KM Fix – Photographic 5’ 20 (68F)

Papers

20
B2 LIQUID CHEMISTRY FOR AUTOMATICPROCESSING

Processing Processing  Processing

Step Time Temperature (°C)

KM XD-90 30” 35
DEVELOPER

KM XF-SR FIXER 60” 25-35

C. GRAPHIC ARTS RAPID ACCESS FILM CHEMISTRY

Processing Processing  Processing Replenishment Rate

Step Temperature ml/m2
Time (°C)

PCR-846 20” – 40” 35 ± 0.3 310 (for 0-50% exp)

DEVELOPER 310 – 620 ml/m2 for 50%-100%
exp)

CFL-871 FIXER 20” – 40” 35 ± 0.3 300 - 600

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 CHAPTER 2: DEVELOPMENT OF MAIN THEME

2.1 NEED OF THE STUDY

1. Financial performance analysis is used to identify the relationship between financial

statements.
2. To know where the organisation lags behind.
3. To know the areas to be improved upon.
4. The most common methods used for financial statement analysis are ratio analysis , altman z
score& ZETA Score
5. Financial statement will judge profitability and financial soundness of the organization
6. To predict the risk of bankruptcy with the help of Z-Score model

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 2.2 OBJECTIVE OF THE STUDY

Primary objective:

A study on financial performance and predicting financial distress of Nippon

photographic pvt ltd.

Secondary objective:

1. To provide a strong theoretical framework for analysis financial statements.

2. To study the growth profile of the company during the study period.
3. To study the financial position of the company and operation of Nippon photographic
pvt ltd.
4. To know the liquidity and solvency position of Nippon photographic pvt ltd.
5. To find out the working capital investment efficiency
6. To predict the risk of bankrupty with the help of z-score model.

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 2.3 SCOPE OF STUDY

The Study mainly attempts to analyze the Financial Performance and Predicting Financial
distress of the Nippon Photography Private Limited for the study. The Financial authorities can
use this for evaluating their Performance in future and also to predict the risk of bankruptcy
which will help to analyze Financial statements and to apply the resources of the Company
properly for the development of the Company. The present study attempt to develop a trend
analysis model for sales and Working Capital and profit and loss accounts. There can be
forecasting to evaluate the Overall Performance of the Nippon Photography Private Limited in
future and to predict the risk of the finance distress of Nippon Photography Private Limited in
future.

24
 2.4 LIMITATION OF THE STUDY

1. The project period of three months is insufficient as the company’s operations are
numerous and complex and hence various areas could not be fully covered.
2. The data have been tabulated using the last three years annual report of the company and
such data are only secondary in nature.
3. Analysis of ratios can also be done with the help of alternative formulae
4. The scope of analysis is only for three years

25
 2.5 REVIEW OF LITERATURE

Altman’s Z-score

The popular ones being predicting bankruptcy of private firms (Altman, 1993), no
manufacturers’ Z-score model, and the Emerging Markets Score of Altman, (Altman, Hartzell, &
Peck, Emerging Market Corporate Bonds: A Scoring System,, 1995).Altman and Narayanan
(1997) present a review on international studies conducted in 22 countries in which half of them
are on developing countries. The major conclusion of all these studies is that the multivariate
techniques such as multiple discriminant analysis, logistic regression, and probit models built on
the basis of accounting ratios are effective tools for predicting default companies. In many cases,
accounting ratio-based credit scoring models have shown that they can perform quite well over
many different time periods and across many different countries (Altman, Narayanan , & Paul,
1997). Among them, multiple discriminant analysis is found to be a superior and a more
acceptable technique.

26
Bhatia, 1988; Sahoo, Mishra , Soothpathy, & Mayadnar, 1996

Examine the predictive power of accounting ratios on a sample of sick and non-sick companies
by applying the multiple discriminant analysis technique. In both the studies, the selected
accounting ratios are effective in predicting sickness with high level of accuracy. But, these
studies have considered a select sample of sick companies as defined by the Sick Industries
Companies Act (SICA) and not the firms under banking definition of default.(Gupta, 1983)Study
on a sample of Indian companies financed by ICICI concludes that certain cash flow coverage
ratios are better indicators of corporate sickness. The study has not favoured the application of
either multiple discriminant analysis or any other.

Aiyabei 2002

The theoretical aspect of a financially distressed firm based on a cyclical concept and examined
the financial performance of small business firms based in Kenya using Z score model.(McClure,
2004) Had confirmed the ‘Z’ score model through his research study and he concluded that to
keep an eye on their investments, investors should consider checking their companies’ Z-score
on a regular basis. A deteriorating Z-score can signal trouble ahead and provide a simpler
conclusion than the mass of ratios. Given its shortcomings, the Z is probably better used as a
gauge of relative financial health rather than as a predictor. Arguably, it is best to use the model
as a quick check of financial health, but if the score indicates a problem, it’s a good idea to
conduct a more detailed analysis.

Gupta, 1999

In Indian context, (Gupta, 1999) attempted a refinement of Beaver’s method with objective of
predicting the business failure. Whereas,(Mansur.A & Mulla, 2002)made a study in Textile mill,
with the help of Z score model for evaluating the financial health with five weighted financial

27
ratios and followed by(Selvam, Vanitha, & Babu., 2004) had revealed about cements Industry’s
financial health especially India Cements Ltd. (krishnaChaitanya, 2005) used Z model to
measure the financial distress of Industrial Development Bank of India (IDBI) and concluded
that IDBI is likely to become insolvent in the years to com.

Mensah 1984

Indicates that the past performance involved in a firm’s accounting statements may not be
informative in predicting the future, and thus suggests that it is necessary to regenerate the
accounting-ratio-based models periodically.(Hillegeist, Keating Cram, & Lundstedt, 2004)Argue
that the ability of accounting information in predicting bankruptcy is likely to be limited given
the fact that they are formulated to describe the financial condition of the company under the
“going-concern” principle (i.e., assuming it will not go bankrupt).

