Suhas Final Project

A STUDY ON IMPACT OF LEVERAGES
LIST OF TABLES
TABL PAGE
PARTICULARS
E NO. NO.
4.1 Table Showing the Changes in EBIT & EBT 46
4.2 Table Showing the Changes in Contribution & EBIT 48
4.3 Table Showing the Changes in Contribution & EBT 50
4.4 Table Showing the Comparison Of Financial Leverage 52
4.5 Table Showing the Comparison Of Operating Leverage 54
4.6 Table Showing the Comparison Of Combined Leverage 56
4.7 Table Showing the Earning Available to Equity 58
Shareholders
4.8 Table Showing the Comparison Of EPS 60
4.9 Table Showing Debt Equity Ratio 62
4.10 Table Showing Debt to Total Capital Ratio 64
4.11 Table Showing Net Worth to Total Capital Ratio and 66
Debt to Total Capital Ratio
4.12 Table Showing External-Internal Equity Ratio 68

4.13 Table Showing Degree Of Financial Leverage (DFL) 71
4.14 Table Showing Degree Of Operating Leverage (DOL) 74
4.15 Table Showing Degree Of Combined Leverage (DCL) 77
LIST OF GRAPHS
V.V.N DEGREE COLLEGE Page 1

CHAR PAGE
PARTICULARS
T NO. NO.
4.1 Graph Showing the Changes in EBIT & EBT 47
4.2 Graph Showing the Changes in Contribution & EBIT 49
4.3 Graph Showing the Changes in Contribution & EBT 51
4.4 Graph Showing the Comparison Of Financial Leverage 53
4.5 Graph Showing the Comparison Of Operating Leverage 55
4.6 Graph Showing the Comparison Of Combined Leverage 57
4.7 Graph Showing the Earnings Available to Equity 59
Shareholders
4.8 Graph Showing the Comparison Of EPS 61
4.9 Graph Showing Debt Equity Ratio 63
4.10 Graph Showing Debt to Total Capital Ratio 65
4.11 Graph Showing Net Worth to Total Capital Ratio and 67
Debt to Total Capital Ratio
4.12 Graph Showing External-Internal Equity Ratio 69

4.13 Graph Showing Degree Of Financial Leverage (DFL) 72
4.14 Graph Showing Degree Of Operating Leverage (DOL) 75
4.15 Graph Showing Degree Of Combined Leverage (DCL) 78

CHAPTER - 1
INTRODUCTION
1.1 INTRODUCTION TO FINANCE:

Finance was studied as part of economics before the turn of the present century. It was only in
the early part of the present century when massive consolidation movement tool place that
finance came to be studied as a corporate discipline, formation of large seized understandings
by consolidating the smaller once brought before the management the problem of financing
these giant enterprises. Accordingly, over whelming emphasis was placed on study of sources
and forms of financing the new industrial giants.
MEANING OF FINANCE:
Finance is one of the major elements, which activates the overall growth of the economy.
Finance is the lifeblood of economic activity. Finance is defined as “the provision of money as
the time when it is required every enterprise, whether big, medium or small, needs finance to
carry on its operations and to achieve its target. Finance is regarded as the lifeblood of the
business enterprises without adequate finance; no enterprise can possibly accomplish its
objectives.
The subject of finance has been traditionally classified into two classes:-
1. Public Finance
2. Private Finance
Public finance deals with the requirements and disbursements of funds in the government
institution life states, local self-governments and control governments.
Private finance is concerned with requirements receipt and disbursements of funds in case of
an individual.
Definitions of Finance:-

“The science of raising and expanding the public revenue”
“A branch of economics concerned with resource allocation as well as resource management,

acquisition and investment. Simply, finance deals with matters related to money and markets”.
Finance is a branch of economics that deals with the management of funds, financial sources
and other assets. In broader terms, finance is raising or investing money either as equity or
debt. Finance is a wide-ranging term which includes funding, investments, trading and risk
management (through various types of insurance policies).
Financial Management
Meaning:
Financial Management is the specialized functions directly associated with the top
management. The significance of this function is not only seen in the ‘Line’ but also in the
capacity of ‘Staff’ in the overall administration of a company.
Definitions:
“Financial Management is the application of the planning and control functions to the finance
function.”
- Archer &Ambrosio.
“Financial Management is the operational activity of a business that is responsible for

obtaining and effectively utilizing the funds necessary for efficient operation.”
- Joseph & Massie
SCOPE OF FINANCIAL MANAGEMENT:

Financial management is broadly concerned with the acquisition and use of funds by a business
firm. The important tasks of financial management are categorized as follows:
SCOPE OF
FINANCIAL
MANAGEMENT
GOALS OF FINANCIAL MANAGEMENT

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Specific Objectives:-
1. Profit Maximization: Earning profits by a company or a corporate is a social

obligation. Profit is the only means through which an efficiency of organization can be
measured. Profit maximization achieved by an organization is regarded as a primary
measure of its success. The survival of the firm depends upon its ability to earn profits.
Though profit maximization has many features different people expressed different
opinions to consider this as main goal of a company.
 Profit maximization increases the confidence of management in expansion and
diversification programs of a company.
 Profit maximization attracts the investors to invest their savings in securities.
 Profits ensure maximum welfare to the share-holders, employees and prompt
payment to creditors of the company.
 Profit indicates the efficient use of funds for different requirements.
2. Wealth Maximization: The concept of ‘Wealth Maximization’ refers to the

gradual growth of the value of assets of the firm in terms of benefits it can produce. The

wealth maximization attained by a company is reflected in the market value of shares.

In other words, it is nothing but the process of creating wealth of an organization. This
maximizes the wealth of shareholders.
Wealth maximization is the net present value of a financial decision. Wealth
maximization concept has been explained differently by practical financial executives.
“When the company’s profits are more, he advises the management to keep certain
amount of profit for future expansion, through which he increases the production and
market share.”
General Objectives:
1. Balanced Asset Structure: The subject of financial management must have a goal
of maintaining balanced asset structure of company. The size of fixed assets is to be
decided scientifically. The size of current assets must permit the company to exploit the
investments on fixed assets.
2. Liquidity: The liquidity objective of a company will exploit the long-term vision of a
company. If a firm is ‘Liquid’, it is an indication of positive growth.
3. Judicious Planning of Funds: The concept of wealth or profit maximization is
achieved only when a company reduces its cost. Cost here not only refers to the overall
cost of operations but also the cost of funds.
4. Efficiency: “Innovate or Perish” is the slogan of this century. If a company is
innovative or efficient, it can be run successfully in its future periods. It is the
obligation of a finance manager to be vigilant in increasing the efficiency level of a
company.
5. Financial Discipline: As in the recent past, country has witnessed different types of
scandals, corporate financial indiscipline, and misuse of funds. Hence it has become an
obligatory responsibility of a company to have financial discipline through various

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techniques of financial management i.e., capital budgeting, fund flow and cash flow
statement, performance budgeting, CVP analysis etc.
A’s of Financial Management
1. Anticipating Financial Needs: The financial manager has to forecast expected

events in business and note their financial implications. Financial needs can be
anticipated by forecasting expected funds in a business and recording their financial
implications. In a big business, a financial need expands into an impressive array of
documents. These are:
 Cash budget which is essentially a cash flow statement;
 A Pro-forma income statement summarizing sales, other income, costs, taxes
and net income for the period;
 A Pro-forma balance sheet showing what the assets and liabilities will be like
during the forecast period;

 A statement of sources and uses of funds, showing where the funds to operate
the business will come from and how they will be absorbed during the period.
2. Acquiring Financial Resources: This implies knowing when, where and how to
obtain the funds which a business needs. Funds should be acquired well before the need
for them is actually felt. The financial manager should know how to tap the different
sources for both funds. He may require short-term and long-term funds. The financial
image of a corporation has to be improved in appropriate financial circles which are
primarily responsible for supplying finance.
3. Allocating Funds in Business: Allocating funds in a business means investing
them in the best plan of assets. Assets are balanced by weighing their profitability
against liquidity. Profitability refers to the earning of profits. Liquidity means closeness
to money. The finance manager should allocate funds according to their profitability,
liquidity and leverage.
4. Administrating the Allocation of Funds: Once funds are allocated on various
investment opportunities, it is the basic responsibility of the finance manager to watch
the performance of each rupee that has been invested. This helps the management to
increase efficiency by reducing the cost of operations and earn fair amount of profits
out of these investments.
5. Analyzing the performance of Finance: Once the funds are administered, it is
very comfortable for the finance manager to take decisions. Through budgeting, he will
be able to compare the actual with standards. The returns on the investments should be
continuous and consistent. The cost of each financial decision and returns of each
investment must be analyzed. This helps in achieving ‘liquidity’ of a business unit.
6. Accounting and Reporting to the Management: Finance manager not only
acts as line but also as staff. He has to advise and supply information about the
performance of finance to the top management and is also responsible for maintaining
up-to-date records of the performance of financial decisions. Financial management is
concerned with the many responsibilities which are the main thrust of a business

enterprise. Hence accounting and reporting of the performance of finance is an

important aspect of financial management.
FUNCTIONAL AREAS OF FINANCIAL MANAGEMENT:
1. Estimation of Financial Management:

The requirement of finance to a business concern is continuous. It is needed in all the
stages of business cycle namely, initial growth, saturation and declining stage. Funds
are needed to establish the industry both for meeting capital expenditure and revenue
expenditure. Funds are also needed at the growth stage for expansion and to increase
the production to meet the demand of consumers. The requirement of finance rises at

the stage of saturation also for diversification. If the firm becomes sick, to rejuvenate
the activities of such business concern rescheduling, repackage of financial services are
needed. Hence, it is the first task of finance manager.
2. Selection of the Right Sources of Funds:
After estimating the total funds of business concern, it is the second important step of
the finance manager to select the right type of sources of funds at the right time at right
cost. Each financial instrument is associated with different types of costs. Equity has
the cost of dividend or expectation of the shareholders, debenture or borrowings has the
cost of interest, preference share has the cost of dividend. Careful selection has to be
made out of the available alternative sources of funds.
3. Allocation of Funds:
After mobilizing the total funds of a firm, it is the responsibility of finance manager to
distribute the funds to capital expenditure and revenue expenditure. The evaluation of
different proposals of project must be made before making a final decision on
investment. Each investment must yield fair amount of returns, so that it should
contribute to the goal of ‘Wealth Maximization’.
4. Analysis and Interpretation of Financial Performance:
It is another important task of finance manager. He is expected to watch the
performance of each portfolio that can be measured in terms of profitability and returns
on the investments. Ratio analysis and comparison of actual with standard helps the
finance manager to have maximum control over the entire operations of the business
unit.
5. Analysis of Cost-Volume-Profit:
It is another important tool of the financial management that helps the management to
evaluate different proposals of investments. Make or Buy decision, Deletion and
Continuation of a product line decision can be made by adopting CVP/BEP analysis.
This helps the management to achieve long term objectives of a firm.
6. Capital Budgeting:

It is a technique through which a finance manager evaluates the investment proposals.

Pay Back Period, ARR, IRR, NPV are some of the modern techniques, very popular in
capital budgeting. These techniques are adopted by finance manager to attain financial
objective of the enterprise.
7. Working Capital Management:
Working Capital is rightly an adjunct of fixed capital investment. It is a financial
lubricant which keeps business operations going. It is the lifeblood of a firm. Cash is
the central reservoir of a firm and ensures liquidity. The finance manager should weigh
the advantage of customer trade credit, such as increase in volume of sales, against
limitations of costs and risks involved therein. He should match the inventory level to
sales and reduces the stay of inventory during the production. This helps the
management to meet the demand of the market on time.
8. Fair Return to Investors:
Returns are the divisible profits available to the investors. Equity shareholders normally
expect fair amount of profit and capital appreciation for their investment. Unless and
until this is fulfilled by a company, the confidence of the investors will be stake. In long
term it helps the nation to build strong capital formation and increases industrial
activities. It also contributes to the growing activities. Hence a business firm must
assure regular income to the shareholders.
Capital Structure
“Capital structure of a company refers to the composition of its capitalization and it includes all
long term capital sources i.e., loans, reserves, shares and bonds.”
- Gerestenberg

“The capital structure of business can be measured by the ratio of various kinds of permanent
loan and equity capital to total capital.”
- Schwarty
Factors affecting capital structure:
Internal Factors
1. Financial Leverage: The use of fixed securities, such as debt and preference capital
along with owners’ equity in the capital structure is described as ‘financial leverage’.
This decision is most important from the point of financing decisions.

2. Cash Flows: Cash flow ability of a company will have direct impact on the capital
structure. Cash flows permit the company to meet its short term obligations. Sound cash
flows facilitate the finance manager in raising funds through debt.
3. Risk: Ordinarily, debt securities increase the risk, while equity securities reduce the
risk. The risk attached to the use of leverage is called “Financial Risk”. A firm can
avoid or reduce the risk, if it does not employ debt capital in the capital mix.
4. Growth and Stability: In the initial stages, a firm can meet its financial requirements
through long-term sources, particularly by raising equity shares. Once the company is
stable, it can raise debt or preference capital for growth and expansion programs of the
company.
5. Cost of Capital: The cost of capital refers to the expectation of suppliers of funds. The
objective of knowing the cost of capital is to increase the returns on investments, so
that, a firm should earn sufficient profits to repay the interest and installment of
principal to the lenders.
6. Purpose of Finance: The purpose of finance is another factor that influences the
capital structure. If a firm is engaged in business transactions, it can make use of Debt
and Equity mix or can enjoy leverage benefits. For an existing company, funds may be
required for expansion or diversification. It may be financed through retained earnings,
debentures or preference capital. Hence purpose of business influences the Capital
Structure.
7. Retaining Control: The attitude of the management towards retaining control over the
company will have direct impact on the capital structure. If the existing shareholders
want to continue the same holding on the company, they may not encourage the issue
of additional equity shares. Fresh issue of equity share reduces the interest and holding
over the company. The divisible profits percentage of such company will also come
down. In the long run, it affects the market value of the shares. Hence, in the normal
practical situation, the existing equity shareholders direct the management to raise the
additional source only through debentures or preference shares.

8. Flexibility: Flexibility means the firm’s ability to adopt its capital structure to the
needs of changing conditions; its capital structure should be flexible, so that without
much practical difficulties, a firm can change the securities in capital structure. The
degree of flexibility in the capital structure mainly depends on flexibility in fixed
charges, restrictive covenants in loan agreements, terms of redemption and the debt
capacity.
9. Asset Structure: Funds are needed to make investments on fixed assets and current
assets. Fixed assets investments can be met by long-term sources i.e., through the issue
of equity, debentures or preference capital. A portion of current asset investments are
also financed by long-term sources. Short-term sources are used for meeting the
working capital requirement. Hence, Asset Structure influences the Capital Structure.
External Factors
1. Size of the Company: If the size of the business is small, the requirement of finance is
too little. If the size of the business is large, large amount of capital is required. If a firm
plans to raise smaller amount of capital, it selects only few securities in its capital
structure.
2. Nature of the Industry: The nature of industry, method of production, type of product
etc., will also influence the capital structure. A trading company, which has less asset
structure, has to depend mainly on equity or preference capital to meet their capital
requirement.
3. Investors: The statistics of public issues in the primary market indicates more
fluctuations in the flow of funds. Now the investors are cautious over the investments.
Political, socio-economic factors of the country made the investors to be very alert in
their portfolio management.
4. Level of Interest Rate: The rate of interest will have direct impact on borrowed funds.
If the expectation of the banker is more to get high percentage of interest, a firm can
postpone the mobilization of funds or can make use of retained earnings. Hence, it
affects the capital structure.

5. Availability of Funds: The availability of money in the capital and money market will
directly influence the company financial structure. Hence, a finance manager has to
study the flow and availability of funds before he decides about the capital structure.
6. Period of Finance: Funds are required for different purposes.
o Short term (1-3 years) funds are required to meet working capital requirements.
Hence, it is raised through commercial banks (O.D, Cash Credit).
o Medium term finance (8-10 years) is required to meet expansion and
diversification purposes and which can be raised through issue of preference or
debenture capital.
Hence period of finance will also influence the capital structure.
7. Legal Requirements: The legal and statutory requirement of the Government will also
influence the capital structure. SEBI guidelines on investors protection, maintain
Debt: Equity ratio and current ratio, promoter contribution etc., will have direct bearing
on capital structure. Besides this, the monetary and fiscal policies of the government
also affect the capital structure decision.
8. Level of Business Activity: When a level of business activity of a firm is rising, it
requires more funds for expansion or diversification. The company may opt for raising
additional funds through debentures, preference shares or it can borrow term loans.
Hence, it affects the capital structure.
9. Taxation Policy: High corporate tax, high tax on dividend and capital gains directly
influence the decision of capital structure. High tax discourages the issue of equity and
encourages to issue more amount of debt instrument, as the fixed charges on these
securities, i.e., interest can be directly charged to Profit and Loss A/c for income tax
calculations. Hence capital structure of a company is affected.
1.2 INTRODUCTION TO LEVERAGE:
Leverage has been defined as “the action of a lever, and mechanical advantage gained by
it.” In simple words, it is a force applied at a particular point to get the desired result. The

term leverage refers generally to circumstances which bring about an increase in income
volatility. In business, leverage is the means which a business firm can increase the profits.
The force will be applied on debt; the benefit of this is reflected in the form of higher
returns to equity shareholders. It is termed as “Trading on Equity.”
TYPES OF LEVERAGES:
1. Financial Leverage:
The main aim of any business is to maximize the wealth of the firm and increased
return to the equity holders. Earnings per share are a barometer through which
performance of an industrial unit can be measured.
Financial leverage helps the finance manager to select an appropriate mix of capital
structure. Capital is required for the purpose of meeting both long-term and short-term
financial requirement of a business unit. This could be raised through long term
sources, namely, equity shares, debentures, preference shares, etc. Also could be raised
through short term sources namely, over draft, cash credit, bill discounting, etc., can be
raised to fulfill the short-term requirement through the commercial banks. Each of these
instrument is directly associated with the cost.
Operating Income / EBIT

o Financial Leverage =
Taxable Income / EBT
Significance of Financial Leverage:

Financial leverage is employed to plan the ratio between debt and equity so that earning per
share is improved. Following is the significance of financial leverage:
1) Planning of Capital Structure: The capital structure is concerned with the raising of
long-term funds, both from shareholders and long-term creditors. The effects of
borrowing on cost of capital and financial risk have to be discussed before selecting a
final capital structure.
2) Profit planning: The earning per share is affected by the degree of financial leverage.
If the profitability of the concern is increasing then fixed cost funds will help in
increasing the availability of profits for equity shareholders. Therefore, financial
leverage is important for profit planning.
3) Financial Leverage is said to be a “Second phase Leverage” as it starts off at the point
where the operating leverage stops.
Limitations of financial leverage:
1) Double-edged weapon: It can be successfully employed to increase the earnings of the

shareholders only when the rate of earnings of the company is more than the fixed rate
of interest. On the other hand, if it does not earn as much as the cost of interest bearing
securities, then it will work adversely and hence cannot be employed.
2) Increases risk and rate of interest: Another fact is that every rupee of extra debt
increases the risk and hence the rate of interest on subsequent loans also goes on
increasing. It becomes difficult for the company to obtain further debts without offering
extra securities and higher rates of interest reducing their earnings.
3) Restrictions from financial institutions: The financial institutions also impose
restrictions on companies which resort to excessive trading on equity because of the
risk factor and to maintain a balance in the capital structure of the company.
2. Operating leverage:
There are two major classifications of costs in the organization. They are,

a) Fixes cost
b) Variable cost
The operating leverage has a bearing on fixed costs. The operating leverage will be at a
low degree when fixed costs are less in the production process. Operating leverage
shows the ability of a firm to use fixed operating cost to increase the effect of change
in sales on its operating profits. It shows the relationship between the changes in sales
and the charges in fixed operating income. Thus the operating leverage has impact
mainly on fixed cost, variable cost and contribution.
Contribution
o Operating Leverage =
EBIT / Operating profit
Characteristics of Operating leverage:
a) The concept of operating leverage cannot be applied at the breakeven level, because the
operating profit becomes zero.
b) The operating leverage is the reciprocal (inverse) of the Margin of Safety. In view of
the reciprocal relationship, the inference is that higher the operating leverage, lower
will be the margin of safety and higher risk to the company.
c) The operating leverage decreases as the level of production or activity increases,
provided that other things remain the same.
d) The operating leverage is a function of three factors;
i. The amount of fixed cost.
ii. The contribution.
iii. Volume of sales.
e) For levels of activity below the break-even level, operating leverage is negative.
Significance of Operating Leverage:

 It is used to know the impact of earnings per share and the price-earnings ratio.
 Operating Leverage is based on the principle of marginal costing, where breakeven
point can be calculated at different level of sales.
 Any change in sales due to the change in operating cost results in higher operating
profits.
 Therefore, Operating Leverage is said to be “First phase Leverage” which
magnifies the profit due to change in sales volume.
3. Combined leverage:
This leverage shows the relationship between a change in sales and the corresponding
variation in taxable income. If the management feels that a certain percentage change in
sales would result in percentage change to taxable income they would like to know the
level or degree of change and hence they adopt this leverage. Thus, degree of leverage
is adopted to forecast the future study of sales levels and resultant increase/decrease in
taxable income.
o Combined Leverage = Operating Leverage × Financial Leverage
Contribution EBIT
o Combined Leverage = ×
EBIT / Operating profit EBT
Contribution
o Combined Leverage =
Earnings before tax [EBT]

 Financial Risk :
Financial Leverage not only maximizes the returns to shareholders but also exposes the
firm to high financial risk, (if it is unplanned). The theory says ‘leverage effect can be
enjoyed only up to a particular point of time or stage’, (if all other things are favorable).
If it crosses the expected line (more debt and less equity), increases the financial risk
(interest burden) and ultimately it leads to insolvency. Capital structure only through
equity is also not favorable to the company, as it reduces EPS, (because of non-
existence of debt capital). The entire earnings of the company will be taxable, as a
result of this, it has to declare lower percentage of dividend, in the long run, it would
directly affect the market value of shares.
 Business Risk :
Business risk is related to the investment decisions or assets mix of the firm. Business
risk may be defined as the variability in return on assets. Such variability is the result of
internal and external environment, in which the firm has to operate. Given the
environment in which the firm has to operate, business risk is an unavoidable risk.
Therefore, it is the basic duty of the financial executives to take both the risks in taking
financial as well as investment decisions.

Difference between Operating and Financial Leverage
Operating Leverage Financial Leverage

1. Operating leverage is related to the 1. Financial leverage is more concerned
investment activities (capital with financial matters (mixing of debt
expenditure decision). equity in capital structure).
2. The fluctuation in the EBIT can be 2. The changes of EPS due to Debt:
predicted with the help of operating Equity Mix is predicted by financial
leverage. leverage.
3. Financial Manager uses the operating 3. The uses of financial leverage to make
leverage to identify the items of asset decisions in the liability side of the
side of the Balance sheet. Balance sheet.
4. Operating leverage is used to predict 4. Financial leverage is used to analyze
business risk. the financial risk.

CHAPTER – 2
RESEARCH DESIGN
2.1 STATEMENT OF THE PROBLEM

This study entitled “IMPACT OF LEVERAGES” with special reference to “KAR

MOBILES LTD, BANGALORE”, the problem of statement is to understand the growth and
impact of the leverages on the Earnings Per Share (EPS) and the Capital Structure of the
company.
2.2OBJECTIVES OF THE STUDY
 To analyze the pattern of various leverages to the growth of the company.

 To study the importance of leverages in the capital gearing of the company.
 To examine the impact of financial leverage on earnings per share and dividend.
 To assess the interrelationship between financial leverage, operational leverage and
combined leverage.
 To make suggestions based on findings.
2.3SCOPE OF THE STUDY
 The study of “IMPACT OF LEVERAGES” was restricted to a period of One Month.
2.4 METHODOLOGY
Research methodology may be understood as science of study. This project is done
scientifically and in a systematic manner to solve the research problem with the help of
company’s financial statements.
2.4.1 RESEARCH DESIGN

This is a Descriptive Study that aims at interpreting the Impact of Leverages in the
Organization. It includes fact finding enquiries of different kinds. The major purpose of
descriptive research design is description of the state of affairs as it exists at present. In
this method the researcher has no control over the variables and he/she can only report
what had happened, what is happening.
2.4.2 SOURCES OF DATA

PRIMARY DATA: - The information collected for the first time is called primary data
collection.
SECONDARY DATA: - The information collected from various existing resource is
known as secondary data collection. The researcher referred Various Books of different
Authors, Websites, and Annual Reports of the company in this Research.
2.4.3 SAMPLING TECHNIQUES
The methods used in drawing samples from a population usually in such a manner that
the sample will facilitate determination of some hypothesis concerning the population.
There is no need of Sampling Techniques.
2.4.4 SAMPLING SIZE
The sampling size is number of observations used for calculating estimates of given
population.
2.5 PLAN OF ANALYSIS

Simple Percentage Analysis was adopted where ever necessary for this study. The data was
classified and tabulated for the purpose of analysis. Percentages were calculated for the
purpose of generalizations. Charts, Graphs and Diagrams have been drawn based on the
tabulation. Inferences were drawn and conclusions were made.
2.6 REFERENCE PERIOD

The reference period for this research is 1 Month.
2.7 LIMTATIONS OF THE STUDY

 The study covered a vast concept, hence wide collection and coverage of
information was not easily possible.
 Analysis of data collected has been done on the assumptions that the information
provided by the respondents is genuine.
 Due to time constraints, the study was limited to 1 month.
 Confidential matters would not be revealed easily.
2.8 CHAPTER SCHEME
Chapter 1:- Introduction

Chapter 2:- Research Design
Chapter 3:- Industry and Company Profile
Chapter 4:- Data Analysis & Interpretation
Chapter 5:- Findings
Chapter 6:- Suggestions

CHAPTER - 3
INDUSTRY AND COMPANY PROFILE
3.1 INDUSTRY PROFILE
Introduction
A valve is a device that is used to control the flow of fluids (liquids, gases, fluidized solids, and
slurries) by opening closing or partially obstructing various passageways. The valves can

function or actuate either manually or automatically. With manual valves, an external force is
necessary to actuate the valve while automatic valves are self actuating valves that operate
freely without any external source; they rather need external mechanical devices to function.
Most of the valves have closed as their default position and need some form of external
intervention to function. Fail safe valves return to their actual position (open or close) when the
external force is removed some valves also have a default position of open and they remain
open until closed for special purposes. Common types of valves include gate valves, butterfly
valves, globe valves, ball valves, etc.
Industry scenario
The industrial valve industry is made up of relatively small number of large global business
and a very large number of small to medium-size manufacturing companies many of which
specialize in niche markets, products or applications. The markets in the developed countries
are now relatively mature and are expected to show little growth for new products in the next
few years and the growth in the developed market will be concentrated on the replacement
market that is one third of the total valve market. Russia, France, the United Kingdom and
Taiwan are also notable valve producers, all with over US$1.3billion in annual shipments.
Germany, Italy and Japan are the world’s largest net exporters of valves. The largest and most
technically proficient valve manufacturing industries are generally located in the developed
nations, as evidenced by the fact that the US, Germany, Japan and Italy together accounted for
50% of global valve production in 2004.

