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A STUDY ON FINANCIAL PERFORMANCE ANALYSIS IN MANNARKKAD STEELS PVT LTD AT KANJIKODE, PALAKKAD

PROJECT REPORT Submitted by

ABDUL BASHEER . M Register No. 098001603001

in partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

EXCEL ENGINEERING COLLEGE


(Affiliated to Anna University of Technology, Coimbatore &Approved by AICTE, New Delhi)

Department of Management studies

Komarapalayam, Namakkal District


June 2011

BONAFIDE CERTIFICATE

EXCEL ENGINEERING COLLEGE (Affiliated to Anna University of Technology Coimbatore & Approved by AICTE, New Delhi)
DEPARTMENT OF MANAGEMENT STUDIES

PROJECT REPORT JUNE 2011

This is to certify that the project entitled

A STUDY ON FINANCIAL PERFORMANCE ANALYSIS IN MANNARKKAD STEELS PVT LIMITED, AT KANJIKODE,PALAKKAD


is the bonafide record of project work done by

ABDUL BASHEER.M Register No: 098001603001


of Master of Business Administration during the year 2010-2011.

Project Guide

Head of the Department

Submitted for the Project Viva-Voce examination held on__________

Internal Examiner 2

External Examiner

DECLARATION

I affirm that the project work titled A STUDY ON FINANCIAL PERFORMANCE


ANALYSIS IN MANNARKKAD STEELS PVT LTD, AT KANJIKKOD,PALAKKAD being submitted in partial

fulfillment for the award of Master of Business Administration (MBA) is the original work carried out by me. It has not formed the part of any other project work submitted for award of any degree or diploma, either in this or any other University.

Signature of the candidate

ABDUL BASHEER.M Register No: 098001603001


I certify that the declaration made above by the candidate is true Signature of theGuide G.DHANASEKARAN HOD Excel Engineering college

ACKNOWLEDGEMENT I express my sincere thanks to our Honorable Chairman Dr.A.K.NATESAN and Vice chairman Dr.N.MATHAN KARTHIC of Excel group of Institutions Komarapalayam for giving me an opportunity to be a student of this reputed institution. I extend my respect to our principal Dr.G.RAMADAS ME., for his valuable support in carrying out my project work. Its my privilege to thank our HOD Mr.G.DHANASEKARAN, MBA., MMM., M.Phil, Ph.D., department of management studies for their support in my project guidance for doing the project guidance for the project work. I express my sincere thanks to my project guide Mr. G.DHANASEKARAN, MBA., MMM., M.Phil, Ph.D.Assistant Professor for her valuable suggestion and guidance for doing the project work. I deem it a privilege to express my sense of gratitude to Mr.

P.P.MOHANAN(GM) M.Com, MBA for given me this wonderful opportunity to do a project in MANNARKKAD STEELS PVT LIMITED I also express my gratitude to all faculty members, my parents who have helped to carry out this work last but not least I thank almighty God for the blessing showered on me during these periods. (ABDUL BASHEER. M)

TABLE OF CONTENTS
Serial no. 1. 1.1 Introduction 1.2 Design Of The Study 1.3 Industry Profile 1.4 Company Profile 1.5 Review Of Literature 1.6 Objective Of Study 1.7 Scope of the study 1.8Limitation Of Study 2. CHAPTER II RESEARCH METHODOLOGY 2.1Data Collection 2.2Tools Of Analysis 2.3 Research Design 2.4 Sample Size 3. CHAPTER III ANALYSIS AND INTERPRETATION 3.1 Ratio Analysis 3.2 Comparative financial statement 4. CHAPTER IV FINDINGS,SUGGESTIONS AND CONCLUSTION 4.1 Findings 4.2 Suggestions 4.3Conclusion BIBLIOGRAPHY APPENDIX Description CHAPTER I INTRODUCTION Page no. 1-21 1 4 5 8 12 19 20 21 22 22 22 22 22 23-63 23 28 64-67 64 65 67 68 69