Black & Scholes, 1973; Merton, 1974

Based on the criticisms of accounting-ratio-based models, market-based models are proposed by

(Black & Scholes, 1973; Merton, 1974).It is claimed that market prices reflect future expected
cash flows, and thus should be more useful in predicting bankruptcy. Market-based models are
further examined by a number of studies, including (Hillegeist, Keating Cram, & Lundstedt,
2004; Reisz & Perlich, 2004; Vassalou & Xing, 2004; Campbell, Hilscher, & Szilagyi, 2006) in
assessing default probability.

Kealhofer & Kurbat, 2001; Oderda, Dacorogna, & Jung; Hillegeist, Keating Cram, &
Lundstedt, 2004; Reisz & Perlich, 2004; Stein, 2005; Campbell, Hilscher, & Szilagyi, 2006;
Blochlinger & Leippold, 2006; Agarwal & Taffler , 2008

The empirical evidence on the relative performance of market-based against accounting-

ratiobased models is mixed performance of market-based against accounting-ratio-based models
is mixed.

Thynne, 2006

28
A company is financially distressed whenever its EBITDA is less than its interest
expenses.Financial leverage involves the substitution of fixed-cost debt for owner's equity in the
hope of increasing equity returns. Financial leverage improves financial performance when
business financial prospects are good but adversely impact on financial performance when things
are going poorly. As a result, increasing the ratio of debt to equity in a company's capital
structure implicitly makes the company relatively less solvent and more financially risky than a
company without debt. Capital adequacy relates to whether a company has enough capital to
finance its planned future operations. If the company's capital is inadequate, then it must either
be able to successfully issue new equity, or arrange new debt. The amount of debt a company
can successfully absorb and repay from its continuing operations, is normally referred to as the
company's debt capacity.

Patrick & Ooghe, 2004.

For many small and newly formed businesses, this is often the single most important reason for
business failure. The problem arises when the money coming into the company from sales is not
enough to cover the costs of production. It is important to remember that it is a case of having the
Money to be able to pay debts when the debts are due not simply generating enough revenue
during a year to cover costs

Charitou, 2002.

Many new businesses will have to put together a business plan to present to the bank before it
receives loans or financial help. The time and effort put into these plans is crucial for success.
Bad planning or poor information on which the plan is based is likely to lead to difficulties for
the firm. For example, if the firm plans to sell 2,000 units per month in the first year because it
used only limited market research and ends up only selling 500 per month, it will soon be in
serious danger of collapse.

Moyer, Tuncan , Birgonul , & Dikmen, 2006

29
Falling sales might be a sign that there might be something wrong with the product or the price
or some other aspect of the marketing mix. Sometimes the fall in sales might be as a result of the
Competition providing a better product or service - in part the business can do something about
this they have to recognize it in the first place.

Sipika & Smith, 2002

Changing tastes, technology and fashion can cause demand for products to fall - the business
needs to be aware of these trends. Demand might fall for other reasons not in the firm's control.
It might be due to a change in the economic climate of the country. If the economy is
experiencing a downturn then maybe people may not have as much money to spend on the
businesses products or services. The Bank of England may have increased interest rates and this
has led to people cutting back their spending.

Kip, 2000.

Costs of production can rise for a number of reasons. There may have been wage rises, raw
material prices might have increased (for example the price of oil or gas) the business might
havehad to spend money on meeting some new legislation or standard and so on. In many cases,a
firm can plan for such changes and is able take them into account but if the costs rise
unexpectedly, this can catch a firm off guard and tip them into insolvency.

Eidleman, 2007

To project a high profile image for the company by hiring expensive office space and a fancy
logo and website will not do much to facilitate in the success of your business. In fact high
overheads, because of expensive space and website maintenance costs, can drive you out of
business very fast, because the golden rule for the success of any business is to keep overheads
low especially at the start up time(Argenti, 2003).Diversifying customer base is an important
factor in building the business. Being flexible enough to adapt to new trends and ideas is
important to staying in business

30
Eidleman, 2007.

Uncontrolled growth of the business can also cause it to fail if not handled appropriately. Obesity
is a problem in business as it is in an individual’s health? Proper planning must be in place even
for business growth. Successful growth requires a professional management team, flexible
organization, and proper systems and controls.

For decades, considerable accounting and finance research was directed at finding a ratio that
would serve well as a predictor of bankruptcy. One of the most comprehensive studies of that
early era was(Beaver, 1967).Beaver studied the performance of various ratios as bankruptcy
predictors and concluded that the cash flow to debt ratio was the single best predictor.

CHAPTER 3 – ANALYSIS AND INTERPRETATION

3.1 RESEARCH METHODOLOGY

Meaning of research:

Research is the process of systematic and in depth study or search for any particular topic,
subject or area of investigation, backed by the collection, compilation, presentation and
interpretation of relevant details or data. It is a careful search of industry into any subject or
subject matter, which is an endeavor to discover or find out valuable facts, which would be
useful for further application of utilization. Research may involve a scientific study or
experimentation and result in discovery or invention, which would aid either scientific
development or decision-making.

Research design:

31
 The research design followed for the study is analytical research. The secondary data is
collected from the journals and existing data available with the financial reports.

Analytical research design:

In analytical research, on the other hand, the researcher has to use facts or information
already available, and analyze these to make a critical evaluation of the material.

Data collection:

There are two type of data collection are as follows

 Primary data
 Secondary data

Primary data

The primary data can be accessed through personal enquiry and through direct observation

Secondary data:

On the other hand, the secondary data re those which have already been collected
someone else passed through the statistical process. Secondary data were collected from books,
journals magazines, newspaper, internet and other available information obtained through the
company pamphlets.

Data, which are not originally collected but rather than obtained from the published or
unpublished sources, are known as secondary data. They are

 Company records
 Annual reports

Tools applied

 Ratio analysis

32
  Altman z score model
 ZETA score model

Ratio analysis

A ratio is a simple arithmetical expression of one number to another. The technique of ration
analysis can be employed for measuring short term liquidity or working capital position of the
firm.

A financial ratio or accounting ratio is a relative size of two selected numerical values taken
from an enterprise’s financial statements. In accounting, there are many standard ratios to
compare the strengths and weaknesses in various companies. If shares in a company are traded in
a financial market, the market price of the share is used in certain financial ratios.

Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent
value, such as 10%.

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “The indicated
quotient of two mathematical expression” and as “The relationship between for evaluating the
financial position and performance of firm. The absolute accounting figure reported in financial
statement do not private a meaningful understanding of the performance and financial position of
a firm. An accounting figure conveys meaning when it is related to some other relevant
information.

Ratios help to summarize large quantities of financial data and to make qualitative
judgments about the firm’s financial performance

LIQUIDITY RATIO: -

a. CURRENT RATIO

The ratio of current asset to current liability is called current ratio. Current ratio indicates
the ability of a concern to meet its current obligations as and when they are due for payment. The
standard expected in current ratio is 2:1.

Current asset

33
 Current Ratio        =  ….…………………..   

Current Liabilities

  Current Assets       =   Cash in Hand + Cash at Bank + Bills Receivable + Sundry Debtors +
Marketable Securities or Short term investments + Loans & Advances + Stock / Inventories +
Prepaid Expenses + Accrued Incomes

  Current Liabilities      =     Sundry Creditors + Bills Payable + Provision for Bad Debts +
Provision for Taxation + Bank Overdraft +  Outstanding Expenses + Income received in
Advance +  Short term Loans

b. LIQUID RATIO

Liquid ratio is also known as the quick ratio or acid test ratio. This is calculated by
comparison of quick asset and current liability.

The standard expected in quick ratio is 1:1.

Liquid asset or Quick asset

  Liquid ratio   =          ………………………………….

                                            Current Liabilities

Liquid assets mean current assets less stock and prepaid expenses.

    Liquid Assets = Current Assets – Closing Stock – Prepaid Expenses

34
c. ABSOLUTE LIQUID RATIO

This ratio is also called cash position ratio or super quick ratio. This is slightly variation of
quick assets. The absolute ratio measures liquidity in terms of cash and cash equivalents.

The standard expected in absolute ratio is 0.75:1.

Absolute liquid asset

Absolute Liquid ratio = .....................................

Liquid liabilities

Absolute liquid assets = cash + bank + marketable securities

LEVERAGE RATIO

a. PROPRIETARY RATIO

This ratio expresses the relationship between the propertor’s fund and total tangible assets.
This ratio shows the soundness of the company. A higher ratio indicates safety to creditors and
low ratio shows greater risk to the creditors.

Shareholder’s fund or proprietors fund

Proprietary Ratio          =          ………………………………………..

                                                                  Total tangible Assets

b. DEBT EQUITY RATIO

35
 It is one of the long term solvency ratios. It is used to analyze the capital structure of the
firm. This ratio establishes relationship between long term liability and shareholders fund.

Long term Liabity

Debt equity ratio = ……………………………………...................

shareholders fund

ACTIVITY RATIO

a. INVENTORY TURNOVER RATIO

This ratio indicates the number of times the inventory has been converted into sales during
the period. Thus it evaluates the efficiency of the firm in managing its inventory. It is calculated
by dividing the cost of goods sold by average inventory.

Cost of goods sold

Stock Turnover Ratio (STR)             =        …………………………

                                                                Average Stock

The average inventory is simple average of the opening and closing balances of inventory.
(Opening + Closing balances / 2). In certain circumstances opening balance of the inventory
may not be known then closing balance of inventory may be considered as average inventor.

b. WORKING CAPITAL TURNOVER RATIO

36
 A higher ratio is an indicator of better utilization of current assets and working capital and
vice-versa (a lower ratio is an indicator of poor utilization of current assets and working capital).
It is calculated by dividing sales by working capital.

Net sales

Working Capital Turnover Ratio   = ………………………

                                                            Working Capital

         Working Capital = current Assets – Current Liabilities

e. FIXED ASSET TURNOVER RATIO

This ratio determines the efficiency of utilization of fixed asset and profitability of business
concern. Higher the ratio, the more is the efficiency in utilization of fixed asset. A lower ratio is
the indication of under utilization of fixed assets.

Net sales

Fixed Assets Turnover Ratio       = …………………….

                                                           Net Fixed Assets

         

     Net Fixed Assets = Gross Fixed Assets - Depreciation

PROFITABILITY RATIOS

a. GROSS PROFIT RATIO

The gross profit margin ration shows the margin left after meeting manufacturing cost. The ratio
also measures. The efficiency of production as well as pricing. 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. A
high ratio may also imply of a higher sales rise without a corresponding increase in the cost of

37
goods sold. Whereas a low gross profit margin in a danger signals, warranting a careful and
detailed analysis of the factors responsible for the same.

Gross profit

Gross Profit Ratio             =      …………………. X 100          

Net sales        

b.NET PROFIT RATIO

The Net Profit Margin Ration determines the between Net profit and sales of business
firm. This relationship is also known as net margin. This ratio shows the earning left for
shareholder (both equity and preference) as percentage of Net sales. Net Margin Ratio measures
the over all efficiency of production, Administration selling, Financing, pricing and Tase
Management.

Net profit

Net Profit Ratio                =          …………………. X 100

Net Sales

c. OPERATING RATIO

Operating ratio reflects the difference between total operating expenses and sales.
Operating expenses include cost of goods sold, administrative and selling expenses and
excluding financial expenses.

Operating cost

Operating Ratio                =          ………………….. X 100

                                                           Net Sales

38
FINANCIAL DISTRESS:

Financial distress is a term in corporate finance used to indicate a condition when promises

to creditors of a company are broken or honored with difficulty. If financial distress cannot be
relieved, it can lead to bankruptcy. Financial distress is usually associated with some costs to the
company; these are known as costs of financial distress.

A company under financial distress can incur costs related to the situation, such as more
expensive financing, opportunity costs of projects and less productive employees. The firm's cost
of borrowing additional capital will usually increase, making it more difficult and expensive to
raise the much needed funds. In an effort to satisfy short-term obligations, management might
pass on profitable longer-term projects. Employees of a distressed firm usually have lower
morale and higher stress caused by the increased chance of bankruptcy, which would force them
out of their jobs. Such workers can be less productive when under such a burden.