Industrial production of valves in

India (Fy03 - Fy07)
16
14
12
10
0
Fy3 Fy4 Fy5 Fy6 Fy7
Increasing price sensitivity in the valve market
Valve industry has become much more price and cost sensitive. There has been downward
pressure on the prices with end users demanding very tight costing from plant manufacturers in
difficult markets due to economic conditions. These price cuts are then transmitted down the
purchasing trials of the valve manufacturers. Many valve prices are lower than they were few
years ago and this is impacting the size of the markets.
The advancement of technology provides to achieve faster industrial growth. The engineering
sector has wide scope for the development of Indian economy by providing employment,
effective utilization of natural resources and earning the foreign exchange. Industrialization is
mainly to attain higher levels of economic development and well being of the people of
country.

3.2 COMPANY PROFILE
A. Background and inception of the company
 Kar Valves Limited was born out of an electric supply undertaking in the old
Maharaja’s state of Cochin under the name of Cochin State Power and Light
Corporation Limited.
 This company was started in the year 1936 and was engaged in distribution of
electricity.
 In 1971 this business was nationalized so the company received compensation from the
government and the shareholders decided to invest in the new business activity.
 The company was names as “Kar valves limited” and incorporated in the year 1972
under Indian Companies Act, with a licensed capacity of 1.5 million valves per annum.
 Mr.L.L.Narayan laid the foundation stone on 30th August 1973 and established as
private organization and started as a manufacturing unit. Sri V.P.Aghoram was
appointed as the Managing Director of the company in 1972.
 The company commenced its commercial production in the year 1975 and the first
invoice was made on 12-03-1975 to M/s.Conwest Private Limited, Delhi.
 Large valves for Diesel Loco Applications and Export came into focus. This success
led the company to expand its licensed capacity from 1.5 Million to 5 Million per
annum.
KAR MOBILES LIMITED [KML]
 1973 Foundation Stone Laid.

 1975 Commercial production started and made forays into OEM segmen.
 1976 Developed large valves for diesel loco applications.
 1977 First exports made to R A Lister & Co.
 1988 Capacity enhanced from 1.5 million to 5 million no’s.
 1983 Set up plant II, a 100 % EOU, with a capacity of 1.5 million valves.

 1991 Promoted “ETA Technologies” for developing special purpose machines.

 1995 Received ISO 9000 Certification.
 1996 Business Process Re-engineering implemented.
 1997 Entered into technical collaboration with TRW Inc., USA.
 1998 Human Resource Development established.
 1999 Approved by Electro Motive Division [EMD] of General Motors Corporation.
USA as first vendor from India.
 2000 TQM and TPM initiated.
 2001 Received QS 9000 Certification.
MILESTONES OF KAR MOBILES LTD
The milestones of KAR MOBILES LIMITED are:-
 Kar Mobiles Limited is the recipient of the ISO9002 Certificate.

 Kar Mobiles Limited has been honored with the “EXCELLENCE OF EXPORTS”
(E&PC) award since 1988 awards.
 Kar Mobiles Limited has been ranked number 2 in India.
KAR MOBILES LIMITED, BANGALORE
 The unit has grown substantially employing around 688 employees.

 Company became the first vendor from India to be approved by Electro Motive
Division [EMD] of General Motors Corporation, USA.
 QS-9000 certified by BVQI.
 Exports to almost every part of the Globe.
 More than 600 types of valves developed over a wide range of applications.
 Initiatives like TQM, TPM and Employee involvement.

 Well –equipped standards room with testing facilities.

 Synergy with reputed local testing institutes enables and ensures high quality products.
 Defect-free products meeting the specification of customers.
 Negligible warranty claims.
 Concern for environment and initiatives for ISO 140000 Certification.
Kar Mobiles Limited also has one more unit in Tumkur.
GOALS OF THE COMPANY
The goals of Kar Mobiles limited are:-
 To achieve a profit before tax of 15%.

 To achieve 60% turnover from export by 2008-2009.
 To achieve CAGR of 10%.
B. Nature of the Business Carried

The Kar Mobiles Limited manufactures valves for all internal combustion engines. The
company is one the diesel oriented unit which supplies valves for all engines both petrol
and diesel and is fully equipped to support its developing market needs. A valve is a
product rarely noticed by the average person, yet it plays an important role in the quality of
our life. Each time you turn on water faucet, use your dishwasher, or turn on a gas range, or
step in the accelerator of your car, you operate a valve.
Valves made from chrome-silicon alloy steel and exhaust from chrome-nickel-silicon alloy
steel (to operate under high temperature and high stress conditions). Valves are also
supplied with liquid nitrating process or hard chrome plating which increases the surface
hardening the stem. This improves resistance with consequent sliding ease.

C. VISION, MISSION AND QUALITY POLICY
Vision
To achieve 2000 Million Sales by 2013 by strengthening our global presence in Large
Engine Valve market.
Mission
o Provide superior products and service to our customers and maintain market
leadership.
o Evolve as an institution that serves the best interests of all stakeholders.
o Ensure the highest standard of ethics and integrity in all our actions.
Motto
“Customer Satisfaction through on-time delivery of superior quality valves” A

testimony to the company’s commitment to quality system through –
o QS 9000 Quality certificate from BVQI.

o Well equipped standards room with testing facilities.
o Negligible warranty claims.
o Initiation like TQM, TPM and employees involvement.
o Concern for environment and initiatives for ISO 14000 certificate.
Quality Policy
Kar Mobiles Limited is committed to comply with ISO/TS 16949 system

requirements and improve customer satisfaction by –
o Identifying and fulfilling all requirements of the clients/customers.

o Complying with all applicable statutory and regulatory requirements.

o Providing training to all employees to particle total quality management and

achieve continual improvement in all areas.
D. Product Profile
RANGE:-
More than 600 types of valves developed over a wide range of applications.
MATERIALS USED TO PRODUCE VALVES:-
Low Carbon, Matensitic Austenitic and Stainless Valve Steels and Nickel and
alloys are used in manufacture of valves.
TYPES OF VALVES MANUFACTURED:-
The entire array of monometal bimetal (friction/butt welded) valves manufactured

available in a range as below:
 Head finish: Machine all over, as forged under head.
 Seat: Hard faced, Induction hardened.
 Tip end: Flame hardened, Induction hardened, Satellite faced, Wafer welded.
 Custom built valves for special applications.

MARKET SEGMENT:-
Agriculture/industry/stationery, Passenger car/light commercial vehicles/heavy

commercial vehicles, tractors.
High performance car, Locomotives, Battle tanks, Marine, two wheelers, Valve train
components.
E. AREA OF OPERATION :-
The company has its network all over the globe, and the manufacturing process entirely
takes place in India. They have agents who market their products behalf of the company
and even they sell their product directly to the customers according to their needs and
satisfaction.
CLEINTS / CUSTOMERS:
OVERSEAS:-
 GM and EMD - USA
 HATZ - GERMANY
 Lister petter Ltd- UK
 Lombardi SRL-ITALY
 Mirrless black stone-UK
 Seyr-CHINA
 Vega-GERMANY
 Wiscon and Federal-USA.
DOMESTIC:-
o Ashok Leyland
o Bajaj Tempo Ltd
o Bharath earth mover’s Ltd

o Cummins India Ltd

o Diesel Locomotive Works
o Escorts Tractors Ltd
o L & T John Deere
o Mahindra & Mahindra Ltd
o Maruti Udyog Ltd
o TATA Engineering Co Ltd
o VST Tillers and Tractors Ltd
o Hero Honda.
Over a quarter century of service in both domestic and overseas markets, has earned for
the company an impressive clients and substantial market share.
Exports are the main thrust area and the company has gained:
o Ship-to-use and preferred supplier status with OEMs.
o Confidence of transcontinental customers.
Kar Mobiles is the first vendor from India approved by GM and EMD – USA.
F. OWNERSHIP PATTERN:
Pattern of Share Holding:-
Sl Category No. of shares Percentage of share

No. holding
1. Promoters 1039769 46.42
2. Government of Kerala 37500 1.67
3. Banks 3978 0.18
4. Private bodies corporate 165189 7.37
5. Individual and others 993564 44.36
Total 2240000 100.00

Rane engine valves Ltd (REVL) is the main promoters of the company with 42.18% share in
the company. Rest of the share is dividend among private body corporate, individual and
others, banks and government of Kerala.
G. COMPETITORS :-
o Rane Engine valves Limited.
o Shriram Piston and Rings Limited.
o Auto Field Engineers
o Benera Udyog Limited.
o Duro Valves Limited.
o Gratto Valves Limited.
o Valcram Valves Limited.
H. INFRASTRUCTURE FACILITIES :-
o Canteen
o Ambulance
o Reading room
o Sports/Club
o Books for reference and Books for technical reference, etc.
New equipped machines used in company:
Friction welding
 Two manufacturing plants producing over 6.5 million valves per annum.
 Access to the latest product and process technology.
 Special purpose machines made in-house for captive usage.
 Product lines with robust process and stable (Cp).

