SUMMER TRAINING PROJECT

REPORT

ON

FINANCIAL ANALYSIS OF
KONE ELEVATOR india ltd.

FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENT

FOR THE AWARD OF DEGREE
OF
MASTERS OF BUSINESS ADMINISTRATION

Submitted by : Submitted to :
Niti Chawla Ms.Anjali Sharma

90212233199
SESSION – 2009-2011

Under the guidance of :

Mr. Sukhbir Singh Khalsa

C.T INSTITUTE OF MANAGEMENT STUDIES

SHAHPUR, JALANDHAR

1
 Certificate
This is to certify that the project work done on entitled “A Study on Financial Analysis of
Kone Elevator India Limited” is a bonafide work carried out by Ms.Niti Chawla under my
supervision and guidance. The project report is submitted towards the partial fulfillment of
2 years, full time degree of Masters of Business Administration.
This work has not been submitted anywhere else for any other degree/diploma. The original
work was carried during 1st June 2010 to 31st July 2010 in Kone Elevator India
Limited,Delhi

Date : Name & Sign of Faculty

Niti Chawla
Roll No.: 90212233199

2
3
 ACKNOWLEDGEMENT

“Such thanks I give as near death to those that wish her live.”-
Shakespeare
Carrying out this project and its presentation in literally form becomes
possible with the help, guidance and inspiration.We received from
professionals engaged in business and education. I feel obliged to all those
authorities whose work has been consulted and utilized and acknowledge the
text.
First of all I express our sincerest depth of gratitude to almighty GOD who
always supports us in our endeavour. I thank my institute who has given me
an opportunity to show my skills.
I am deeply grateful to Mr.Sukhbir Singh Khalsa for his ever willing help
and guidance to complete my project successfully.
Above all I would like to thank all contacted persons of firm who took out
valuable time to answer my queries and gave me full information about
elevator company.
I extend my sincere gratitude towards my parents,who have always
encouraged me and gave suggestions as how to work on project.They always
stand by me in solving all my queries.Their support has always motivated
me.
Above all it gives me immense pleasure to thank author of various books
who indirectly helped me in gaining knowledge.

Niti Chawla

4
 Preface

In the present era, the business world is expanding its wings over the
global nest the business activities are becoming more vast, extensive and
complex due to the need of surviving through the ever increasing
competition. The cutthroat competition has led to marketing concept in
which customer’s need and wants are taken into prime consideration from
the product design stage to port transaction stage. To have an edge over
the competitors the companies need to know what customer wants, then
carry out market research. The more a company is aware of customer’s
likes and dislikes, the more successful it is.

As a common perception, companies view the business in

the term of products they make but the viewpoint is myopic. Instead a
business must be viewed as a customer satisfying process and not as a
goods producing process.

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 DECLARATION

I do hereby declare that this piece of project report entitled “A Study

on Financial Analysis of Kone Elevator India Limited” for partial
fulfillment of the requirements for the award of the degree of
“MASTER OF BUSINESS ADMINISTRATION” is a record of
original work done by me under the supervision.This project work is
my own and has neither been submitted nor published elsewhere.

PLACE:
DATE:

6
Sr. No. Contents Page No.

1 Introduction to company. 1-8

 History. 2
 Vision and Mission. 3
 Core value and philosophy. 4
 Management. 5
 Core team. 6-7
8
 Corporate social responsibility.
9-11

3 12-15
Need, scope and methodology.
15
 Objective of the study.
4 16-30
Introduction to study. 16-17
 What is shares and its type which is available. 18
 Share/ Stock derivatives. 19
 History. 20-22
 Shareholder, application and their rights. 23
 Trading. 24-25
 Buying and selling of shares. 26-27
 Share price determination. 28-30
 Advantages and disadvantages.
5 31-38
Data analysis and interpretation.
6 40-41
Finding and Suggestion.
7 42-43
Conclusion.
8 44-45
Limitation.
v-vi
Bibliography. vii
Annexure. vii-x
 Questionnaire.

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 ORGANISATION PROFILE

INTRODUCTION

KONE is one of the world’s leading elevator and escalator companies. It provides its customers
with industry-leading elevators and escalators and with innovative solutions for their maintenance
and modernization. KONE also provides maintenance of automatic building doors.

KONE provides innovative and eco-efficient solutions for elevators, escalators and
automatic building doors. We support our customers every step of the way; from
design, manufacturing and installation to maintenance and modernization. KONE is a
global leader in helping our customers manage the smooth flow of people and goods
throughout their buildings.

Our commitment to customers is present in all KONE solutions. This makes us a

reliable partner throughout the life-cycle of the building. We challenge the
conventional wisdom of the industry. We are fast, flexible, and we have a well-
deserved reputation as a technology leader, with such innovations as KONE
MonoSpace®, KONE MaxiSpace™, and KONE InnoTrack™. You can experience
these innovations in architectural landmarks such as the Trump Tower in Chicago, the
30 St Mary Axe building in London, the Schiphol Airport in Amsterdam and the
Beijing National Grand Theatre in China and Delhi Metro Rail Stations in India.

KONE employs over 32,000 dedicated experts to serve you globally and locally in 50
countries.KONE India believes quality and safety is move to do with attitude and
behavior of the people. In the continuous process of training and developing the
people, KONE India has invested heavily in an ultramodern training centre. The
training centre has four shafts for important hands on training in erection and service
of an elevator. It is also equipped with simulator lab for training engineers on
commissioning and trouble shooting.

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 History

Kone Corporation is a world-leading designer and manufacturer of elevators,

escalators, and "autowalks." Based in Helsinki, Finland, Kone has developed an
international organization of 150 subsidiaries and nearly 22,500 employees, who
produce and install 12,000 units per year. The late 1990s introduction of the
company's Monospace elevator concept, which reduces space and energy
requirements, has helped invigorate Kone's business in a difficult economic climate.
Yet sales of new elevators, escalators, and autowalks represent only 41 percent of the
company's sales. Since the late 1980s Kone has built a strong business in elevator
maintenance and modernization. In 1997 the company held maintenance and
modernization contracts on more than 400,000 elevators worldwide.
Whereas Europe traditionally has been the company's primary sales base, representing
55 percent of company revenues in 1997, the company has made strong inroads into
the U.S. market, which provides 29 percent of company sales. In the 1990s Kone has
stepped up its position in the Asia-Pacific region, including opening a new elevator
and escalator factory in Kunshan, China in 1998. At 11 percent of annual sales, this
region represents a still limited share of Kone's revenues, sparing the company the
brunt of the late 1990s economic crisis there. Nonetheless, the company remains
committed to developing this market. Kone also delivers elevators and escalators to
the African and South American markets, which together represent only five percent
of annual sales.
Kone had been a diversified materials handling equipment company until the 1990s,
when the conjunction of a worldwide recession and a too-rapid expansion forced the
company to streamline its operations, returning to its long-time core elevator and
escalator component.

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 KONE India Delivery

KONE India factory located at Chennai is the heart of KONE India’s front line
operations. This state of the art factory is equipped with fully automatic CNC
machines for punching and bending operations, robotic machines for wielding
operations. Factory is also equipped with the latest laser cutting machines for
cutting complex profiles. The latest addition is a V cut machine, to improve
aesthetics of panels which are bend is the first of its kind in India in this industry.
A fully automatic conveyor painting and powder coating plant helps to improve
the aesthetics of the final products.