ABSTRACT
Financial analysis is useful to identify the strengths and weakness of the firm by establishing a relationship between the items of the balance sheet and profit &loss Account. In order to compensate with the fast changes in the requirements of the financial effectives, it is necessary to analyze the financial performance of the organization. The objective of this study is to analyze the financial performance of the MANNARKKAD STEELS PVT LTD through profitability, liquidity and turnover from 2005-2006 to 2009-2010. The data has been collected from the annual reports and hence it is an analytical study. The analysis is made by financial ratios of profitability and liquidity. The analysis shows financial performance of MANNARKKAD STEELS PRIVATE LIMITED. From the profitability analysis it is clear that the companys profit is satisfactory. But the current ratio level is not good. So the company has to take immediate measure to improve the liquidity position.

LIST OF TABLES
Serial no. 1. Description RATIO ANALYSIS a) Table showing Current Ratio b) Table showing Quick Ratio c) Table showing Turnover Ratio 1. Table showing Inventory or Stock Turnover Ratio 2. Table showing Debtors Turnover Ratio 3. Table showing Creditors Turnover Ratio 4. Table showing Fixed Asset Turnover Ratio 5. Table showing Current Asset Turnover Ratio 6. Table showing Net Working Capital Turnover Ratio 7. Table showing Total Asset Turnover Ratio d) Table showing Profitability Ratio 1. Table showing Gross Profit Ratio 2. Table showing Net Profit Ratio 3. Table showing Return On Capital Employed 4. Table showing Operating Profit Ratio 5. Table showing Return On Total Asset 6. Table showing Value added Per Employee e) Table showing Structured Health Ratio 1. Table showing Current Asset To Fixed Asset Ratio 2. Table showing Current Asset To Total Asset Ratio f) Table showing Other Ratios 1. Table showing Raw material consumption to Value of Production 2. Table showing Working Capital In Month Of Production 2. TREND ANALYSIS a) Table showing Fixed Asset Turnover Ratio b) Table showing Net Profit Ratio c) Table showing Return On Capital Employed d) Table showing Current Asset To Total Asset Ratio COMPARITIVE FINANCIAL STATEMENT Balance sheet comparative from 2006-2010 Page no.

37 38 39-46 40 41 42 43 44 45 46 47-52 47 48 49 50 51 52 53-54 53 54 55-56 55 56 57-60 57 58 59 60 61-63 61

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LIST OF CHART
Serial no. 1. Description RATIO ANALYSIS a) Chart showing Current Ratio b) Chart showing Quick Ratio c) Chart showing Turnover Ratio 1.Chart showing Inventory or Stock Turnover Ratio 2.Chart showing Debtors Turnover Ratio 3.Chart showing Creditors Turnover Ratio 4.Chart showing Fixed Asset Turnover Ratio 5.Chart showing Current Asset Turnover Ratio 6.Chart showing Net Working Capital Turnover Ratio 7. Chart showing Total Asset Turnover Ratio d) Chart showing Profitability Ratio 1. Chart showing Gross Profit Ratio 2. Chart showing Net Profit Ratio 3. Chart showing Return On Capital Employed 4. Chart showing Operating Profit Ratio 5. Chart showing Return On Total Asset 6. Chart showing Value added Per Employee e) Chart showing Structured Health Ratio 1. Chart showing Current Asset To Fixed Asset Ratio 2. Chart showing Current Asset To Total Asset Ratio f) Chart showing Other Ratios 1. Chart showing Raw material consumption to Value of Production 2. 2. 1. 2. 3. 4. Chart showing Working Capital In Month Of Production TREND ANALYSIS Chart showing Fixed Asset Turnover Ratio Chart showing Net Profit Ratio Chart showing Return On Capital Employed Chart showing Current Asset To Total Asset Ratio Page no.