 Separate production lines to manufacture valves for applications ranging from

Motor Cycle to Locomotive and Marine Engines.
I. ACHEIVEMENTS/AWARDS :-
Awards are part of the evolution and growth of every company. They look at these
recognitions as a source of motivation that drives them to pursue higher levels of
performance and excellence. They are proud of every award they have received, and
they greatly value the role they have played in transforming KAR MOBILES into a
high-performance organization.
 ACMA – Automobile Components Manufacture Association of India
 CII – Confederations of India Industries
 EIA – Exports Inspection Agency, etc..
For their excellence in good quality products, customer satisfaction and commitment
1995 – ISO 9000certification, ISO 9002 certification from BVQI.
2001 – QS 9000 certification.
2003 – ISO 14000 certification.
2004 – ISO 15000 certification.
MAJOR DEPARTMENTS IN KAR MOBILES LIMITED:
1. Production Department.
2. Finance Department.
3. Human Resource Department.
4. Marketing Department

J. ORGANISATION CHART OF KAR MOBILES LIMITED:-
CORPORATE

FINANCE DEPARTMENT

K. Future growth and prospectus :-

Looking forward, the industry displays tremendous potential in generating employment
and boosting entrepreneurship in country. The spate of new investment plans
announced by global and domestic automobile manufacturers promises the emergence
of India as a global hub for auto components.
The industry is transforming, and the boosting demand will see the emergence of
several new payers in industry. The vast market for auto components, and the diverse
products and technology involved ensures a place and role for many. At the same time
the entry of several global automobile manufacturers will bring in more regulation into
the industry and see a pruning of the spurious market. Among the small players in the
unorganized segment, this implies moving away from being standalone companies to
entering into their contact manufacturing or being ancillary units. The newly defined
rules are specialized, development and delivery that hold the key of the success in the
auto component industry.
At KAR MOBILES, they have always taken a long term perspective when preparing
their business strategies. They expect robust all-round growth in the global economy in
the next 10 years. They also believe that the global economy has become more
inclusive. Countries like India and China are now poised to play a larger role in
determining the course of the global economy. Their manufacturing presence in India,
the U.S, Europe and China has positioned them to capture global growth opportunities,
and is also helping downturns, should they occur. In view of this, they are very
optimistic about the future.
KAR MOBILES is a 37 years old company. Since their inspection they have believed
in setting challenging milestones and have worked hard to achieve their goals.

While scale of operations is an important parameter for manufacturing company like

Kar Mobiles, there are other critical areas like :- Technology, Product development,
Customer Service Human Resource in which they are striving to excel. Their goal is to
be the industry benchmark in all these areas, to be an end-to-end service provider to
global customers and provide them with unassailable value. The company in its
continuous quest for excellence seeks new frontiers, delivering best-of-breed products
that meet global quality standards and adopts innovative techniques to further improve
customer service.

CHAPTER – 4
DATA ANALYSIS AND
INTERPRETATION
Amount
Rs.
Sales
Less: Variable Cost
Contribution
Less: Fixed Cost
Earnings Before Interest and Tax [EBIT]

MASTER TABLE TO CALCULATE THE LEVERAGES
Less: Interest
Earnings Before Tax [EBT]
Less: Tax
Earnings After Tax

V.V.N DEGREE
Less: COLLEGE
Preference dividend Page 44
Earnings available to Equity shareholders

TABLE NO –4.1
Table showing the Changes in EBIT and EBT
Year EBIT EBT F.L (Times)

2005-06 63513 57759 1.09
2006-07 50503 44507 1.13
2007-08 54769 45333 1.2
2008-09 33976 15295 2.22
2009-10 53879 44429 1.21
EBIT
 Financial Leverage =
EBT
ANALYSIS:
From the above table we can understand that the company’s EBIT and EBT is 63513 and
57759 in 2005-06, 50503 and 44507 in 2006-07, 54769 and 45333 in 2007-08, 33976 and
15295 in 2008-09, 53879 and 44429 in 2009-10 respectively.
GRAPH NO 4.1 SHOWING THE CHANGES IN EBIT AND EBT

EBIT and EBT

70000
60000
50000
40000 EBIT
EBT
30000
20000
10000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
From the above graph we can interpret that there has been a gradual increase in the EBIT&
EBT of the organization during 2009-10 bringing about an impact in the financial leverages of
the organization leading to a increase in the EPS of the company.
TABLE NO –4.2
Table showing the Changes in Contribution and EBIT

Year Contribution EBIT O.L (Times)
2005-06 368490 63513 5.8
2006-07 338262 50503 6.7
2007-08 454537 54769 8.3
2008-09 522758 33976 15.39
2009-10 432580 53879 8.02
Contribution
 Operating Leverage =
EBIT
ANALYSIS:
From the above table we can understand that the company’s Contribution and EBIT is
368490 and 63513 in 2005-06, 338262 and 50503 in 2006-07, 454537 and 54769 in 2007-08,
522758 and 33976 in 2008-09, 432580 and 53879 in 2009-10 respectively.
GRAPH NO 4.2 SHOWING THE CHANGES IN CONTRIBUTION AND

EBIT

CONTRIBUTION and EBIT

600000
500000
400000
Contribution
EBIT
300000
200000
100000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
From the above graph we can interpret that the organizations contribution a difference of sales
to variable cost has been fluctuating with a comparative increase in the EBIT indicating that
the organization has a decline impact on the sales and its operating expenses.
TABLE NO –4.3

Table showing the Changes in Contribution and EBT
Year Contribution EBT C.L (Times)
2005-06 368490 57759 6.37
2006-07 338262 44507 7.60
2007-08 454537 45333 10.02
2008-09 522758 15295 34.18
2009-10 432580 44429 9.73
Contribution
 Combined Leverage =
EBT
ANALYSIS:
From the above table we can understand that the company’s Combined Leverage is 6.37 times
in the year 2005-06, 7.60 times in 2006-07, 10.02 times in 2007-08, 34.18 times in 2008-09,
and 9.73 times in 2009-10.

GRAPH NO 4.3 SHOWING THE CHANGES IN CONTRIBUTION AND

EBT
CONTRIBUTION and EBT

600000
500000
400000
Contribution
EBT
300000
200000
100000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
Combined Leverage shows the relationship between change in sales and the corresponding
variation in taxable income. From the above graph we can observe that there have been
fluctuations in the contribution and the EBT of the organization leaving an impact in
company’s operating costs which can inversely affect the taxable income of the company.

TABLE NO – 4.4
Table showing the Comparison Of Financial Leverage
Year F.L (Times)
2005-06 1.09
2006-07 1.13
2007-08 1.2
2008-09 2.22
2009-10 1.21
ANALYSIS:
From the above table we can understand that the company’s Financial Leverage is 1.09 times
in 2005-06, 1.13 times in 2006-07, 1.20 in 2007-08, 2.22 in 2008-09, and 1.21 in 2009-10.

GRAPH NO 4.4 SHOWING THE COMPARISON OF FINANCIAL

LEVERAGE
COMPARISON OF FINANCIAL LEVERAGE

2.5
1.5
F.L (Times)
0.5
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The above graph helps in inferring that the financial leverages of the company has shown a
upward growth from the year 2005 to 2009 but has had a fall of the leverage in 2010 indicating
that the firm is surrounded with uncertainty leading the firm to financial difficulties.

TABLE NO –4.5
Table showing the Comparison Of Operating Leverage
Year O.L (Times)
2005-06 5.8
2006-07 6.7
2007-08 8.3
2008-09 15.39
2009-10 8.02
ANALYSIS:
From the above table we can understand that the company’s Operating Leverage is 5.8 times
in 2005-06, 6.7 times in 2006-07, 8.3 times in 2007-08, 15.39 times in 2008-09, and 8.02 times
in 2009-10.

GRAPH NO 4.5 SHOWING THE COMPARISON OF OPERATING

LEVERAGE
COMPARISON OF OPERATING LEVERAGE
16
14
12
10
O.L (Times)
8
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The above graph helps in inferring that the operational leverages of the company has shown a
upward growth from the year 2005 to 2009 but has had a fall in the leverage in 2009-10
indicating that the firm to work towards it fixed operating expenses.