The Quality management system of the factory is collective for ISO 9001 – 2000.
Regress quality check at every stage including pre shipment audit helps to
deliver the component error free. KONE India developed an in house ERP
system which helps the factory in meeting and exceeding the customer
expectations.

Meeting the environmental challenge of urbanization

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Elevators and escalators account for 2–10% of a building’s entire energy consumption
and buildings account for 40% of the world’s energy consumption. As urban areas
grow and the cost of energy keeps rising, the challenge for KONE is to design
solutions that are environmentally efficient and ensure smooth people flow.

KONE takes care of the whole lifecycle

KONE provides safe, environmentally efficient and responsible high performance

services, modernizations and solutions. We strive for continuous improvement in all of
our business activities by following or exceeding applicable rules and regulations, and
working with our suppliers and customers to prevent or reduce business operation
related emissions and waste.

We are pioneers

KONE is a pioneer in developing Eco-efficient solutions. KONE machine room-less

elevators, since their launch in 1996, have saved as much electricity as is produced by
a typical 250 MW power plant. This is equivalent to the consumption of two million
barrels of oil or the CO2 emissions of 100,000 cars driving around the world.

For the lifetime of your building

The KONE elevator or escalator that you buy today is built to last for a life-cycle
extending even to 2050 and beyond. It incorporates eco-efficient solutions that keep
the total cost of ownership low while reducing the ecological footprint of your
building. Our maintenance and modernization services help you keep your equipment
operating efficiently and looking good for its entire lifetime.

Operating buildings in an eco-efficient way

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KONE is constantly aiming to improve the environmental efficiency of its delivery
and installation processes. KONE’s country organizations all over the world work for
sustainable urban development. Best practices are shared globally within the whole
company.

When you look at the long term, KONE solutions provide lower total cost of
ownership, due to their energy-efficiency. KONE Eco-efficient™ solutions can help
you reduce the elevators’ and escalators’ energy consumption by as much as three-
quarters. Over the lifetime of the equipment, the savings can amount to more than the
cost of the equipment itself.

KONE’s product lifecycle analyses show that most of our products’ carbon
footprint is created when they are operated, not when they are constructed. Therefore,
improving the environmental efficiency of our solutions by reducing their need for
energy and oil is a key issue for us.

Energy-saving hoisting solutions. The heart of our eco-efficient solutions,

the KONE EcoDisc® hoisting machine, introduced in 1996, uses significantly less
energy than conventional hydraulic or traction 2 speed drives.

Recovering energy. Our regenerative systems can recover up to 25% of the

total energy used by an elevator and for example use it as one energy source for
lighting the building.

Standby energy saving. Up to 80% of an elevator’s energy consumption

occurs when the elevator is idle. We have developed solutions that, at a preset time
after the car has been used, turn off the lights and fan and switch the signalization to
standby mode. In the case of KONE escalators, a good way to save energy is to run the
12
escalators at standby speed or in on-demand start mode when they’re not in use. Tests
show this can save up to 30% of the energy used.

Preserving warm and cool air. For automatic building doors, we offer
various solutions to reduce the loss of warm or cool air from the building, making the
building heating or cooling more energy efficient.

Energy-efficient lighting. LED lights consume 80% less energy than

halogen lights. If every elevator, escalator and automatic door light in a major city was
replaced with LED lights, it would save thousands of megawatt hours a year.

Less oil and hazardous substances. In addition to saving energy, KONE

Eco-efficient™ solutions use less oil than standard elevators and escalators. We also
avoid using hazardous substances in our solutions.

Efficient Maintenance

Our comprehensive maintenance services help keep the equipment safe and efficient
throughout its lifetime. When the equipment is well maintained and running reliably,
it’s also running energy-efficiently. Our maintenance services are designed with
environmental efficiency in mind – to minimize service calls, utilize the latest
technology and optimize the routes of the technicians.

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 Optimizing routes. We use the latest technology to optimize the technician’s
route, not only to save time but also to reduce fuel consumption and the carbon
footprint of our service operations.

Reducing the amount of service calls. Our globally harmonized preventive

maintenance method reduces the amount of unforeseen breakdowns and unnecessary
visits.

Utilizing the latest technology. We use wireless technology to exchange

information between the KONE Customer Care Center™ and technicians. Technicians
have the right information and equipment to fix the problem during the first service
visit.

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KONE Eco-efficient Solutions

Energy saving elevators

The power behind our eco-efficient solutions is the
KONE EcoDisc® hoisting machine, which can save
half or more of the energy consumed by an elevator.
Our solutions not only save energy when the elevator
is moving. We also provide solutions that reduce
standby energy consumption when the elevator is
standing still. Working together, these solutions can
save as much as three quarters of the elevator’s total
energy consumption. Over the lifetime of the
equipment, the energy savings can amount to more
than the original cost of the elevator.

Energy Saving Escalators

KONE is the first in the industry to offer an eco-

efficient escalator, which combines a highly-
efficient drive system with a compact drive to
achieve new levels in energy-efficiency, space
saving, reliability and aesthetics. A KONE
escalator can also save energy when there are no
passengers on board. By using standby speed and
energy-efficient LED lights, you can cut the
escalator’s energy consumption considerably.
Many of our solutions are available as easy to
install retrofit packages.

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 OUR VISION
We intend to be the recognized leader in service excellence among all companies—not
just elevator companies—worldwide. We will inspire our customers’ total confidence
through exceptional service that earns us 100 percent of their business, 100 percent of
the time.

OUR VALUES—PRINCIPLES THAT GUIDE OUR

WORK BEHAVIOR

People
We believe the most important assets of the Kone
Elevator Company go home at the end of every workday.

Safety
Millions of people around the world use Kone elevators
and escalators every day without giving safety a second
thought. For us, that’s success. We understand that the
safe way is the only way.

Quality
For more than 100 years, quality has made Kone the
most trusted name in the industry.

Integrity
We must do the right thing every time, and run our
business to the letter and spirit of the law. By acting
ethically and honorably, we win the loyalty of our
customers.

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Passenger safety

Elevators, escalators, moving walks and automatic building doors are among the safest
modes of transport in the world. For KONE safety is always top on mind. Here are
some basic rules for a safe and comfortable ride Attention is paid to safety in all
KONE processes. KONE strives to provide safe products and services to its customers
and end-users as well as a safe working environment for its own people.

The Safety function in KONE is part of Human Resources. The Safety function’s task
is to support the KONE units in their efforts to continuously improve their safety
management activities. Internal audits are a focal point of workplace safety
management and are regularly organized at KONE units. The Safety function audits
the unit-level safety management. This approach is designed to reinforce safety issues
as an integral part of the day-to-day work of every KONE employee.

All KONE units are required to comply with the company’s safety policy, which
defines, for example, the general principles of safety operations and includes safety
training and methods as well as information about reporting. An internal review
system has been established for monitoring accidents in the workplace by following
the trends in the development of IIFR* (Industrial Injury Frequency Rate) figures.
Information about possible workplace safety and necessary corrective actions are
communicated to all units.