ALTMAN ZSCORE

The Altman ZScore (named after Edward Altman, the New York University professor who
devised it) is a statistical tool used to measure the likelihood that a company will go bankrupt.

Though Altman devised the ZScore in the 1960s, the notion of trying to predict which companies
would fail was far from new at that time. However, Altman added a statistical technique called
multivariate analysis to the mix of traditional ratioanalysis techniques, and this allowed him to
consider not only the effects of several ratios on the "predictiveness" of his bankruptcy model,
but to consider how those ratios affected each other's usefulness in the model.

39
Altman developed the ZScore after evaluating 66 companies, half of which had filed for
bankruptcy between 1946 and 1965. He started out with 22 ratios classified into five categories
(liquidity, profitability, leverage, solvency and activity) but eventually narrowed it down to five
ratios. The results is

Z< 1.21 indicates bad financial performance leads to bankruptcy

Z > 1.21 and Z<2.9 indicates poor financial performance

Z> 2.9 indicates good financial performance

ZScore = 0.717a + 0.847b +3.107c+ 0.420d+ 0.998e

The variables are as follows:

a.The ratio of Working Capital to Total Assets

b. the ratio of Retained Earnings to Total Assets

c. the ratio of Operating Earnings to Total Assets

d. the ratio of Book Value of Equity to Total Liabilities

e.the ratio of Sales to Total Assets

Zeta Model

The probability of default can be used in various financial modeling applications:

a) Estimating the appropriate risk premium in commercial lending.
b) Estimating the appropriate discount in traded bonds.
c) Modeling the credit limit in trade credit applications.
d) Calculating the incremental expected cost associated with individual suppliers.

40
These characteristics are independent of the assumptions that were made in the original test
sample and amount to extensive holdout experience.

Because we understand the spectrum of credit quality, we know how to customize decision rules
such as:
a) “Accept only if the company is investment grade.”
b) “Reject the customer if the expected default rate is greater than 5%.”
c) “Find a replacement supplier if the expected cost (due to possible failure) is 20% higher than
the contractual cost.”

The zetascore is calculated as follows:
Z-Score = 1.2a + 1.4b + 3.3c + 0.6d + e
The variables are as follows:
a: the ratio of workingcapital to total assets;
b: the ratio of retainedearnings to total assets;
c: the ratio of EBIT to total assets;
d: the ratio of the marketvalue of the equity to total liabilities; and
e: the ratio of sales to total assets

3.2 DATA ANALYSIS AND INTERPETATION

RATIO ANALYSIS

Current ratio

Current Assets

Current ratio =

41
 Current Liabilities

3.2.1 Table showing computation of the current ratio

CURRENTRATIO
YEARS MAR’14 MAR’13 MAR’12
Current asset 1,95,78,084 2,35,01,266 21409904
Current liability 1559174 3402326 1684283
RATIOS 12.56 6.91 12.71

Findings:

From the above table the Current ratio of the year 2014 is 12.56, for the year 2013 current
ratio is 6.91 and for the year 2012 current ratio is 12.71 respectively

Interpretation

The benchmark ratio is 2:1. In none of the years current ratio reached the benchmark ratio.
From the years 2012-14 the current ratio has been increasing. This indicates weakened ability to
meet the current obligation

3.2.1 Chart showing computation of the current ratio

42
 Current Ratio
14
12.56 12.71
12

10

8 6.91
6 RATIOS

0
MAR’14 MAR’13 MAR’12

Quick ratio

43
 Quick Assets

Quick ratio =
Current Liabilities

LIQUID (OR) QUICK RATIO

YEARS MAR’14 MAR’13 MAR’12
Liquid asset 7869038 10,887,854 8,209,634
current liabilities 1559174 3402326 1684283
Ratios 5.04 3.2 4.87
3.2.2 Table showing computation of liquid ratio (or) quick ratio

Findings:

From the above table the quick ratio of the year 2014 is 5.04, for the year 2013 quick ratio
is 3.2 and for the year 2012 quick ratio is 4.87 respectively.

Interpretation

The benchmark ratio is 1. For the years 2012-2014 the quick ratio was above the
benchmark. This indicates ability to meet short term obligation. This indicates weakened ability
to meet short term obligation

3.2.2 Chart showing computation of the liquid ratio (or) quick ratio

44
 Liquid Ratio
6
5.04 4.87
5

4
3.2 Ratios
3

0
MAR’14 MAR’13 MAR’12

Absolute Quick ratio

45
 Cash and cash equivalents

+ market securities

Absolute Quick ratio =

Current Liabilities

3.2.3 Table showing computation of the absolute liquid ratio:

ABSOLUTE LIQUID RATIO

YEARS MAR’14 MAR’13 MAR’12
Cash & Bank 5,114,7721 8,433,719 4,876,984
balance
Current liabilities 1559174 3402326 1684283
Ratios 3.28 2.48 2.89

Findings:

From the above table the absolute liquid ratio of the year 2014 is 3.28, for the year 2013
absolute liquid ratio is 2.48 and for the year 2012 absolute liquid ratio is 2.89 respectively.

Interpretation

The benchmark ratio is 1. For the years 2012-2014 the absolute quick ratio was above the
benchmark. This indicates ability to meet short term obligation. This indicates weakened ability
to meet short term obligation

3.2.3 Chart showing computation of the absolute liquid ratio

46
 Absolute Ratio
3.5 3.28
3 2.89
2.48
2.5

2 Ratios

1.5

0.5

0
MAR’14 MAR’13 MAR’12

Debt equity ratio

Long term liability

47
Debt equity Ratio          =          ………………………………………..

                                                       Shareholder’s fund or proprietors fund

3.2.4 Table showing computation of debt equity ratio

DEBT EQUITY RATIO
YEARS MAR’14 MAR’13 MAR’12
Long term liability 1825657 3532384 1669434
Shareholder fund 28919131 2938457 26223965
Ratios 0.63 0.13 0.064

Findings:

From the above table the debt equity ratio of the year 2014 is0.63, for the year 2013 debt
equity ratio is 0.13 and for the year 2012 debt equity ratio is 0.064 respectively.