TABLE NO –4.6
Table showing the Comparison Of Combined Leverage
Year C.L (Times)
2005-06 6.37
2006-07 7.60
2007-08 10.02
2008-09 34.18
2009-10 9.73
ANALYSIS:
From the above table we can understand that the company’s Combined Leverage is 6.37 times
in the year 2005-06, 7.60 times in 2006-07, 10.02 times in 2007-08, 34.18 times in 2008-09,
and 9.73 times in 2009-10.

GRAPH NO 4.6 SHOWING THE COMPARISON OF COMBINED

LEVERAGE
COMPARISON OF COMBINED LEVERAGE

40
35
30
25
C.L (Times)
20
15
10
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The above graph helps in inferring that the combined leverage of the firm has dipped down in
the year 2009-10 indicating a warning to the total risk of the organization i.e., care need to be
taken for both the operating risk and financial risk.

TABLE NO –4.7
Table showing Earnings available to Equity Shareholders
Year Earnings Available to Equity No. of Shares EPS

share holders
2005-06 36472 224000 16.28
2006-07 25167 224000 11.24
2007-08 26933 224000 12.02
2008-09 8195 224000 3.66
2009-10 29275 224000 13.07
Earnings Available to Equity Shareholders

 EPS = × 100
No. of Equity Shares
ANALYSIS:
From the above table we can understand that Earnings Per Share (EPS) to equity shareholders
is 16.28, 11.24, 12.02, 3.66, and 13.07 in the years 2005-06, 2006-07, 2007-08, 2008-09, and
2009-10 respectively.

GRAPH NO 4.7 SHOWING THE EARNINGS AVAILABLE TO EQUITY

SHAREHOLDERS
EARNINGS AVAILABLE TO EQUITY

SHAREHOLDERS
250000
200000
2005-06
2006-07
2007-08
150000 2008-09
2009-10
100000
50000
0
Earnings Available To Equity share holders No. of Shares
INTERPRETATION:
The above graph shows that Earnings available to equity share holders has increased during the
year 2009-10, which infers that the market value of equity shares has gone higher in the stock
market compared to the past performance.

TABLE NO –4.8
Table showing the Comparison Of EPS
Year EPS
2005-06 16.28
2006-07 11.24
2007-08 12.02
2008-09 3.66
2009-10 13.07
ANALYSIS:
From the above table we can understand that Earnings Per Share (EPS) to equity shareholders
is 16.28, 11.24, 12.02, 3.66, and 13.07 in the years 2005-06, 2006-07, 2007-08, 2008-09, and
2009-10 respectively.

GRAPH NO 4.8 SHOWING THE COMPARISON OF EARNINGS PER

SHARE
COMPARISON OF EPS
18
16
14
12
10 EPS
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The above graph interprets that the Earnings Per Share of the organization has increased in the
year 2009-2010 indicating that the company has been able to devise an appropriate capital
structure to vary the EBIT of the organization.

TABLE NO –4.9
Table showing Debt Equity Ratio
Year Long Term Debt Equity Share Capital Long Term Debt / Equity
2005-06 95221 22400 4.25
2006-07 88047 22400 3.93
2007-08 146576 22400 6.54
2008-09 165505 22400 7.38
2009-10 81909 22400 3.66
Long Term Debt

 Debt Equity Ratio =
Equity Share Capital
ANALYSIS:
From the above table we can understand that the debt equity ratio for the year 2005-06 is 4.25,
2006-07 is 3.93, 2007-08 is 6.54, 2008-09 is 7.38, and in 2009-10 its 3.66.

GRAPH NO 4.9 SHOWING DEBT EQUITY RATIO
LONG TERM DEBT AND EQUITY SHARE CAPITAL

8
5
Long Term Debt / Equity
4
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The above graph helps in inferring that there is a drastic increase in the Long Term Debt to
Equity Share Capital Ratio from the year 2005-06 to 2009-10 i.e., 4.25, 3.93, 6.53, 7.38, 3.66
respectively, which infers that the debt equity ratio is unfavorable as it is higher than the
standard ratio 2:1, where the margin of safety for creditors will be less.

TABLE NO –4.10
Table showing Debt to Total Capital Ratio / Funded Debt to Total

Capitalization Ratio
Year Capital Long Term Debt Long Term Debt / Capital

Employed Employed * 100
2005-06 304606 95221 31.26%
2006-07 290585 88047 30.30%
2007-08 365564 146576 40.09%
2008-09 387447 165505 42.71%
2009-10 321346 81909 25.49%

Long Term Debt
 Debt to Total Capital Ratio = × 100
Capital Employed
ANALYSIS:
From the above table we can understand that Debt to Total Capital ratio for the years 2005-06,
2006-07, 2007-08, 2008-09, and 2009-10 are 31.26%, 30.30%, 40.09%, 42.71%, and 25.49%
respectively.
GRAPH NO 4.10 SHOWING DEBT TO TOTAL CAPITAL RATIO

CAPITAL EMPLOYED AND LONG TERM DEBT

45.00%
40.00%
35.00%
30.00%
Long Term Debt / Capital

25.00% Employed * 100
20.00%
15.00%
10.00%
5.00%
0.00%
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
From the above graph we can infer that Debt to Total Capital Ratio is 25.49% in 2009-10
which is below the standards (50% to 55%) indicating the company can raise its long term
sources of funds.
TABLE NO – 4.11

Table showing Net Worth to Total Capital Ratio and Debt to Total Capital Ratio
Net Worth / Long Term Debt /
Capital Net Long
Year Capital Capital
Employed Worth Term Debt
Employed * 100 Employed * 100
2005-06 304606 207364 68.07% 95221 31.26%
2006-07 290585 202538 69.70% 88047 30.30%
2007-08 365564 218988 59.90% 146576 40.09%
2008-09 387447 221942 57.28% 165505 42.71%
2009-10 321346 239437 74.51% 81909 25.49%
Net Worth
 Net worth to Total Capital Ratio = × 100
Capital Employed
Long Term Debt

 Debt to Total Capital Ratio = × 100
Capital Employed
ANALYSIS:
The above table shows that the net worth to capital employed ratio is 68.07% in 2005-06,
69.70% in 2006-07, 59.90% in 2007-08, 57.28% in 2008-09, and 74.51% in 2009-10.
It also shows that debt to total capital ratio is 31.26% in 2005-06, 30.30% in 2006-07, 40.09%
in 2007-08, 42.71% in 2008-09, and 25.49% in 2009-10.

GRAPH NO 4.11 SHOWING NET WORTH TO TOTAL CAPITAL

RATIO, DEBT TO CAPITAL RATIO
NET WORTH TO TOTAL CAPITAL RATIO & DEBT TO TOTAL

CAPITAL RATIO
80.00%
70.00%
60.00%
Net Worth / Capital Employed *

50.00% 100
Long Term Debt / Capital
Employed * 100
40.00%
30.00%
20.00%
10.00%
0.00%
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The above graph shows that the net worth to total capital ratio has increased in the years
2005-06, 2006-07, and 2009-10 and decreased in 2007-08 and 2008-09 indicating utilization of
funds.
It also shows that debt to total capital ratio has decreased in 2009-10 to 25.49% indicating the
opportunities for the organization to raise long term debts from external sources.

TABLE NO –4.12
Table showing External-Internal Equity Ratio
Year Long Term Debt Net Worth Long Term Debt / Net
Worth
2005-06 95221 207364 0.45
2006-07 88047 202538 0.43
2007-08 146576 218988 0.66
2008-09 165505 221942 0.74
2009-10 81909 239437 0.34
Long Term Debt

 Debt Capital to Net Worth Ratio =
Net Worth
ANALYSIS:
The above table shows that Debt capital to Net Worth ratio is 0.45 in 2005-06, 0.43 in 2006-07,
0.66 in 2007-08, 0.74 in 2008-09, and 0.34 in 2009-10.

GRAPH NO 4.12 SHOWING EXTERNAL INTERNAL EQUITY RATIO
LONG TERM DEBT AND NET WORTH

0.8
0.7
0.6
0.5
External-Internal Equity Ratio
0.4
0.3
0.2
0.1
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The above graph shows that Debt Capital to Net Worth ratio for the year 2009-10 is 0.34 which
is less than the standards mentioned (1:1) and hence, the organization is in a favorable position
with respect to its sources of external and internal funds.