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PRODUCTS OF KONE ELEVATOR :

 KONE Special Elevators

 KONE TravelMaster™ 115 inclined autowalk
 KONE EcoMaster™ 135 inclined autowalk
 KONE InnoTrack™ autowalk
 KONE TravelMaster™ 110 Escalator
 KONE EcoMaster™ 130 Escalator
 KONE TransitMaster™ 180 escalator
 KONE S MiniSpace™
 KONE MiniSpace™
 KONE Classic Standard
 KONE Classic Special
 KONE Swift(ADV)
 KONE Scenic Elevators
 KONE Bed Elevators
 KONE Goods Elevators
 KONE Special Elevators
 KONE TravelMaster™ 115 inclined autowalk
 KONE InnoTrack™ autowalk
 KONE Bed Elevators
 KONE Goods Elevators

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 MANAGEMENT
In KONE ELEVATOR INDIA LTD. The management is
concerned with direction and control over the various activities and work for
the atainment of the objectives of the objectives laid by the administration.

MANAGEMENT

TOP LEVEL MIDDLE LEVEL LOWER LEVEL

MANAGEMENT MANAGEMENT MANAGEMENT

CHAIRMAN SR MANAGER OF ENGINEERS

ASSEMBLY
MANAGING DIRECTOR SUPERVISIORS
MARKETING
JOINT MANAGING FOREMAN
QUALITY CONTROL
DIRECTOR PEROSANAL
HEAVY MACHINE SHOP DEPARTMENT
G.M R&D OFFICER
LIGHT MACHINE SHOP
G.M FINANCES OPERTIONAL STAFF
PARCHASE
G.M ENGINE OTHER STAFF
PAINT SHOP
G.M WORKS
GEAR SHOP

FACTORY MANAGER

STORE OFFICER

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20
SWOT ANALYSIS OF KONE ELEVATOR INDIA LTD.

SWOT stands for strengths, weakness, opportunities and threats, which helps to isolate
the strong and week areas within an export strategy. SWOT also indicates the future
opportunities or threats that may exist in the chosen markets and is instrumental in
strategy formulation and selection.

To apply your own SWOT analysis, start by creating a heading for each category –
‘Strengths’, ‘Weaknesses’, ‘Opportunities’, and ‘Threats’. Under each of these, write a
list of five relevant aspects of your business and external market environment.
Strengths and weaknesses apply to internal aspects of your business; opportunities and
threats relate to external research.

Your final analysis should help you develop short and long term business goals and
action plans, and help guide your market selection process.

Environmental factors internal to the company can be classified as strengths or

weaknesses, and those external to the company can be classified as opportunities or
threats.

STRENGTHS

Business strengths are its resources and capabilities that can be used as a basis for
developing a competitive-advantage. Examples of such strengths include:

• Patents
• Strong brand names.
• Good reputation
• Cost advantages from proprietary know-how.
• Exclusive access to high grade natural resources.
• Favorable access to distribution networks.

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WEAKNESSES

The absence of certain strengths may be viewed as a weakness. For example, each of
the following may be considered weaknesses:

• Lack of patent protection.

• High cost structure.
• Lack of access to the best natural resources.
• Lack of access to key distribution channels.

OPPORTUNITIES

The external environmental analysis may reveal certain new opportunities for profit
and growth. Some examples of such opportunities include: .

• Arrival of new technologies.

• Loosening of regulations.
• Removal of international trade barriers.

THREATS

Changes in the external environmental also may present threats to the firm. Some
examples of such threats include:

• Emergence of substitute products.

• New regulations.
• Increased trade barriers
• Intoduction of new companies.

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 PRACTICAL FRAMEWORK OF TRAINING REPORT

INTRODUCTION TO THE TOPIC – FINANCIAL ANALYSIS

Financial statements are prepared primarily for decision-making. They play a

dominant role in setting the framework of the managerial decisions. But the
information provided in the financial statements is not an end in itself as no
meaningful conclusions can be drawn from these statements alone. However the
information provided in the financial statements is of immense use in decision –
making through analysis and interpretation of financial statements. Financial analysis
is the process of identifying the financial strength & weaknesses of the Firm by
property, establishing relationship between the items of the Balance Sheet and the
Profit and Loss Account.

MEANING :

The term “Financial Analysis” also known as analysis and interpretation of financial
statements refer to the process of determining financial strength and weaknesses of the
firm by establishing strategic relationship between the items of the balance sheet,
profit and loss account and other operative data.
According to Metcalf and Titard, “Analyzing financial statements is the process of
evaluating the relationship between the component parts of the financial statements to
obtain a better understanding of a firm’s position and performance.”
In the words of Myers, “Financial statement analysis is largely a study of relationship
among the various financial factors in a business as disclosed by a single set of
statements, and a study of the trend of these factors as shown in a series of
statements”.

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OBJECTIVE :

The purpose of objective of financial analysis is to diagnose the information contained

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

TYPES OF FINANCIAL ANALYSIS

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

Types of Financial Analysis

On the basis of material On the basis of modus

used operandi

External Internal Horizontal Vertical

analysis analysis analysis analysis

24
On the basis of Material used:
a. External analysis
b. Internal analysis

a. External analysis

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

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

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

b. Vertical analysis

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

25
2.1.4 PROCEDURE OF FINANCIAL STATEMENT ANALYSIS
There are three steps involved in the analysis of financial statements. These are (i)
selection (ii) classification (iii) interpretation.The first step involves selection of information
(data) relevant to the purpose of analysis of financial statements. The second step involved is
the methodical classification of the data and the third step includes drawing of inferences and
conclusion.

The following procedure is adopted for the analysis and interpretation of financial statements:
-
1. The analyst should acquaint himself with the principles and postulants of accounting.
He should know the plans and policies of the management so that he may be able to
find out whether these plans are properly executed or not.
2. The extent of analysis should be determined so that the sphere of work may be
decided. If the aim is to find out the earning capacity of the enterprise then analysis of
income statement will be undertaken. On the other hand, if financial position is to be
studied then Balance sheet analysis will be necessary.
3. The financial data given in the statements should be re-organized and re-arranged. It
will involve the grouping of similar data under same heads, breaking down of
individual components or statements according to the nature. The data is reduced to a
standard form.
4. A relationship is established among financial statements with the help of tools and
techniques of analysis such as ratios, trends, common size, funds flow etc.
5. The information is interpreted in a simple and understandable way. The significance
and utility of financial data is explained for helping decision taking.
6. The conclusions drawn from interpretation are presented to the management in the
form of reports.

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2.1.5 METHODS OR DEVICES OF FINANCIAL ANALYSIS

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

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

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

3. COMMON SIZE STATEMENTS

The common size statements, balance sheet and the income statements are shown in
analytical percentages. The figures are shown as percentages of total assets, total liabilities
27
and the total sales. The total sales are taken as 100 and different assets are expressed as a
percentage of the total. Similarly various liabilities are taken as a part of the total liabilities.
These statements are also known as component percentage as 100 percent statements because
every individual item is stated as a percentage of the total 100.

4. FUNDS FLOW ANALYSIS

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

5. CASH FLOW ANALYSIS

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

6. RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial statements. It is
the process of establishing and interpreting various ratios for helping in making certain
decisions. However ratio is not end itself. It is only a means of better understanding of
financial strengths and weaknesses of a firm. A ratio is a simple arithmetical expression of the
relationship of one number to another. It may be defined as the indicated quotient of the two
mathematical expressions.

7. COST VOLUME PROFIT ANALYSIS

Profit is the most important measure of a firm’s performance. In the free market
economy, profit is a guide for allocating resources efficiently. An analysis of the effects of
various factors on profit is an essential step in financial planning and decision-making.
The analytical techniques used to study the behavior of profit in response to the changes in
the volume costs and price is called the Cost Volume Profit (CVP) analysis.