Interpretation

For the years 2012-2014 the debt equity ratio was below the benchmark. This indicates
ability to meet short term obligation. This indicates weakened ability to meet short term
obligation

3.2.4 Chart showing computation of the debt equity ratio

48
 Debt Equity Ratio
0.7
0.63
0.6

0.5

0.4 Ratios

0.3

0.2
0.13
0.1 0.06

0
MAR’14 MAR’13 MAR’12

Proprietary ratio

Shareholder’s fund or proprietors fund

Proprietary Ratio          =          ………………………………………..

49
                                                                  Total tangible Asset

3.2. 5 Table showing computation of the proprietary ratio:

PROPRIETARY RATIO
YEARS MAR’14 MAR’13 MAR’12
Shareholder fund 28919131 2938457 26223965
Total tangible asset 30739788 31470841 27893398
Ratios 0.94 0.88 0.94

Findings:

From the above table the proprietary ratio of the year 2013 is 0.88, for the year 2014 and
2012 debt equity ratio is same as 0.94 respectively.

Interpretation

From the above table it is understood that the proprietary ratio decreased 2013 and increased in
2012 and2014 to 0.9

3.2.5 Chart showing computation of the proprietary ratio

50
 Properitary Ratios
0.95
0.94 0.94
0.94
0.93
0.92
0.91 Ratios
0.9
0.89
0.88
0.88
0.87
0.86
0.85
MAR'14 MAR'13 MAR'12

Gross profit ratio:

51
 Gross profit

Gross Profit Ratio             =      …………………. X 100          

Net sales        

3.2.6 Table showing computation of the Gross profit ratio

Gross profit ratio

YEARS MAR’14 MAR’13 MAR’12
Gross profit 22052019 14798504 14930070
Net Sales 28577504 24190863 25476371
Ratio 77.16 61.17 58.6

Findings:

From the above table the gross profit ratio of the year 2014 is 77.16%, for the year 2013
gross profit ratio is 61.17% and for the year 2012 gross profit ratio is 58.6% respectively.

Interpretation

A higher ratio is preferable for showing higher profitability. Comparing with 2014 the gross
profit ratio of 2012 is low. So the company's profitability position is satisfactory

3.2.6 Chart showing computation of the Gross profit ratio

52
 Gross profit Ratio
90
80 77.16
70
61.17 58.6
60
50 Ratio

40
30
20
10
0
MAR’14 MAR’13 MAR’12

Net profit ratio :

53
 Net profit

Net Profit Ratio                =          …………………. X 100

Net Sales

3.2.7 Table showing computation of the Net profit ratio

Net profit ratio
YEARS MAR’14 MAR’13 MAR’12
Net profit 1714492 980674 568017
Sales 28577504 24190863 25476371
Ratio 5.99 4.05 2.23

Findings:

From the above table the net profit ratio of the year 2014 is 5.99%, for the year 2013 net
profit ratio is 4.05% and for the year 2012 net profit ratio is 2.23% respectively.

Interpretation

The net profit ratio is the overall measure of the firm's ability to turn each rupee of
income from services in net profit. If the net margin is inadequate the firm will fail to achieve
return on shareholders’ funds. The higher net profit ratio will help the firm service in the fall of
income from service, raise in cost of production or declining demand.

The net profit is increased because the income from service is increased. The
increment resulted a slight decreased in 2012 ratio compared with the year 2014

3.2.7 Chart showing computation of the Net profit ratio

54
 Net profit Ratio
7
5.99
6

5
4.05
4 Ratio

3
2.23
2

0
MAR’14 MAR’13 MAR’12

Operating ratio:

Operating cost

55
Operating Ratio                =          ………………….. X 100

                                                           Net Sales

3.2.8 Table showing computation of the operating ratio:

Operating ratio
YEARS MAR’14 MAR’13 MAR’12
Cost of sales 6525485 9392359 10546301

Operating expense 6057672 6641683 8902757

Sales 28577504 24190863 25476371
Ratio 44.03 66.28 76.34

Findings:

From the above table the operating ratio of the year 2014 is 44.03%, for the year 2013
operating ratio is 66.28% and for the year 2012 operating ratio is 76.34% respectively.

Interpretation

Operating profit ratio refers to the relationship between profit after tax and net sales. A
higher ratio is preferable for showing higher profitability.

Comparing with 2014 the operating ratio of 2012 is low. So the company's profitability
position is satisfactory.

3.2.8 Chart showing computation of the operating ratio

56
 Operating Ratio
90
80 76.34
70 66.28
60
50 Ratio
44.03
40
30
20
10
0
MAR’14 MAR’13 MAR’12

Material consumed

57
 Material consumed

Material consumed =      ….....…………………………….. X 100

                                                           Net Sales

3.2.9 Table showing computation of the material consumed ratio

Material consumed ratio

YEARS MAR’14 MAR’13 MAR’12
Material consumed 6525485 9392359 10546301
Sales 28577504 24190863 25476371
Ratio 22.83 38.83 41.40

Findings:

From the above table the material consumed ratio of the year 2014 is 22.83, for the year
2013 material consumed ratio is 38.83 and for the year 2012 material consumed ratio is 41.4
respectively.

Interpretation

Material consumed ratio refers to the relationship between material consumed and net
sales. A higher ratio is preferable for showing higher profitability.

Comparing with 2014 the operating ratio of 2012 is high . So the company's profitability
position is satisfactory

3.2.9 Chart showing computation of the material consumed ratio

58
 Material consumed Ratio
45 41.4
40 38.83

35
30
25 22.83 Ratio

20
15
10
5
0
MAR’14 MAR’13 MAR’12

Capital Turnover Ratio      

Net sales
59
Capital Turnover Ratio       = ……………………………..