37 38 39-46 40 41 42 43 44 45 46 47-52 47 48 49 50 51 52 53-54 53 54 55-56 55 56 57-60 57 58 59 60

CHAPTER-I 1.1 INTRODUCTION


It is always necessary for any firm to evaluate the performance of the firm. Evaluation of the performance is widely used in the business world. In this project I focused on the financial part of the MANNARKKAD STEELS PVT. LTD. Wise Park, Kanjikode, Pallakkad. I used all the methodologies and approaches which are generally used to evaluate the financial performance of a firm. The income Statement, Balance Sheet, and Cash Statement form part of the financial statement. The Income Statement contains details about different sources of income to the organization because of various business transactions. The Balance Sheet displays the dynamics of assets and liabilities of the organization. Cash Flow Statement is the financial document detailing the exchange of cash between a business and the outside world. Financial Performance Analysis is the detailed study of the dynamics and implications of the financial condition of the organization. The paper examines Financial Performance. The role of various financial ratios and their inter-relationships towards evaluating the firms financial performance are discusses. Financial Performance predictions normally require large information to explore using traditional statistical methods such as multiple discriminate analysis and binary logistic regression analysis. Parametric statistical models are based on normality assumption requirements for the interpretation of the tests of significance, and if the data does not satisfy this assumption, the results obtained may be biased. Researchers and economists evaluate firms performance using variety of financial ratio.

RATIO ANALYSIS
Ratio Analysis is one of the most powerful tools of Financial Analysis. It aims at making use of quantitative information for decision making. A ratio is an expression of relationship between two figures or two amounts. It is a yard-stik which measures relationship between two variables. Ratios are simply a means of highlighting in arithmetical term the relationship between figures drawn from various financial statements. Robert Anthony defines a ratio as simply one number expressed in terms of another. A great number of ratios can be computed from the basic financial statements Balance Sheet and Profit and Profit and Loss Account.
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Ratio Analysis is the most important method of financial analysis. Ratio analysis is not just comparing different numbers from the Balance Sheet, Income Statement and Cash Flow Statement. It is comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between

individual values and relate them to how a company has performed in the past and might perform in the future. All stakeholders within the company need to be able to appreciate how the company is performing. Their understanding of how the firm is performing is enhanced through ratio analysis.

MANAGERIAL USES OF RATIO ANALYSIS


Helps in decision making Helps I financial forecasting and planning Helps in communicating Helps in co-ordination Helps in control Other uses such as Utility to shareholders/Investors Utility to Creditors Utility to Employees

OPERATING CYCLE
The Operating Cycle id duration in time taken by a unit of cash to circulate through the business operation. The time between purchase of raw materials and their conversion into cash in know as operating Cycle. It is also called Working Capital Cycle. A useful tool for managing working capital is the Operating Cycle. The Operating Cycle analysis the accounts receivable, inventory and accounts payable cycles in terms of number of days. In other words, accounts receivable are analyzed by the average number of days it takes to collect an account. Inventory is analyzed by the average number of days it takes to collect an account. Inventory is analyzed by the average number of days it takes to turn over the sale of a product ( from the time it comes in the store to the point it is converted to cash or an account receivable). Account Payable are analyzed by the average number of days it takes to pay a supplier invoice.

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CAPITAL STRUCTURE
It refers to the determination of ratio of capital to be raised from different sources like issue of shares, debentures and bonds. It is a managerial decision regarding the proportion of different capital mix at the lowest cost of capital. According to Geristenberg capital structure of a company refers to the composition or markup of its capitalization and it includes all Long Term Debts, Preference Share Capital and Share holders und Components: Capital Structure= Total Assets Total Liabilities (or) Equity Share Capital+Preference Share Capital+Long term Debt + Reserves and Funds. Financial Structure=Total Liabilities (or) Long term liability + Current Liability

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1.2 DESIGN OF THE STUDY


Descriptive type of research has been carried for this study for a period of 45 days starting from 18th APR 2011 to 2th JUN 2011, taking into consideration financial years of20052006, 2006-2007,2007-2008, 2008-2009, and 2009-2010. The study is carried out using the Secondary Data collected from the published financial statements.