28
 RATIO ANALYSIS

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

MEANING
A ratio is a simple arithmetical expression of the relationship of one number to another. It
may be defined as the indicated quotient of two mathematical expressions.
According to the Accountant’s Handbook by Wixon, Kell and Bedford, a ratio is an
expression of the quantitative relationship between the two numbers.
According to the Kohler, a ratio is the relation of the amount, a, to another b, expressed as the
ratio of a to b; a:b (ais to b) or as a simple fraction, integer, decimal fraction & percentage. In
simple language ratio is one number expressed in terms of the another and can be worked out
by dividing one number into the other.

STEPS INVOLVED IN THE RATIO ANALYSIS

Selection of relevant data from the financial statements depending upon the objective of the
analysis.
1. Calculation of appropriate ratios from the above data.
2. Comparison of the calculated ratios with the ratios of the same firm in the past, or the
ratios developed from projected financial statements or the ratios of some other firms
or the comparison with the ratio of the industry to which the firm belongs.
3. Interpretation of the ratios.

29
GUIDELINES FOR USE OF RATIOS
The calculation of ratios may not be difficult task but their use is not easy. Following
guidelines or factors may be kept in mind while interpreting various ratios.

1. ACCURACY OF FINANCIAL STATEMENTS:

The ratios are calculated from the data available in financial statements. The reliability of
ratio is linked to the accuracy of information in these statements. Before calculating ratios one
should see whether proper concepts and conventions have been used for preparing financial
statements or not.
2. OBJECTIVE OR PURPOSE OF ANALYSIS:
The type of ratios to be calculated will depend upon the purpose for which these are
required. If the purpose is to study current financial position then ratios relating to the current
assets and current liabilities will be studied. The purpose of user is also important for the
analysis of ratios.
3. SELECTION OF RATIOS:
Another precaution in ratio analysis is the proper selection of appropriate ratios. The
ratios should match the purpose for which these are required.
4. USE OF STANDARDS:

The ratios will give an indication of financial position only when discussed with
reference to certain standards. Unless otherwise these ratios are compared with certain
standards one will not be able to reach at conclusion.

5. CALIBRE OF THE ANALYST:

The ratios are only the tools of the analysis and their interpretation will depend upon
the caliber and competence of the analyst. He should be familiar with various financial
statements and the significance of change etc.

6. RATIO PROVIDE ONLY A BASE:

The ratios are only guidelines for the analyst; he should not base his decision entirely
on them. He should study any other relevant information, situation in the concern, general
economic environment etc. before reaching final conclusions.

30
CLASSIFICATION OF RATIOS

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

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

Classification according to the nature of ratios

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

According to importance of ratios

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

31
According to users of the ratios
Ratios for Ratios for Ratios for
management shareholders creditors
Return on Earning per Current ratios
capital share
employed Liquid ratios
Gross profit Yield ratios Debt equity
ratios Payout ratios ratio
Current ratios

32
Functional classification
The four most important financial dimensions, which a firm would like to analyze, are:
 Liquidity ratios
 Leverage ratios
 Activity ratios
 Profitability ratios

A. LIQUIDITY RATIOS:
Liquidity refers to the ability of the concern to meet its current obligations and when these
become due. The short – term obligations are met by realizing amounts from current, floating
or circulating assets. A firm should ensure that it does not suffer from lack of liquidity and
also that it does not have excess of liquidity. The failure of the company to meet its
obligations due to lack of sufficient liquidity will result in poor creditworthiness, loss of
creditors confidence, or even in legal tangles resulting in the closure of the company. A very
high degree of the liquidity is also bad, idle assets earn nothing. The firm’s funds will be
unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance
between the high liquidity and lack of liquidity.

The most common ratios which indicates the extent of liquidity or lack of it are:
• Current ratio
• Quick ratio
• Absolute ratio

1. CURRENT RATIO
The current ratio is calculated by dividing current assets by liabilities with the help of

following formula:

Current ratio = Current Assets

Current Liabilities

This ratio is an indicator of the firm’s commitment to meet its short-term liabilities.
Current assets means assets that will either be used up or converted into cash within a years’
time or norms, operating cycle or the business, whichever is longer. Current liabilities means
liabilities payable within a year or during the operating cycle of business, whichever is
longer, out of existing current assets or by creation of other current liabilities.
 An ideal current ratio is (2:1). The ratio of 2 is considered as a safe margin of
solvency due to the fact that if the current assets are reduced to half i.e. 1 instead of 2, then
also the creditors will be able to get their payable in full.
Some of the current assets and current liabilities are as follows:

Current Assets Current Liabilities

Marketable Securities Bank overdraft
Sundry Debtor (less provision) Income tax
Billing Receivable Payable
Advances (recoverable)
Pre-paid expenses
Book debts outstanding for more than 6 months and loose tools should not be included
in current assets.

2. QUICK RATIO: (Acid Test Ratio or Liquid Ratio)

This ratio establishes a relationship between quick or liquid assets

and current liabilities.

Quick Ratio = Quick Assets

Quick Liabilities
Quick Assets = Current Assets – Inventories (i.e. stock) – prepaid expenses

An asset is liquid if it can be converted into cash immediately or reasonably soon

without a loss of value. Cash is (the most liquid asset).
Generally, a quick ratio is (1:1) is considered to represent a satisfactory current
financial condition. A quick ratio of (1:1) or more does not necessarily imply sound liquidity
position of dead stock is fairly low.

3. ABSOLUTE LIQUID RATIO / CASH RATIO:

As all book debts may not be liquid, and cash may be immediately needed to pay operating
expenses and moreover, inventories are not absolutely non-liquid. To a measurable extent,
inventories are available to meet current obligation.
It would be appreciated that a company with a lower quick ratio may be quite solvent
in case its inventory has a ready market; its realizable value is even above the book value and
the portion.
Since cash is the most liquid asset, a financial analyst may examine the ratio of cash
and its equivalent to current liabilities.
B. LEVERAGE RATIO (Test of long term solvency)
Solvency of a business means its ability to meet its long – term liabilities debenture holder;
mortgagors and other long – term depositors are primarily interested in ascertaining whether
the company is having adequate profit to pay its interest obligation regularly. They would
very much like to study the financial structure, the contribution of long-term depositors, vie a
vie the owner to the total capital employed.

1. DEBT – EQUITY RATIO

The ratio is also called ‘External Internal Equity Ratio’. It indicates the comparative claims of
outsiders and owner in the concern’s total equities the claim of depositors, mortgagors,
bondholders, suppliers, and other creditors are matched with those of owner, i.e. shareholders
or proprietors. The management has to keep healthy balance between the two equities:
external and internal.
Debt Equity Ratio = Total Debt
Net worth

TOTAL DEBT NET WORTH

Debentures and Bonus Equity share capital
Loan and Mortgage Pref. Share capital
Security deposit with company Reserve capital & Revenue
Fixed Deposit / Unsecured loans Profit and Loss (Cr.)
All Current Liabilities

These funds are available at the rate of the interest generally lower than the market
rate. They are used along with share capital funds; the entire balance is then left for
distribution among shareholders.
If the proportion of outside fund is quite high, the company is technically said to be
highly leveraged. In case the ratio is 1, it is considered quit satisfactory.
High – Debt Company is able to borrow funds on very restrictive terms and
conditions.
 2. EQUITY RATIO / PROPRIETORY RATIO
It is variant of debt – equity ratio. It is an important test to judge the long-term solvency of a
concern. It establishes relationship between the proprietor or shareholder’s funds and the total
assets. It may be expressed as:
Equity ratio = Proprietor’s funds
Total Assets
Proprietor’s fund or Net worth = Equity Share Capital + Reserve and Surplus + Preference
Share Capital.
Total Assets = Total Equities or Total Resources of the concern.
If we take the total assets as 100, the percentage of proprietor’s funds indicates the
contribution made by the owners towards total assets. The nearer the percentage of
proprietor’s funds to 100, the larger is their contribution and the greater is the securities for
creditors, depositors, mortgagors, and debenture holders.