DEGREE OF FINANCIAL LEVERAGE (DFL)
o Financial leverage is concerned with the effect of changes in EBIT on the earnings
available to equity shareholders. It is the ability of the firm to use fixed financial
charges to magnify the effect of changes in EBIT on the EPS.
o EBIT-EPS analysis is widely used method of examining the effect of financial leverage.
High fixed financial cost increases the financial leverage and financial risk. The
financial risk refers to the risk of the firm not being able to cover its fixed financial
cost. In case of default, the firm can be technically forced into liquidation. Larger is the
amount of fixed financial cost the larger is the EBIT required to recover them. DFL
depends on fixed financial cost.
o When firms earn more on the asset purchased with the funds than the fixed cost of their
use, the financial leverage is favorable. Unfavorable leverages occur when the firm
does not earn as much as the firm’s cost.
% change in EPS
 Degree of Financial Leverage = > 1
% change in EBIT

TABLE NO –4.13
Table showing the Degree of Financial leverage (DFL)
Year % Change in EPS % Change in EBIT DFL (%)
2005-06 0 0 0
2006-07 -30.95 -20.5 1.5
2007-08 6.93 8.44 0.82
2008-09 -69.55 -37.96 1.83
2009-10 257.1 58.58 4.4
Current Year EPS – Previous Year EPS

 % Change in EPS =
Previous Year EPS
Current Year EBIT – Previous Year EBIT

 % Change in EBIT =
Previous Year EBIT
ANALYSIS:
The above table shows that the degree of financial leverage is 1.5% in 2006-07, 0.82% in
2007-08, 1.83% in 2008-09, and 4.40% in 2009-10. The percentage change in EPS is due to
percentage change in EBIT.

GRAPH NO 4.13 SHOWING THE DEGREE OF FINANCIAL

LEVERAGE
DFL (%)
4.5
3.5
2.5 DFL (%)
1.5
0.5
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The above graph shows that the degree of financial leverage is 1.5% in 2006-07, 0.82% in
2007-08, 1.83% in 2008-09, and 4.40% in 2009-10, which infers that the degree of financial
leverage is favorable to company in 2006-07, 2008-09, 2009-10 and unfavorable in 2007-08
because greater the degree of financial leverage when higher is the quotient of % change in
EPS due to % change in EBIT.

DEGREE OF OPERATING LEVERAGE (DOL)
o Degree of operating leverage is a measure of business or operating risk of the firm.

Operating risk is the risk of the firm not being able to cover its fixed operating cost.
The larger is the magnitude of such cost, the larger is the volume of sales required to
recover them. Thus, the Degree of Operational Leverage depends on fixed operating
cost.
o High Degree of Operating Leverage (DOL) is GOOD when Sales Revenue is rising
and BAD when they are falling.
o Operating Leverage is favorable when increase in sales volume has a positive effect on
EBIT and unfavorable when decrease in sales volume has a negative effect on EBIT.
% Change in EBIT
 Degree of Operating Leverage = >1
% Change in Sales

TABLE NO –4.14
Table showing Degree of Operating Leverage
Year % Change in EBIT % Change in Sales DOL (%)
2005-06 0 0 0
2006-07 -20.48 -5.35 3.82
2007-08 8.44 27.64 0.31
2008-09 -37.96 9.6 -3.95
2009-10 58.58 -13.68 -4.28
Current Year EBIT – Previous Year EBIT

 % Change in EBIT =
Previous Year EBIT
Current Year Sales – Previous Year Sales

 % Change in Sales =
Previous Year Sales
ANALYSIS:
From the above table we can infer that the degree of operating leverage is 3.82% in 2006-07,
0.31% in 2007-08, -3.95% in 2008-09, and -4.28% in 2009-10.

GRAPH NO 4.14 SHOWING THE DEGREE OF OPERATING

LEVERAGE
DOL (%)
4
1
DOL (%)
0
2005-06 2006-07 2007-08 2008-09 2009-10
-1
-2
-3
-4
-5
INTERPRETATION:
From the above graph we can interpret that the degree of operating leverage is 3.82% in 2006-
07, 0.31% in 2007-08, -3.95% in 2008-09, and -4.28% in 2009-10, which infers that degree of
operating leverage is favorable in the year 2006-07 and unfavorable in 2007-08, 2008-09, and
2009-10 because greater the degree of operating leverages when higher is the quotient of %
change in EBIT due to % change in sales bringing about an impact in the organizations fixed
operating cost.

DEGREE OF COMBINED LEVERAGE (DCL)
o Degree of Combined Leverage measures the % change in Earnings Per Share (EPS) due
to % change in Sales. It can work in either directions, it is favorable when Sales
increases and unfavorable when Sales decreases.
o Usefulness of DCL lies in the fact that which indicates the effect, the sales changes will
have on EPS. Its potential is also great in the area of choosing financial plans for new
investments.
% Change in EPS
 Degree of Combined Leverage =
% Change in Sales

TABLE NO –4.15
Table showing Degree of Combined Leverage
Year % Change in EPS % Change in Sales DCL (%)
2005-06 0 0 0
2006-07 -30.96 -5.35 5.78
2007-08 6.94 27.64 0.25
2008-09 -69.55 9.6 -7.24
2009-10 257.1 -13.68 -18.8
Current Year EPS – Previous Year EPS

 % Change in EPS =
Previous Year EPS
Current Year Sales – Previous Year Sales

 % Change in Sales =
Previous Year Sales
ANALYSIS:

The above table shows that the degree of combined leverage is 5.78% in 2006-07, 0.25% in
2007-08, -7.24% in 2008-09, and -18.8% in 2009-10.
GRAPH NO 4.15 SHOWING THE DEGREE OF COMBINED

LEVERAGE
DCL (%)
10
0
2005-06 2006-07 2007-08 2008-09 2009-10 DCL (%)
-5
-10
-15
-20
INTERPRETATION:
From the above graph we can interpret that Degree of Combined Leverage is 5.78% in
2006-07, 0.25% in 2007-08, -7.24% in 2008-09, and -18.80% in 2009-10, which infers that

company’s combined leverage is favorable in 2007-08, 2008-09 and unfavorable in 2006-07

and 2009-10 due to reduction in % of Sales.
CHAPTER – 5
FINDINGS

FINDINGS:
It has been found that the financing activity of the firm has an effect in the EBIT
defining the ability of the firm to use its fixed financial charges.
It has been found that decrease in the operating leverage indicates a decrease in the
sales volume which is unfavorable to the organization.
It has been found that the total risk of the firm is within manageable limits as the
Degree of Financial leverage is high.
It has been found that Margin of Safety is less for Creditors as debt-equity ratio is
unfavorable.
It has been found that the Debt to Total Capital Ratio is favorable to the organization by
which the firm can raise its long-term finance.
It has been found that the Net Worth to Total Capital Ratio indicates that the firm has
been utilizing its funds properly.
It has been found that the firm has the most appropriate combination of Debt and
Equity indicating a trade of between risk and return.

CHAPTER –6
SUGGESTIONS

SUGGESTIONS:
Based on the analysis and findings from the financial statements of the company,
The following improvement areas are recommended in order to achieve Efficiency and
Profitability of the organization.
The firm needs to increase its sales volume keeping in control the operating
profitability.
The firm’s total risk should be brought into manageable limits by increasing the
Degree of Operating Leverage and decreasing the Degree of Financial leverage.
The firm needs to focus on increasing its Margin of Safety to its Creditors (Outsiders).
The company can plan on expansion as it has a good financial position to raise its
Long-Term Funds.

CHAPTER – 7
BIBLIOGRAHY
REFERENCE BOOKS
Financial Management by REDDY, APPANNAIAH, and SATYAPRASAD.

Financial Management by M.Y.KHAN.
Financial Management by I.M.PANDEY.
Financial Management by PRASANNA CHANDRA.

Financial Management by CA.C. RAMA GOPAL.

Management Accounting by M.N.ARORA.
Management Accounting by SHASHI.K.GUPTA, and R.K.SHARMA.
WEBSITES
www.rane.co.in

CHAPTER – 8
ANNEXURE
BALANCE SHEET (Rs. In thousands)

2006 2007
PARTICULARS
Rs. Rs.
1. SOURCES OF FUNDS
1. Shareholder's Funds
a. Share Capital 22,400 22,400
b. Reserves and Surplus 184,964 207,364 180,138 202,538
2. Loan Funds
a. Secured Loans 91,447 87,607
b. Unsecured Loans 3,774 95,221 440 88,047
3. Deferred Tax Liability 2,021 -
TOTAL 304,606 290,585


2. APPLICATION OF FUNDS
1. Fixed Assets
a. Gross Block at Cost 256,961 269,722
b. Less : Depreciation 141,329 149,391
c. Net Block 115,632 120,331
d. Capital Work-in-progress at cost 7,466 123,098 4,148 124,479
2. Investments 260 10
3. Deferred Tax Asset - 5,994
4. Current Assets, Loans & Advances
a. Inventories 146,119 129,790
b. Sundry Debtors 158,576 170,703
c. Cash and Bank Balances 3,016 6,319
d. Other Current Assets 10,270 11,066
e. Loans and Advances 17,014 334,995 17,149 335,027
Less:
Current Liabilities and Provisions
a. Liabilities 135,345 130,042
b. Provisions 19,392 154,737 58,983 189,025
Net Current Assets 180,258 146,002
5. Miscellaneous Expenditure
Voluntary Retirement 990 14,100
TOTAL 304,606 290,585