                                                           Capital employed

3.2.10 Table showing computation of the capital turnover ratio

Capital turnover ratio
YEARS MAR’14 MAR’13 MAR’12
Sales 28577504 24190863 25476371
Capital employed 26223965 27938457 28919131
Ratio 1.09 0.86 0.88

Findings:

From the above table the capital turnover ratio of the year 2014 is 6.54, for the year 2013
capital turnover ratio is 3.51 and for the year 2012 capital turnover ratio is 1.96 respectively.

Interpretation

Capital is the important resource which can decide the strength of the company, because every
action behind the company there is involvement of the capital hide. So capital utilisation is the
one of the important management which should company use wisely.

Gradual increase on sale and the ratio of capital turnover ratio is showing that the company is in
the healthy position

3.2.10 Chart showing computation of the capital turnover ratio

60
 Capital turnover Ratio
1.2
1.09
1
0.86 0.88
0.8
Ratio
0.6

0.4

0.2

0
MAR’14 MAR’13 MAR’12

Fixed Assets Turnover Ratio      

Net sales

61
Fixed Assets Turnover Ratio       = …………………….

                                                           Net Fixed Assets

              Net Fixed Assets = Gross Fixed Assets - Depreciation

3.2.11 Table showing computation of the fixed asset turnover ratio

Fixed asset turnover ratio
YEARS MAR’14 MAR’13 MAR’12
Sales 28577504 24190863 25476371
Fixed asset 6815470 7308866 7878017
Ratio 4.19 3.31 3.23

Findings:

From the above table the fixed asset turnover ratio of the year 2014 is 4.19, for the year 2013
fixed assets turnover ratio is 3.31 and for the year 2012 fixed assets turnover ratio is 3.23
respectively

Interpretation

Fixed assets are used in the business for producing the goods to be sold. The ratio shows
the firms' ability in generating sales from all financial resources committed to total assets. The
ratio indicates the amount of one rupee invested in fixed assets.

The income from service generally increases in the current year due to increase in the
operations and due to increase in extra invoice and net fixed assets are reduced due to
depreciation. Finally, that affected a huge increase in the ratio compared with the previous year’s
ratio.

3.2.11 Chart showing computation of the fixed asset turnover ratio

62
 Fixed asset turnover Ratio
4.5 4.19
4
3.5 3.31 3.23
3
2.5 Ratio

2
1.5
1
0.5
0
MAR’14 MAR’13 MAR’12

Stock Turnover Ratio (STR)            

Cost of goods sold

63
Stock Turnover Ratio (STR)             =        …………………………

Average Stock

3.2.12 Table showing computation of the stock turnover ratio

Stock turnover ratio
YEARS MAR’14 MAR’13 MAR’12
Cost of Sales 6525485 9392359 10546301
stock 11709046 12613412 13200270
Ratio 0.56 0.74 0.79

Findings:

From the above table the stock turnover ratio of the year 2014 is 0.56, for the year 2013 stock
turnover ratio is 0.74 and for the year 2012 stock turnover ratio is 0.79 respectively

Interpretation

Stock are used in the business for producing the goods to be sold. The ratio
shows the firms' ability in generating sales from all financial resources committed to total assets.
The ratio indicates the amount of one rupee invested in stock .

The income from service generally increases in the current year due to increase in
the operations and due to increase in extra invoice and inventory are reduced due to
depreciation. Finally, that affected a huge decrease in the ratio compared with the previous year’s
ratio

3.2.12 Chart showing computation of the stock turnover ratio

64
 Stock turnover Ratio
0.9
0.79
0.8 0.74
0.7
0.6 0.56
0.5 Ratio

0.4
0.3
0.2
0.1
0
MAR’14 MAR’13 MAR’12

Working Capital Turnover Ratio  

Net sales

Working Capital Turnover Ratio   = ………………………

65
                                                            Working Capital

         Working Capital = current Assets – Current Liabilities

3.2.13 Table showing computation of the working capital turnover ratio

Working capital turnover ratio

YEARS MAR’14 MAR’13 MAR’12
Cost of Sales 6525485 9392359 10546301
Working capital 18018910 20098940 19725621
Ratio 0.36 0.46 0.53

Findings

Working Capital Turnover Ratio for the year 2014 was 0.36; it was 0.46 for 2013 and0.53
for 2012 respectively

Interpretation

This ratio indicates the number of items the working capital is turned over in the course
of a year. The working capital turnover ratio measures the efficiency with which the working
capital is being used by the firm. For the period 2012-14 the ratio was lesser. It indicates the
efficient utilization of working capital.

3.2.13 Chart showing computation of the working capital turnover ratio

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 Working capial turnover Ratio
0.6
0.53
0.5 0.46

0.4 0.36
Ratio
0.3

0.2

0.1

0
MAR’14 MAR’13 MAR’12

Return on asset    

Net Profit /loss before interest, tax& dividend

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Return on asset    = ……………………………………………………….. X 100

sales

3.2.14 Table showing computation of the return on asset ratio

Return on asset ratio

YEARS MAR’14 MAR’13 MAR’12
Net loss 1714492 980674 568017
Sales 28577504 24190863 25476371
Ratio 5.99 4.05 2.23

Findings:

Return on total asset ratio is highest in the year 2014 having 5.99 and the return total
asset ratio is lowest in the year 2012 having 2.23.

Interpretation

The ratios for the financial years 2012-2014 are 5.99,4.05and 2.23 respectively. The
company does have enough cash and marketable security or absolute liquid asset for meet
immediate obligations.

3.2.14 Chart showing computation of the return on asset ratio

68
 Return on asset Ratio
7
5.99
6

5
4.05
4 Ratio

3
2.23
2

0
MAR’14 MAR’13 MAR’12

Return on shareholder equity     

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 Net Profit /loss before interest, tax& dividend

Return on shareholder equity     =………………………………………………….. X 100

                                                            Shareholders fund

3.2.15 Table showing computation of the return on shareholder equity ratio

Return on shareholder equity ratio

YEARS MAR’14 MAR’13 MAR’12
Net loss 1714492 980674 568017
Share holders fund 26223965 27938457 28919131
Ratio 6.54 3.51 1.96

Findings:

Return on shareholder equity ratio is highest in the year 2014 having 6.54 and the return
total asset ratio is lowest in the year 2012 having 1.96.