3. FUNDED DEBT TO TOTAL CAPITALISATION RATIO

Funded debt to total capitalization ratio reveals what portion of total capitalization is provided
by founded debt and is formulated as:
Funded debt to total capitalization = Funded debt * 100
Total capitalization

Funded Debt = Debentures + Bonus + Mortgage Loan + Other Loan – Term Loans
Total Capitalization = Proprietor’s Fund’s + Funded Debt
This ratio depicts the extent of dependence on outside sources for providing long term
finance 67% dependence may be reasonable for trading and industrial concerns. The less the
better, for long-term solvency. Beyond 67% it would be too risky. A high percentage reduces
the security for depositors.

4. FIXED ASSET RATIO:

The ratio is expressed as follows:
Fixed Asset Ratio = Fixed Asset
Long Term Funds

The ratio should not be more than 1 if it is less than 1, it shows that a part of the
working capital has been financed through long-term funds. This is desirable to some extent
because a part of working capital is termed, as “Core Working Capital” is more or less of a
fixed nature. The ideal ratio is .67.
 5. DEBT SERVICE RATIO / INTEREST COVERAGE RATIO:
Debit ratio discussed earlier is static in nature, and fails to indicate the firm’s ability to
meet interest obligations. Debt-service means regular and timely permanent interest due on
loans and debentures. Since interest is paid out of the earning), he more the earning available,
(he less is the risk as to the payment of interest. The interest coverage ratio is computed by
dividing earnings before interest and taxes (EBIT) by interest changed:
Interest Coverage = EBIT
Interest

C. ACTIVITY RATIOS (Efficiency Ratio):

Funds of creditors and owners are invested in various assets to generate sales and profits. The
better the management of assets, the larger the amount of sales. Activity ratios are employed
to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are
also called turnover ratios because they indicate the speed with which assets are being
converted or turned over into sales and assets.

1. DEBTORS TURNOVER / RECEIVABLE TURNOVER RATIO:

A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of
companies. When the firm extends credits to its customers, book debts are expressed to be
converted into cash over a short period acid, therefore, are included in current assets. The
liquidity position to the firm depends upon the quality of debtors to a great extent.
Debtors Turnover Ratio = Credit Sales
Average debtors

Account Receivable = Sundry Debtors + Bills Receivable

The higher the ratio, the better it is, since it would indicate that debts are being
collected more promptly. For measuring the efficiency, it is necessary to set up a standard
figure; ratio lower than the standard will indicate inefficiency.

2. COLLECTION PERIOD / AVERAGE AGE OF DEBTORS VELOCITY:

Debtor’s collection period represents the time segment, which is generally required to recover
the debts due from customers and amount realizable on bills.
Debtor Collection Period = 365 days
Debtors Turnover Ratio

Debtor collection period measures the quality of debtors since it measures the rapidly
or slowness with which money is collected from then. A shorter collection period implies
prompt payment by debtors. It reduces the chances of bad debts. A longer collection period
implies neither too liberal nor too restrictive. A restrictive policy results in lower sales, which
will reduce profits.
In general, the amount of the receivable should not exceed 3-4 month’s credit sales.

3. TOTAL ASSETS TURNOVER RATIO:

Some analysis like to compute the total assets turnover. This ratio shows the firm’s ability in
generating sales from all financial resources committed to total assets.
Total Assets Turnover Ratio = Sales
Total Assets

D. PROFITABILITY RATIO:
A Company should earn profits to survive and grow over a long period of time. Profit is the
difference between revenues and expenses over a period of time. Profit is ultimate output of
the company and it with has no future if it fails to make sufficient profits. Therefore, the
financial manager should continuously evaluate the efficiency of its company in term of
profits. The profitability ratios are calculated to measure the operating efficiency of the
company. Besides management of the company, creditors and owner are also interested in the
profitability of the firm. Owners want to get a reasonable return on their investment. This is
possible only when the company earns enough profits.
Profitability ratios, deals with two aspects ‘profits’ or
earning and ‘expenses’ incurred to earn that profit. ‘Sales’ has been the main source of
recovery of expenses and earning of profit. These ratios thus study the relationship of profits
as well as expenses with sales. These have accordingly been divided into categories:

A. RATIO OF PROFIT TO SALES

1. Gross profit ratio
2. Net profit ratio
3. Operating net profit ratio

B. RATIO OF EXPENSES TO SALES

C. RETURN ON INVESTMENT RATIO
(A). RATIO OF PROFIT TO SALES
1. Gross Profit Ratio:
Gross profit is an important concept for a business. It is always the endeavor of the
business to increase this margin. Gross profit represents the margin between the ‘Net Sales’
and ‘Cost of Goods Sold’. The larger this gap, the greater is the scope of absorbing various
expenses on administration, maintenance, arranging finance, selling and distribution and
creating necessary provision for anticipated expenses, and yet leaving net profit for the
proprietors or share holders.
Gross profit ratio is an indicator of the extent of average mark-up on cost of goods. It
is primarily a test of the efficiency of purchases and sales management.
Its formulation is as below:
Gross Profit Ratio = Gross Profit * 100
Sales

Gross Profit = Sales – Cost of Goods

Cost of Goods = (Opening Stock + Net Purchase + Procurement Expenses + Production
Expenses – Closing Stock)
This ratio indicates the degree to which the selling price of goods per unit may decline
without resulting in losses from operations to the firm.
In case there is increase in the percentage of the gross profit as compared to the
previous years it is an indicator of one or more of the following factors:
1. The selling price of the goods has gone up without corresponding increase in the cost
of goods sold.
2. The cost of goods sold has gone down without corresponding decrease in the selling
price of the goods.
3. Purchase might have been omitted or the sales figures might have been inflated.
4. The opening stock has been immediately or the closing stock has been overvalued.

In case there is decrease in the rate of gross profit it may be due to one or more of the
following reasons:
1. There may be decrease in the selling price of the goods sold without corresponding
decrease in the cost of the goods sold.
2. There may be increase in the cost of the goods sold without corresponding increase in
the selling price of the goods sold.
3. There may be omission of sales.
4. Stock at the end may have been undervalued or the opening stock may have been
overvalued.
2. Net Profit Ratio / Net Profit Margin:
Net Profit is obtained when operating expenses; interest and taxes are subtracted from
the gross profit. The net profit margin ratio is measured as follows:
Net Profit Margin = Profit After Tax * 100
Sales
Net profit margin ratio establishes a relationship between the net profit and sales and
indicates management’s efficiency in manufacturing administering and selling the products.
This ratio is the overall measure of the firm’s ability to turn each rupee sales into net profit.
This ratio also indicates the firm’s capacity to withstand adverse economic conditions.
A firm with a high net margin ratio would be in an advantageous position to survive in the
face of falling sales prices, risings cost of production or declining demand for the product.
Similarly, a firm with high net profit margin can make better use of favorable conditions.
Such as rising sales prices, falling cost of production or increasing demand for the product.
Such a firm will be able to accelerate its profits at a faster rate than a firm with a low net
profit margin.