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1.3 INDUSTRY PROFILE


Steel is an important indicator to analyze the economic development of a country. The steel industry is highly scientific and technology oriented. Technological advancement is very important for the overall health of the steel industry. Iron and steel manufacturer technology related to the production of iron and its all of particularly those containing a small percentage of carbon. The difference between the various type of iron alloy of iron and carbon often with mixture of other element. Some in general is alloy of iron and carbon, often with mixture of other element. Some alloy that is commercially called iron contains more carbon than commercial steel. Steel is an alloy of iron usually containing less than one percentage of carbon. It is most abundant or earth but it doesnt occur in natural useful metallic form. Integrated controlled chemical composition to meet all product quality requirement. It is used most frequently in the automatic and contraction industries. Steel can be cast in to bars, strips, steel nails, spikes, wire or pipes as needed by indented user. World steel industry:The global steel industry went through one of its most difficult phases between year 1977 and 2001, as it faced severe recession in the global economy leading to imbalances between capacity, production and demand. Now global steel production has crossed one billion tone market due to an upturn in steel demand largely by China. China is the lager steel producer (141 million ton) and consumer (25% of total consumption) in the world. China is now followed by Japan and USA in terms of production. Due to the increased demand, the global steel price have run up significantly over the past two years. The Steel Industry has enough potential to grow at a much accelerated pace in the coming future due to the continuity of the developmental projects around the world. This industry is at present working near its productive capacity which needs to be increased with increasing demand. The Asian countries have their respective dominance in the production of the steel all over the world. India being on e among the fastest growing economies of the world has been considered as one of potential global steel hub internationally. Over the years, particularly after the adoption of the liberalization policies all over the world, the World steel industry is growing very fast. Steel industry is a booming industry in the whole world. The increasing demand for it was mainly generated by the development projects that have
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been going on along the world, especially the infrastructural works and real estate projects that has been on the boom around the developing countries. Steel Industry was till recently dominated by the United State of America but this scenario is changing with a rapid pace with the Indian steel companies on an acquisition spree. The most significant growth that can be seen in the Steel Industry has been observed during the period 1960 to 1974 when the consumption of steel around the whole world doubled. Between these years, the rate at which the Steel Industry grew has been recorded to be 5.5%. This roaring market saw a phase of deceleration from the year 1975 which continued till 1982. After this period, the continuous fall slowed down and again started its upward movement from the early 1990s. this main demand creators for Steel Industry are Automobile industry, Construction Industry, Infrastructure Industry, Oil and Gas industry, and Container Industry. Indian steel Industry:The iron and steel industry in India is over 122 years old. However, a concerted effort to increase the steel output was made only in the early years of planning. Three integrated steel plants were set up at Bhilai, Dugapur and Rourkela. Later two more steel plants, at Bokaro and Vishakhapatnam, were set up. Private sector plants, of which the Tata Iron and Steel Company (TISCO) is the biggest, have been allowed to raise their capacity. TISCO and a large number of mini steel plants in the country contribute about 40 per cent of the steel production in the country. The Government has given a push to sponge irion plants to meet the secondary sectors requirement of steel scrap. During Ancient Period:The history of iron and steel making in India goes back by several centuries. It dates to 480 BC when archers in India used arrows tipped with steel. The iron pillar of Dhar near Indore in Madhya Pradesh dates back to about 321 AD, the iron pillar of Kanab Minar near Delhi dates back to about 400 AD and the iron beams of Sun temple of Konark in Orissa dates back to 13th century. These pillars are a testimony to ancient Indias expertise in the making of steel.