Interpretation

The ratios for the financial years 2012-2014 are 6.54 , 3.51 and 1.96 respectively. The
company does have enough shareholder funds for meet immediate obligations.

3.2.15 Chart showing computation of the return on shareholder equity ratio

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 Return on shareholder equity Ratio
7 6.54
6

4 3.51 Ratio

3
1.96
2

0
MAR’14 MAR’13 MAR’12

ALTMAN Z SCORE

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ZScore = 0.717a + 0.847b +3.107c+ 0.420d+ 0.998e

a.The ratio of Working Capital to Total Assets

b. the ratio of Retained Earnings to Total Assets

c. the ratio of Operating Earnings to Total Assets

d. the ratio of Book Value of Equity to Total Liabilities

e.the ratio of Sales to Total Assets

3.2.16(a) TABLE SHOWING THE Z – SCORE MODEL

YEAR WC/TA RE/TA OE/TA MV/TL SALES/TA

2012 0.642 0.120 -0.0204 0.120 0.93
2013 0.639 0.118 -0.0313 0.118 0.768
2014 0.646 0.133 -0.062 0.133 0.913

3.2.16(b) TABLE SHOWING THE Z – SCORE MODEL

ALTMAN Z SCORE
YEARS MAR’12 MAR’13 MAR’14
Z SCORE 1.50 1.28 1.35

Findings:

From the above table the z –score of the year 2014 is 1.35, for the year 2013 z – score is
1.28 and for the year 2012 z- score is 1.50 respectively

Interpretation

72
 The Z-score of Nippon photographic pvt ltd is showing fluctuated trends during the study
period indicative of poor financial performance but not leading to bankruptcy. Because ,the Z-
score value in between 1.21 and 2.9 during the period (2012-2014). Hence it has poor financial
performance in 2012 – 2014 .

3.2.16 Chart showing the z-score model

Z SCORE
1.55
1.5 1.5
1.45
1.4
Z SCORE
1.35 1.35
1.3
1.28
1.25
1.2
1.15
MAR’12 MAR’13 MAR’14

ZETA SCORE MODEL

Z-Score = 1.2a + 1.4b + 3.3c + 0.6d + e
a: the ratio of workingcapital to total assets;
b: the ratio of retainedearnings to total assets;
c: the ratio of EBIT to total assets;

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d: the ratio of the marketvalue of the equity to total liabilities; and
e: the ratio of sales to total assets

3.2.17(a) Table showing the ZETA score model

YEAR WC/TA RE/TA OE/TA MV/TL SALES/TA

2012 0.642 0.120 -0.0204 0.120 0.93
2013 0.639 0.118 -0.0313 0.118 0.768
2014 0.646 0.133 -0.062 0.133 0.913

3.2.17(b) Table showing the ZETA score model

ZETA SCORE MODEL

YEARS MAR’12 MAR’13 MAR’14
ZETA SCORE 1.873 1.668 1.75

Findings:

From the above table the ZETA –score of the year 2014 is 1.873, for the year 2013 ZETA
– score is 1.668 and for the year 2012 ZETA- score is 1.75 respectively

Interpretation

74
 The ZETA score of Nippon photographic pvt ltd is showing fluctuated trends during the period
of 2012 and 2013 indicates that bankruptcy is likely of poor financial performance .while ,the
ZETA - score value in between 1.8 and 3.0 during the period of 2014 indicates grey area
bankruptcy is not easily to predicated one way or the other way. Hence it has poor financial
performance in 2012 – 2014 .

3.2.17 CHART SHOWING THE ZETA SCORE MODEL

ZETA SCORE
1.9
1.87
1.85

1.8

1.75 1.75 ZETA SCORE

1.7
1.67
1.65

1.6

1.55
MAR’12 MAR’13 MAR’14

3.3 FINDINGS

As per the analysis of the data through various tools the researcher has prepared the following

findings and recommendation to the company.

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1. The Current ratio of the year 2014 is 12.56, for the year 2013 current ratio is 6.91 and for the

year 2012 current ratio is 12.71 respectively

2. The quick ratio of the year 2014 is 5.04, for the year 2013 quick ratio is 3.2 and for the year

2012 quick ratio is 4.87 respectively.

3. The absolute liquid ratio of the year 2014 is 3.28, for the year 2013 absolute liquid ratio is

2.48 and for the year 2012 absolute liquid ratio is 2.89 respectively.

4. The debt equity ratio of the year 2014 is0.63, for the year 2013 debt equity ratio is 0.13 and for

the year 2012 debt equity ratio is 0.064 respectively.

5.The proprietary ratio of the year 2013 is 0.88, for the year 2014 and 2012 debt equity ratio is

same as 0.94 respectively.

6. The gross profit ratio of the year 2014 is 77.16%, for the year 2013 gross profit ratio is

61.17% and for the year 2012 gross profit ratio is 58.6% respectively.

7.The net profit ratio of the year 2014 is 5.99%, for the year 2013 net profit ratio is 4.05% and

for the year 2012 net profit ratio is 2.23% respectively.

8. The operating ratio of the year 2014 is 44.03%, for the year 2013 operating ratio is 66.28%

and for the year 2012 operating ratio is 76.34% respectively.

9. The material consumed ratio of the year 2014 is 22.83, for the year 2013 material consumed

ratio is 38.83 and for the year 2012 material consumed ratio is 41.4 respectively.

10. The capital turnover ratio of the year 2014 is 6.54, for the year 2013 capital turnover ratio is

3.51 and for the year 2012 capital turnover ratio is 1.96 respectively.

11. The fixed asset turnover ratio of the year 2014 is 4.19, for the year 2013 fixed assets turnover

ratio is 3.31 and for the year 2012 fixed assets turnover ratio is 3.23 respectively.

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12. The stock turnover ratio of the year 2014 is 0.56, for the year 2013 stock turnover ratio is

0.74 and for the year 2012 stock turnover ratio is 0.79 respectively

13.The Working Capital Turnover Ratio for the year 2014 was 0.36; it was 0.46 for 2013

and0.53 for 2012 respectively

14.The Return on total asset ratio is highest in the year 2014 having 5.99 and the return total

asset ratio is lowest in the year 2012 having 2.23.