3. Operating Net Profit Ratio:

Operating Net Profit means net profit from normal operations of a business, it is
calculate as:
Operating Net Profit = Net Sales – (Cost of Goods Sold + All Operating Expenses) +
Operating Sundry Income.
Here, all operational expenses refer to office and administration expenses, repairs and
maintenance, selling and distribution expenses and necessary provisions. Operational Sundry
Income may be in the form of discount – earned, commission receiver etc.
Non-Operating Income and non-operating expenses are not taken into account while
ascertaining operating net profit. In case of net profit is given, it has to be adjusted by adding
back non-operating and deducting then from non-operating incomes. Thus an alternative of
finding out operating net profit is:
The formula of operating net profit ratio is as under:
Operating Net Profit = Operating Net Profit * 100
Net Sales

Operating Net profit = Net Profit + Non-Operating Expenses – Non-Operational Income

The higher the ratio, the more is the profitability
(B) RATIO OF EXPENSES TO SALES:
1. Operating Expenses Ratio:
Control over operational expenses is an important requisite for successful
management. Operating ratio indicates proportion of net sales that have been absorbed by the
expenses on operation.
This ratio relates to the total operating expenses (i.e. total expenses non-operating
expenses) to net sales and is expressed in percentage. Its formulation is as below:
Operating Ratio = Total Operating Expenses * 100
Net Sales

Operating Expenses = Cost of Goods Sold + Office and Administration Expenses + Repairs,
Maintenance & Depreciation + Selling and Distribution Expenses + Necessary Provisions
A higher operating expenses ratio is unfavorable since it will leave a small amount of
operating income to meet interest, dividends etc. certain expenses are within the management
policy. The variations in the ratio, temporary or long-lived, can occur due to several factors:

1. Changes in sales price

2. Changes in the demand of the product
3. Changes in the administrative or selling expenses

2. Individual (or specific) Expense Ratios:

The operating expenses ratio indicates the average aggregated variations in expenses,
where some of the expenses may be increasing while others may be falling. Thus, to know the
behavior of specific expenses items, the ratio of each individual operating expenses to sales
should be calculated.
Comparison of such results with corresponding results of the previous years would
pinpoint such items of expenditure or group of expenses, which need control on the part of
the management.
Individual expenses ratios = Specific Expenses * 100
Net Sales
(C) RETURN ON INVESTMENT RATIO:
1. Return on Equity Capital:

Return on equity capital is calculated by dividing net profit after

tax by total equity capital. It is calculated as:

Return on equity capital = Profit after tax * 100

Equity capital

2. Return on Investment (ROI):

It is calculated by dividing net profit after tax by shareholder’s

funds. It is calculated as:

Return on investment (ROI) = Profit after tax * 100

Equity capital

3. Return on Capital Employed:

Return on capital employed is considered to be the prime or principal ratio. It throws
the light on the over – all profitability of the business, which means how much, earning the
amount investment in the business, is yielding.
Profit is the chief motive of organizing business enterprise. Maximization of profit is
the natural instinct of every businessman. The success of the business is, therefore, judged by
the extent of return on the amount invested in the business.
The ratio of the return on investment has 2 components.
1. Capital employed
2. Return or profit
 1. Capital employed:

In general sense, ‘Capital Employed’ refers to the investment made in the business.
Three possible definitions of the term capital employed are generally put forward and used by
various authors in the analysis of financial statements.

1. Gross Capital Employed: Comprises fixed assets plus current assets.

2. Net Capital Employed: Comprises fixed assets plus current assets less current
liabilities.
3. Proprietors Net Capital Employed: Comprises net capital employed plus debentures
and other long-term borrowings.

2. Return on profit
To calculate a fair ratio of return on capital employed, there should be proper
matching of 2 components of the ratio, i.e. capital employed and return. Any incomes from
such assets are excluded from the profit.
The Ratio is computed as = Net Profit (adjusted) * 100
Capital Employed
OBJECTIVES OF STUDY

For achieving the main objective,we have some specific objectives that will help us
for fulfillment of the project report. These objectives are the follows :-

 The first & foremost important objective of the study is to learn the working
procedure.

 To determine the long term liquidity of the funds as well as solvency.

 To determine the debt capacity of the company.

 To conclude factors affecting the financial position of the company .

 To decide about the future prospects of the company.

RESEARCH METHODOLOGY

For carrying out the study of this particular topic the data has been collected basically by two
major sources. These are: -

(a) Primary sources

The primary sources consist of the basic information collected from the staff people of
various departments, the officers as well as the managers of the international tractors limited.
It has been collected by consulting.

(b) Secondary sources

The secondary sources consist of the data and information collected from the annual reports,
magazines, journals. and website.
LIMITATIONS OF THE STUDY

Although there was many limitations that come across during this study but the major
limitation that was faced by me was that the major portion of my collected data was from the
secondary sources.

The ratio analysis is one of the most powerful tools of the financial analysis. Though ratios
are simple to calculate and easy to understand, they differ from some serious limitations.

• LIMITED USE OF A SINGLE RATIO

A single ratio usually does not convey much of the sense. To make a better interpretation
a large number of ratios have to be calculated, which is likely to confuse the analyst than
help him in making any meaningful conclusions.

• LACK OF ADEQUATE STANDARDS

There are no well-accepted standards or rules of thumb for all ratios, which can be
accepted as norms. It renders interpretations of ratios difficult.

• WINDOW DRESSING
Financial statements can easily be window dressed to present a better picture of
profitability to the outsiders. Hence one has to be very careful while making decisions
from ratios calculated from such financial statements.

• PRICE LEVEL CHANGES

While making ratio analysis no consideration is given to the price level and this makes the
interpretations of the ratios invalid.
2.5 DATA ANALYSIS AND INTERPRETATION

1. CURRENT RATIO

Year 2006-2006 2007-2008 2008-09 2009-10

Ratio 1.22 1.41 1.37 2.58

CURRENT RATIO

3
2.5
2
1.5
Ratio
1
0.5
0
2006- 2007- 2008- 2009-
2007 08 09 10

Current Ratio: The current ratio of the company is increasing in all the years, with the
highest increase in the year 2009-2010. This is due to increase in the current assets of the
company namely sundry debtors and the loans and the advances made by the company.
 2. LIQUID RATIO

Year 2006-2007 2007-2008 2008-09 2009-10

Ratio 0.82 0.86 0.83 2.03

LIQUID RATIO

2.5

1.5
Ratio
1

0.5

0
2006-07 2007-08 2008-09 2009-10

Liquid / Quick Ratio: Sundry debtors and loan and advances also affect the quick
ratio of the company. The increase in these sundry debtors and the loans and advances may
decrease the profitability of the company. Usually, a high acid test ratio / quick ratio is an
indication that the firm is liquid and has the ability to meet its current liabilities in time. As a
rule of thumb is 1:1 is considered satisfactory.
 3. ABSOLUTE LIQUID RATIO