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Before Independence:The roots of the Indian Steel industry in modern times can be traced to the year 1874, when a company called Bengal Iron works at Kulti near Asansol in West Bengal produced iron. One of the most important landmarks in the history of Indian steel industry was the commencement of the Tata Steel Company at Jamshedpur in the state of Bihar in 1907. The other prominent steel manufacturers before independence were Indian Iron and steel Company (1922), Mysore Iron steel Works(1923) and Steel Corporation of Bengal(1937). After Independence:India found it difficult to sustain development in steel sector after independence on its own due to the lack of technological development. The high cost of developing decided to go for synergy with other countries for technology transfer. Some of the prominent steel plant set up then was in Rourkela in collaboration with West Germany and in Bokaro in collaboration with Russia. These steel plants came under the purview of public sector enterprises. Future trends: It has to be said that the global recession has affected the Indian steel industry especially stainless steel, but the steel industry is trying to offset the negative effect of the recession by focusing on transportation and construction projects which are usually funded by the government. India is the only country globally to record a positive overall growth in crude steel production at 1.01 per cent for the period January March 2009. It is estimated that Indias steel consumption will grow at nearly 16% annually till 2012. The National steel Policy has forecasted the demand for steel would reach 110 milllion tons by 2019-2020.

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1.4 COMPANY PROFILE


MANNARKKAD STEELS (P) LTD, Wise Park, Kanjikode, Pallakkad Mannarkkad Steel (P).Ltd was formed in the year September 2004 by the famous M/S PAZHERI GROUP, Mannarkkad under the guidance of Pazheri Mohammed Sherief Haji. It was formed with the object of making MS ingots and steel TMT rods. In the first face the company started commercial production of MS ingots in November 2005 and the re rolling project is under way. It has an installed capacity of 30000 MT/ annum and with a short period of 2 years, it has become one of the leading quality manufacturers of MS ingots in Kanjikode. It is the sister concern of m/s Pazheri group, Mannarkkad, which is having diversified business interest such as Gold, Automobile, Rubber, Steel, Plantations, Petroleum, hospitalities and Real estates etc. It has six directors on Board being Pazheri Mohammed sheriff Haji as managing director. The directors are: P. Abdul Karim P. Abdul Azeez N.V. Basheer P. Hamsa P.K. Mohammed Rasheed The company is going for ISO certification and its works is under process. They are likely to be accredited by the month of May 2008.

BOARD OF DIRECTORS
Mannarkkad, steel is a private limited company with 6 share holders. They are the owners of the company. Managing director:The managing director is in charge of the running of the company. He maintains a good rapport with the workers and ensures the good employer-employee relationship.

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General Manager:In Mannarkkad Steels, the general manager is in charge of the all department of the company. He advises on selection and recruiting procedures of personnel, work compensation method and employee welfare activities. He acts as liaison between the laboures and the management. He also oversees the functioning of the inventory management and the pubic relations office.

VARIOUS DEPARTMENTS
Purchase department:Purchase manger is the in-charge of purchase department. In this department they purchase the raw materials for their production process. Under this department there are two sections-internal purchase and import purchase. Account department:The account is in charge of the finance and accounting activities of the company. The accountant also oversees the fund flow in the company and handles the communication with the creditors and the debtors. He also collects information regarding the credit worthiness of distribution and plays a key role in determining sales targets. They stored information relating with management wise and also department wise. Sales department:In these department all sales activities are directed and controlled. In this department a sales manger is appointed and under this sales manager a number of subordinates are work together. The main objective of sales department is to maximize the sales with minimum expenses. Maintenance department:In these department they maintain electrical and mechanical sections. The main function of this department is to maintain a good of machines and equipments and ensure the smoothe work flow.

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Production department:Production department is the main functioning department of the company. The production manager is in charge of production activities of the company. In steel industry, production is the main function. Above 85% of the expenses of the company is incurred in the course of production. So main objective of production department is to increase production, and minimize the wastage. Maximum utilization of available resources is the one of the principle followed in this department. Under this department there are other various section like store section, production section, laboratory section, delivery section.

MANUFACTURING ACTIVITIES OF MS INGOTS:Scraps:Scraps are received from different suppliers including imported scraps, sponge iron etc. Inspection:After receiving the scrap, the same is inspected visually and unloaded the same as per the type of scrap, and then the samples are drawn for chemical analysis. If it is mixed scrap, composition sample is drawn for testing. Then the scraps are segregated to remove the foreign matter, ie rubber, cast iron , alloy materials etc to ensure the scrap is as per IS2830-1992. Charging to furnace:After preparation of furnace, scraps are charged to furnace for melting. While melting, sample at , level are taken for analysis of % carbon, % manganese, aluminum fines etc are added to get the required quality. To purify the metal, de sulphar, de phosphorous/oxidize will be added to achieve required composition. A ladle sample will be taken for testing as soon as heat is ready for tapping and analysis for all required elements. Ingot of that heat will be kept separates as per the grade to which it confirms with the nose marked in the hot chalk.