15. The Return on shareholder equity ratio is highest in the year 2014 having 6.54 and the return

total asset ratio is lowest in the year 2012 having 1.96.

16. The z –score of the year 2014 is 1.35, for the year 2013 z – score is 1.28 and for the year

2012 z- score is 1.50 respectively

17.The the ZETA –score of the year 2014 is 1.873, for the year 2013 ZETA – score is 1.668 and

for the year 2012 ZETA- score is 1.75 respectively

3.4 SUGGESTIONS

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1. The working capital required is satisfactory; the company should take necessary
measures for maintaining the adequate working capital.
2. The company has to improve the liquidity position by increasing the current asset to
reduce the current liabilities.
3. The company has to improve the profitability position by reducing the expenditure of a
firm.
4. Most of the Cash are handled in hand. Its better if the balances are rotated as the bank
balances
5. The profit of the company is not in a good position for the company has to take
alternative action such as
a. Increasing in procurement in photochemical
b. Production and control in expenses like administrative ,selling etc reducing
6. The company has high inventory so it is suggested that the firm must reduce the stock by
increase sales.
7. The direct material cost of the firm is very high so the firm has to decrease the direct
material cost by purchasing raw materials from the other supplier.

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 3.5 CONCLUSION

There is a need of predicting financial failure on time for taking curative and corrective
measures in relating to financial investments,lending and borrowings. The problem of business
failures are attributed to both financial and non financial causes such as poor planning improper
sales forecasting inexperience management , technological advances excessive manpower frauds
and changes in taste and preference of customers. The prediction of business failure is an
important for taking timely corrective and remedial measures for protecting business from the
problem of bankruptcy

APPEND1X

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 STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED 2012 - 2014

2012 2013 2014

Incomes
Revenue from operations (gross) 25,576,912 24,290,128 28,640,682
less:Excise duty 2,299,823 2,318,460 1,521,733
Revenue from operations (net) 23,177,089 21,971,668 27,118,949
Expenses
(a)Cost of materials consumed 10,546,301 11,682,890 17,836,009
(b)Changes in inventories of finished goods and (837,964) (693,782) 519,610
work in progress
(c)Employee benefits expense 4,645,875 4,786,205 4,028,209
(d) Other expenses 8,902,757 6,641,683 6,057,672
Total 23,256,969 22,416,996 28,441,500
Earnings before exceptional items, interest,tax (70,880) (445,328) (1,322,551)
depreciation and amortisation (EBITDA)
(a)finance costs 30,332 37,092 103,456
(b)Depreciation and amortisation expense 632,567 575,241 499,946
(c)Other income (113,244) (70,669) (191,663)
Earnings before exceptional items and tax (629,535) (986,992) (1,734,289)
Exceptional items
Earning before tax (629535) (986,992) (1,734,289)
Tax expenses
(a)current tax expense for current year
(b)MAT credit (where applicable)
(c)current tax expense relating to prior years (95)
(d)Net current tax expense (95)
(e) Deferred tax (61423) (6,317) (19,797)
Earning for the year (568,017) (980,675) (1,714,492)

BALANCE SHEET AS AT 2012 - 2014

2012 2013 2014
EUITY AND LIABILITIES
Shareholders funds
(a)share capital 3,700,000 3,700,000 3,700,000
(b)Reserves and surplus 25,219,13 24,238,45 22,523,965
1 7
Non current liabilities
(a)Deferred tax liabilities(net) 136,374 130,058 110,260
Current liabilities
(a)short term borrowings

80
 (b)trade payables 127,400 1,931,249 107,209
(c)Other current liabilities 1,191,692 1,089,228 1,210,630
(d)short term provisions 365,191 381,849 241,335
Total 30,739,78 31,470,84 27,893,398
8 1

ASSETS
Non current assets
(a)fixed assets 7,878,017 7,308,866 6,815,470
(b)long term loans and advances 1,451,867 660,708 1,499,844
Current assets
(a)Inventories 13,200,27 12,613,41 11,709,046
0 2
(b)Trade receivables 3,332,650 2,454,135 2,754,317
(c)Cash and cash euivalents 4,722,370 8,288,842 3,855,695
(d)Short term loans and advances 154,614 144,877 1,259,026
Total 30,739,78 31,470,84 27,893,398
8 1

BIBLIOGRAPHY

Books Referred

 T.S. Reddy & Y. Hari Prasad Reddy, Management Accounting, Page no: 3.1-3.144-
Margham Publications.
 P.R. VITAL, Mathematical Statistics-Page no: 26.1-26.29- Margham Publications.
 C.R.Kothari, Research Methodology, Second Edition-Page no: 31-82-Margham
Publications.
 K.Subramani - A.Santha, Statistics for Management, Second Edition -Page no: 3.1-3.153
–SCITECH Publications.

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  I M Pandey, financial management-Page no: 22.1-24.6, Ninth Edition-Vikas Publishing
House Pvt Ltd.
 M.Y.Khan & P.K.Jain, financial management, Second Edition, Page no: 7.26-8.9 Tata
McGraw Hills Publishing Company Ltd.

Journals Referred

[1] S.K Khatic & P.K Singh, “case study on Asset management of Indian framers fertilizers
cooperative limited, management accountant, volume 40.
[2] Cherian Joseph (1998), “Case study on Asset management of textile industry in India –
An empirical study”, management accountant, volume 39.
[3] Santhosh.K (2004), “A case study Asset management of Hosiery industry of Tirupur
knitting units” – management accountant, volume 39.
[4] Anisha Sam K .A (2003), “A study on Asset management of steel industry kerala ltd”
-management accountant, volume 43.
[5] R. Swami Nathan (1998), “A study on Asset management of Lakshmi mills company
limited Coimbatore” – management accountant, volume 38.
[6] Hema priya (1998), “A study on Asset management of M/s Veejay Lakshmi engineering
company” – management accountant, volume 39.

Websites Referred

 www.google.com

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