Year 2006-2007 2007-2008 2008-09 2009-10

Ratio 0.27 0.23 0.21 0.59

ABSOLUTE LIQUID RATIO

0.6

0.5

0.4

0.3
Ratio
0.2

0.1

0
2006-07 2007-08 2008-09 2009-10

Absolute Liquid Ratio: Absolute liquid ratio of the company is according to the rule of

thumb i.e. 0.5:1 in the year 2009-10 which is due to heavy cash & bank balances maintained

by the company.
 EFFICIENCY RATIOS

4. DEBTORS TURNOVER RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 17.82 10.21 9.22 8.02

DEBTORS TURNOVER RATIO

18
16
14
12
10
8
6 Ratio
4
2
0
2006- 2007- 2008- 2009-
2007 2008 2009 10

Debtors Turnover Ratio: The Debtors turnover ratio, which shows that the number of
times the debtors are turned over during a year. But the debtor of the company is reducing
which shows that the company is not properly managing its debtors. There is no rule of
thumb, which may be used as a norm to interpret the ratio, as it may be different from firm to
firm depending upon the nature of the business.
 5. INVENTORY TURNOVER RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 12.98 9.90 9.33 10.89

INVENTORY TURNOVER RATIO

14
12
10
8
6 Ratio
4
2
0
2006- 2007- 2008- 2009-10
2007 2008 2009

Inventory turnover ratio: The inventory turnover ratio shows how rapidly the inventory is

turning into receivables through sales. This ratio has been increased as compared to the last

year 2008-2009.A high inventory turnover indicates the efficient management of inventory

because more frequently the stocks are sold.

 6. INVENTORY CONVERSION PERIOD

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 28.12 36.86 39.12 33.51

INVENTORY CONVERSION PERIOD

40
35
30
25
20
15 Ratio
10
5
0
2006- 2007- 2008- 2009-
2007 2008 2009 10

Inventory conversion period: Inventory conversion period of the company on an

average slightly increasing as compared to the year 2006-2007.

 7. CREDITORS TURNOVER RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 7.56 8.65 5.52 9.41

CREDITORS TURNOVER RATIO

10

4 Ratio

0
2006- 2007- 2008- 2009-10
2007 2008 2009

Creditors turnover ratio: This ratio shows the time period of the company to pay its

debts. This company’s creditors ratio is increasing, which shows the company is efficiently

managing its reserves by increasing its time period to pay its debts.
 8. AVERAGE PAYMENT PERIOD

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 48.28 42.19 66.12 38.66

Days Days Days Days

AVERAGE PAYMENT PERIOD

90
80
70
60
50 East
40 West
30 North
20
10
0
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

Average payment period: Average payment period shows the average number of days

taken by the firm to pay its creditors. Average payment period of the company is decreased as

compared to the previous year 2008-2009 that shows that the company is efficiently

managing its creditors in the year 2009-2010.

 SOLVENCY RATIOS

9. DEBT-EQUITY RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 1.93 1.23 1.45 0.57

DEBT-EQUITY RATIO

1.5

1
Ratio
0.5

0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Debt equity ratio: Debt equity ratio is calculated to measure the extent to which the debt

financing has been used in the business. A ratio of 1:1 may be usually considered to be

satisfactory ratio although there cannot be any rule of thumb for all types of business.
 10. FUNDED DEBT TO TOTAL CAPITALISATION

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 10.89 27.78 17.96 28.78

FUNDED DEBT TO TOTAL CAPITALISATION

30
25
20
15
Ratio
10
5
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Funded debt to total capitalization: In this company this ratio is increasing which is

not better for the company. So the company should adopt the measures to reduce this ratio.

There is no rule of thumb but still the lesser the reliance on outsiders the better it will be. If

the ratio is smaller, better it will be up to 50% to 55% this ratio may be tolerable and not

beyond.
 11. EQUITY RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 0.31 0.37 0.35 0.50

EQUITY RATIO

0.5
0.45
0.4
0.35
0.3
0.25
0.2 Ratio
0.15
0.1
0.05
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Equity ratio: Equity ratio is the proprietary ratio of the company, which shows the

relationship between the shareholders and the fund to total assets of the company. In the

company this ratio is varied in different years.

 12. SOLVENCY RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 0.61 0.46 0.51 0.29

SOLVENCY RATIO

0.7
0.6
0.5
0.4
0.3 Ratio
0.2
0.1
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Solvency ratio: Solvency ratio is the ratio of the total liabilities to total assets. In the

company the solvency ratio of the company is reducing which shows the satisfactory or stable

is the long-term solvency position of the firm.

 13. FIXED ASSETS TO NET WORTH RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 0.79 0.84 0.72 0.46

FIXED ASSETS TO NET WORTH RATIO

0.9
0.8
0.7
0.6
0.5
0.4
Ratio
0.3
0.2
0.1
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Fixed assets to Net Worth ratio: This ratio established the relationship between the fixed

assets and shareholders funds to the company. This ratio is on an average but is slightly

decreasing in the last two years. There is no rule of thumb to interpret this ratio but 60 to 65

% is considered to be satisfactory ratio.

 14. FIXED ASSETS TO LONG TERM FUND RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 0.70 0.61 0.59 0.33

FIXED ASSETS TO LONG TERM FUND RATIO

0.7
0.6
0.5
0.4
0.3 Ratio
0.2
0.1
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Fixed assets to long-term fund ratio: This ratio indicates the extent to which the total

of fixed assets are financed by long term funds of the company. But at this company this ratio

is declining which shows that the company is working on its short-term sources.
 15. RATIO OF CURRENT ASSETS TO PROPRIETORS FUND

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 236.92 175.78 199.98 148.85

RATIO OF CURRENT ASSETS

TO PROPRIETORS FUND

250

200

150

100 Ratio

50

0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Ratio of current assets to proprietors fund: There is no rule of thumb is established

for this ratio but in this company this ratio is slightly varied between different years.
 PROFITABILITY RATIO

16. NET PROFIT RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 7.67 8.60 7.62 12.49

NET PROFIT RATIO

14
12
10
8
6
Ratio
4
2
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Net profit ratio: Net profit ratio of the company is increasing which is a healthy sign for

the company. This ratio is increased due to the liberal credit policy of the company and

increase in the sales of the company.

 17. RETURN ON INVESTMENT

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 53.69 47.32 44.48 52.40

RETURN ON INVESTMENT

60
50
40
30
Ratio
20
10
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Return on investment: This ratio is one of the most important ratios used for

measuring the overall efficiency of the firm. As compared to the previous years this ratio is

on an average but it is better to compare with the other similar firms for better results.
 18. EARNING PER SHARE RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 19.82 29.95 30.34 46.44

EARNING PER SHARE RATIO

50

40

30

20 Ratio
10

0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Earning per share: Earning per share is good measure of profitability in this company.

This ratio is increasing every year in this company, which shows the earning capacity of the

invertors.
 19. RETURN ON EQUITY CAPITAL

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 198 299 303.49 464.46

RETURN ON EQUITY CAPITAL

500

400

300

200 Ratio

100

0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Return on equity capital: Return on equity capital, which is the relationship between

profits of a company and its equity capital. In this company this ratio is increasing every year.
 20. DIVIDEND PAYOUT RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 0 0.033 0.313 0.753

DIVIDEND PAYOUT RATIO

0.8
0.7
0.6
0.5
0.4
0.3 Ratio
0.2
0.1
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Dividend payment ratio: This ratio is calculated to know the relationship between

dividend per share paid and the market value of the share. In the company this ratio is

increasing year by year.