2008 2009
PARTICULARS
Rs. Rs.
1. SOURCES OF FUNDS
a. Share Capital 22,400 22,400
b. Reserves and Surplus 196,588 218,988 199,542 221,942
2. Loan Funds
a. Secured Loans 146,576 165,505
b. Unsecured Loans - 146,576 - 165,505
3. Deferred Tax Liability - -
TOTAL 365,564 387,447


1. Fixed Assets
a. Gross Block at Cost 292,320 359,186
b. Less : Depreciation 162,169 174,859
c. Net Block 130,151 184,327
d. Capital Work-in-progress at cost 14,556 144,707 3,865 188,192
2. Investments 10 10
3. Deferred Tax Asset 7,567 4,467
a. Inventories 167,470 106,223
b. Sundry Debtors 195,105 215,235
c. Cash and Bank Balances 7,962 2,972
d. Other Current Assets 34,440 30,621
e. Loans and Advances 21,428 426,405 30,441 385,492
Less:
a. Liabilities 167,757 124,412
b. Provisions 45,368 213,125 66,302 190,714
Net Current Assets 213,280 194,778
Voluntary Retirement - -
TOTAL 365,564 387,447
2010
PARTICULARS
Rs.
1. SOURCES OF FUNDS
a. Share Capital 22,400
b. Reserves and Surplus 217,037 239,437
2. Loan Funds
a. Secured Loans 81,909
b. Unsecured Loans - 81,909
3. Deferred Tax Liability -
TOTAL 321,346


1. Fixed Assets
a. Gross Block at Cost 377,303
b. Less : Depreciation 190,124
c. Net Block 187,179
d. Capital Work-in-progress at cost 21,118 208,297
2. Investments 10
3. Deferred Tax Asset 3,137
a. Inventories 81,793
b. Sundry Debtors 163,758
c. Cash and Bank Balances 4,029
d. Other Current Assets 17,356
e. Loans and Advances 21,984 288,920
Less:
a. Liabilities 110,279
b. Provisions 68,739 179,018
Net Current Assets 109,902
Voluntary Retirement -
TOTAL 321,346
PROFIT AND LOSS ACCOUNT (Rs. In thousands)

PARTICULARS 2006 2007
Rs. Rs.
INCOME
Gross Sales 765,288 728,746
Less: Excise Duty 57,006 58,392
Net sales 708,282 670,354
Operating Revenues 28,144 34,174
Other Income 6,711 3,534
TOTAL 743,137 708,062

EXPENDITURE
Material Cost of Goods Sold - 263,812
Raw materials consumed / Sold 272,466 -
Purchases of Finished Items 7,012 -
Manufacturing and Other Expenses 385,951 378,910

TOTAL 665,429 642,722

Operating Profit 77,708 65,340

Interest 5,754 5,996
Depreciation 14,195 14,837
Profit Before Tax 57,759 44,507
Less: Provision for Taxation
- Current 21,400 13,459
- Deferred 2,413 3,381
- Fringe Benefits 2,300 2,500
Profit After Tax 36,472 25,167
Profit brought forward from last year 10,885 17,140
Profit available for Appropriation 47,357 42,307
Less: Transfer to General Reserve 20,000 20,000
Balance Profit 27,357 22,307
Proposed Dividend on Equity Shares - Interim 8,960 6,720
- Final - -
Tax on Proposed Dividend 1,257 1,142

Balance Carried to Balance Sheet 17,140 14,445
Number of Shares of Rs.10/- each. 224,000 224,000
Earnings per share - Basic and Diluted 16.28 11.24

PARTICULARS 2008 2009
Rs. Rs.
INCOME
Gross Sales 920,439 998,370
Less: Excise Duty 66,826 62,814
Net sales 853,613 935,556
Operating Revenues 45,302 35,463
Other Income 5,704 829
TOTAL 904,619 971,848

EXPENDITURE
Material Cost of Goods Sold 376,009 448,142
Raw materials consumed / Sold - -
Purchases of Finished Items - -
Manufacturing and Other Expenses 458,043 471,119
TOTAL 834,052 919,261
Operating Profit 70,567 52,587


Interest 9,436 18,681
Depreciation 15,798 18,611
Profit Before Tax 45,333 15,295
- Current 17,573 2,000
- Deferred 1,573 3,100
- Fringe Benefits 2,400 2,000
Profit After Tax 26,933 8,195
Profit brought forward from last year 14,445 10,895
Profit available for Appropriation 41,378 19,090
Less: Transfer to General Reserve 20,000 1,000
Balance Profit 21,378 18,090
Proposed Dividend on Equity Shares - Interim 8,960 -
- Final - 4,480
Tax on Proposed Dividend 1,523 761

Balance Carried to Balance Sheet 10,895 12,849
Number of Shares of Rs.10/- each. 224,000 224,000
Earnings per share - Basic and Diluted 12.02 3.66
PARTICULARS 2010
Rs.
INCOME
Gross Sales 855,767
Less: Excise Duty 48,188
Net sales 807,579
Operating Revenues 26,320
Other Income 85
TOTAL 833,984

EXPENDITURE
Material Cost of Goods Sold 331,818
Raw materials consumed / Sold -
Purchases of Finished Items -
Manufacturing and Other Expenses 428,451
TOTAL 760,269
Operating Profit 73,715


Interest 9,450
Depreciation 19,836
Profit Before Tax 44,429
- Current 14,200
- Deferred 1,330
- Fringe Benefits 376
Profit After Tax 29,275
Profit brought forward from last year 12,849
Profit available for Appropriation 42,124
Less: Transfer to General Reserve 20,000
Balance Profit 22,124
Proposed Dividend on Equity Shares - Interim 6,720
- Final 3,360
Tax on Proposed Dividend 1,700

Balance Carried to Balance Sheet 10,344
Number of Shares of Rs.10/- each. 224,000
Earnings per share - Basic and Diluted 13.07

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A STUDY ON IMPACT OF LEVERAGES

4.12 Table Showing External-Internal Equity Ratio 68

V.V.N DEGREE COLLEGE Page 1

4.12 Graph Showing External-Internal Equity Ratio 69

V.V.N DEGREE COLLEGE Page 2

1.1 INTRODUCTION TO FINANCE:

V.V.N DEGREE COLLEGE Page 3

V.V.N DEGREE COLLEGE Page 4

“The science of raising and expanding the public revenue”

“A branch of economics concerned with resource allocation as well as resource management,

“Financial Management is the operational activity of a business that is responsible for

- Joseph & Massie

SCOPE OF FINANCIAL MANAGEMENT:

V.V.N DEGREE COLLEGE Page 5

GOALS OF FINANCIAL MANAGEMENT

V.V.N DEGREE COLLEGE Page 6

1. Profit Maximization: Earning profits by a company or a corporate is a social

2. Wealth Maximization: The concept of ‘Wealth Maximization’ refers to the

V.V.N DEGREE COLLEGE Page 7

wealth maximization attained by a company is reflected in the market value of shares.

V.V.N DEGREE COLLEGE Page 8

A’s of Financial Management

1. Anticipating Financial Needs: The financial manager has to forecast expected

V.V.N DEGREE COLLEGE Page 9

V.V.N DEGREE COLLEGE Page 10

enterprise. Hence accounting and reporting of the performance of finance is an

FUNCTIONAL AREAS OF FINANCIAL MANAGEMENT:

1. Estimation of Financial Management:

V.V.N DEGREE COLLEGE Page 11

V.V.N DEGREE COLLEGE Page 12

It is a technique through which a finance manager evaluates the investment proposals.

V.V.N DEGREE COLLEGE Page 13

Factors affecting capital structure:

V.V.N DEGREE COLLEGE Page 14

V.V.N DEGREE COLLEGE Page 15

V.V.N DEGREE COLLEGE Page 16

1.2 INTRODUCTION TO LEVERAGE:

V.V.N DEGREE COLLEGE Page 17

Operating Income / EBIT

Significance of Financial Leverage:

V.V.N DEGREE COLLEGE Page 18

Limitations of financial leverage:

1) Double-edged weapon: It can be successfully employed to increase the earnings of the

V.V.N DEGREE COLLEGE Page 19

Characteristics of Operating leverage:

Significance of Operating Leverage:

V.V.N DEGREE COLLEGE Page 20

o Combined Leverage = Operating Leverage × Financial Leverage

V.V.N DEGREE COLLEGE Page 21

V.V.N DEGREE COLLEGE Page 22

Difference between Operating and Financial Leverage

Operating Leverage Financial Leverage

V.V.N DEGREE COLLEGE Page 23

2.1 STATEMENT OF THE PROBLEM

V.V.N DEGREE COLLEGE Page 24

This study entitled “IMPACT OF LEVERAGES” with special reference to “KAR

2.2OBJECTIVES OF THE STUDY

 To analyze the pattern of various leverages to the growth of the company.

2.3SCOPE OF THE STUDY

 The study of “IMPACT OF LEVERAGES” was restricted to a period of One Month.

2.4.1 RESEARCH DESIGN

V.V.N DEGREE COLLEGE Page 25

2.4.3 SAMPLING TECHNIQUES