 21. RETURN ON GROSS CAPITAL EMPLOYED

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 23.07 31.57 29.85 38.25

RETURN ON GROSS CAPITAL EMPLOYED

40
35
30
25
20
15 Ratio
10
5
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Return on gross capital employed: Return on capital employed established the relationship

between the profits and the capital employed. This ratio shows the overall profitability of the

company. But the company has to increase this ratio to increase the profitability.
 22. RETURN ON NET CAPITAL EMPLOYED

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 59.67 59.47 62.06 53.96

RETURN ON NET CAPITAL EMPLOYED

64
62
60
58
56
54 Ratio
52
50
48
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Return on the net capital employed: The term net capital employed comprises the

total assets used less current liabilities. This ratio is decreasing which is the good sign for the

company.
 LEVERAGE RATIOS
23. CAPITAL GEARING RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 8.17 2.59 4.56 0.71

CAPITAL GEARING RATIO

9
8
7
6
5
4
Ratio
3
2
1
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Capital gearing ratio: This ratio shows the relationship between the equity share

capital and the other fixed interest bearing loans. This company is low-geared company

because long-term debt was less than the equity and reserves.
 24. RATIO OF RESERVES TO EQUITY CAPITAL

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 269.10 554.08 796.36 1454.1

RATIO OF RESERVES TO EQUITY CAPITAL

1600
1400
1200
1000
800
600 Ratio
400
200
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Ratio of reserves to equity capital: The ratio establishes relationship between the reserves

and the equity capital. This ratio shows the better position of the company, which is highly increasing

every year.
 25. FINANCIAL LEVERAGE

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 1.02 1.04 1.21 1.80

FINANCIAL LEVERAGE

1.8
1.6
1.4
1.2
1
0.8
Ratio
0.6
0.4
0.2
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Financial leverage: Use of long-term debts along with equity shares is financial

Leverage. This shows the capital structure of the company.

 26. RATIO OF CURRENT LIABILITIES TO SHAREHOLDERS FUND

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 1.93 1.23 1.45 0.57

RATIO OF CURRENT LIABILITIES

TO SHAREHOLDERS FUND

2
1.8
1.6
1.4
1.2
1
0.8 Ratio
0.6
0.4
0.2
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Ratio of current liabilities to shareholders fund: This ratio shows that the how much

amount of current liabilities is financed from the fixed assets. This ratio is decreasing which

is positive sign for the company.

 27. AVERAGE COLLECTION PERIOD

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 20.48 35.74 39.58 45.51

AVERAGE COLLECTION PERIOD

50

40

30

20 Ratio

10

0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Average collection period: This ratio represents the average number of days for which it
has to wait for its receivables are converted into cash. In this firm the ratio of average
collection period is increasing which is not a good sign for the company’s profitability
position.
 28. WORKING CAPTIAL TURNOVER RATIO

Year 2006-2007 2007-2008 2008-2009 2009-2010

Ratio 16.23 10.60 10.68 4.59

WORKING CAPTIAL TURNOVER RATIO

18
16
14
12
10
8
Ratio
6
4
2
0
2006- 2007- 2008- 2009-
2007 2008 2009 2010

Working capital turnover ratio: This indicates the number of times the working capital
is turned over in the course of a year. Working capital turnover ratio is reducing of this
company. So the company should have to improve it.
CONCLUSION

The conclusion derived from the study of financial analysis of elevator company

shows that the overall financial strength of the company is extremely good. Because

the current assets exceeds the current liabilities in all the financial years of the

company. But current assets of the company are heavily increased during the year

2009-2010 which boosted the current ratio of the company. The working capital

position of the company is better in the financial year 2009-2010 as compared to the

previous years. The overall profitability of the company is good.

Suggestions :
1. Liquidity Ratios :
Liquidity refers to the ability of the concern to meet its current obligations as and when these
become due. The short-term obligations are met by realizing amounts from current floating or
circulating assets. The liquidity position of the company is better as compared to the previous
years. The ratios such as current ratio, liquid ratio and absolute liquid ratio has been increased
as compared to the previous year 2006– 2007, 2007– 2008 and 2008– 2009. This increases
due to the sundry debtors, loan and advances and heavy cash and bank balances maintained
by the company. Although company is heaving better liquidity position, but there is still a
scope to improve it.
2. Solvency Ratios:
The term solvency refers to the ability of a concern to meet its long-term obligations.
Due to the heavy liquidity position maintained by the company. But the long-term position is
not much better. All the ratios including equity ratio, fixed assets to net worth, fixed assets to
the long-term funds ratios are decreasing. So the company is recommended to make the
balance between liquidity and solvency position of the company.
3. Profitability Ratios:
The primary objective of the business undertaking is to earn profits. Profit earning is
considered essential for the survival of the business. The net profits of the company is
increased as compared to the previous years but this is due to the increase in the credit sales
of the company which shows that the company is adopting liberal credit policy to increase its
profits but the company is also suffered from the increase in average days of collection so the
company should maintain its credit policy to make a balance between the cash and credit
sales and take some measures its average days of collection. For improving its collections, the
company may adopt the services of the factors (factoring).
4. Efficient utilization of resources:
The company is having better short-term financial position. It has more current assets
as compared to the current liabilities, which will effect the overall profitability position of the
company so the company should manage its current assets properly.

5. Management of debtors:
The increase in the current assets is due to the increase in the debtors of the company.
So the company is recommended to manage its debtors properly. Increase in debtors
may create certain problems in the long-term run of the company.
SOME GENERAL SUGGESTIONS FOR THE SUCCESS OF THE COMPANY:

1. Increasing the market area or developing the new market:

The company is having better financial strength. So by efficiently using these
resources company can increase the area of operation or develop new markets by adopting
international standards.

2. Quality control:
By providing good and the cost control measure with the objectives to attain the
desired level of the sales volume.
BIBLIOGRAPHY

R.K. SHARMA and SHASHI K. GUPTA, “Management Accounting and Business

Finance”, Kalyani Publishers, Ludhiana, 2000.

I.M. PANDEY, “Financial Management”, Vikas Publishing house private limited,

New Delhi, 2000.

C.R. KOTHARI, “Research Methodology, Methods & Techniques” Wishwa

Parkashan New Delhi, 1999.

S.D. GUPTA, “Statitical Methods” Sultan Chand & Sons, New Delhi, 2001.

Balance sheets, “International Tractors Limited from 2005 – 2009”. (Four years

Balance Sheets).

Financial statements, “Kone elevator india limited”

a) Profit and loss account from 2006 – 2010.

b) Balance sheets from 2006– 2010.

Websites :

http://www.kone.com/index.aspx

http://www.kone.com/history.aspx?id=history

http://www.kone.com/milestones.aspx?id=milestones

http://www.kone.com/overview.aspx?id=overview

http://www.kone.com/whatdrives.aspx?id=whatdrive

http://www.kone.com/chairman.aspx

http://www.kone.com/viceChairmanMessage.aspx?id=vcm

http://www.kone.com/boardOfDirectors.aspx?id=bod

http://www.kone.com/itl.aspx?id=itl

http://www.kone.com/icml.aspx?id=icml

http://www.kone.com/agro.aspx?id=agro
http://www.kone.com/iatl.aspx?id=iatl

http://www.kone.com/production.aspx?id=Production

http://www.kone.com/newsDetail.aspx?id=news&NewsID=6

http://www.kone.com/newsDetail.aspx?id=news&NewsID=5

http://www.kone.com/financialPartners.aspx?IR=1

http://www.kone.com/market.aspx?id=mkt

http://www.kone.com/client.aspx?id=cnt