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PRODUCTION FLOW DIAGRAM OF MANNARKKAD STEELS (P) LTD, KANJIKKODE, PALAKKAD.

MS SCRAP

INSPECTION OF SCRAP CHEMICAL

IDENTIFICATION & SEGREGATION

STORAGE

HEATING FURNACE RENAIRS ETC PREPARATION OF CHARGE SECONDARY PREPARATION MIXING THE CHARGE

CHARGING THE FURNACE

MELTING THE SCRAP PREPARATION OF MOULD

HEAT THE FURNACE BY

STAGE INSPECTION (CHEMICAL) BATH SAMPLE ALTRATION OF CHARGE IF

ARRANGING THE MOULD

FINAL INSPECTION

ADD REQUIRED INGREDIENTS

POURIN TO MOULD CONFIRM TO SPECIFICATION

COOLING THE MOULD

PREPARING THE FARNACE

REMOVING THE MOULD STOCKY ARD

INGOTS

Chart 1.2: PRODUCTION FLOW DIAGRAM

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1.5 REVIEW OF LITTERATURE


Many researchers have studies Financial Ratio as a part of the learning objective of the Financial Performance of the firms. It is also accompanied by the study on the Long Term and Short Term Loans, Capital Structure and the thorough understanding of the Operating Cycle. According to Milan Sajid Nazir and Talat Afza, in The Impact of Aggressive Working Capital Management Policy on Firms profitability. Working Capital management is highly important in firms as it is used to generate further returns for the stakeholders; however, it has attracted less attention of researchers and practitioners. When working capital is managed improperly, allocating more than enough of it will render management non-efficient and reduce the benefits of short term investments. On the other hand, if working capital is too low, the company may miss a lot of profitable investment opportunities or suffer short term liquidity crisis, leading the degradation of company credit, as it cannot respond effectively to temporary capital requirements. Therefore the study of Financial Performance focuses on Long-Term financial decisions, particularly investments, Capital Structure, Dividends or Company Valuation Decisions. Efficient management of Working Capital is a fundamental part of the overall corporate strategy in crating the shareholders value. Gupta and Gupta and Huefner examined the differences in Financial Ratio averages among industries in two different studies. The conclusion of both the studies was that differences do exist in mean Profitability, Activity, Leverage and Liquidity Ratios amongst industry groups. Filbeck and Krueger highlighted the importance of efficient Working Capital

management by analyzing the Working Capital management policies of 32 non-financial industries in USA. According to their findings significant differences exist between industries in Working Capital practices over time. Moreover, these Working Capital practices, themselves, change significantly within industries over time. In order to validate the results found by Soenen on large sample and with longer time period, jose et al. examined the relationship between aggressive working capital management and profitability of US firms using Cash Conversion Cycle (CCC) as a measure of working capital management where a shorter CCC represents the aggressive relationship

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between the cash conversion cycle and profitability indicating that more aggressive working capital management is associated with higher profitability. Generally, researchers and economists evaluate firms performance using a variety of financial ratios. There are abundant studies that investigated prediction of the financial performance of a firm. Bahtiar jamili Zaaini, Siti Mariyam Shamsudin and Saiful Hafizah Jaaman provide a comprehensive review on their work on the year 2008, Predicting the Financial Performance of Publicly-Traded Malaysian firms using Rough sets based feature selection techniques. They stated that the different also the techniques used to determine optimal ratios and classifiers used to classify firms performances. There were numerous financial ratios that can be considered, therefore, finding the most significant financial ratio is very crucial as it will affect the accuracy. In this section, in order to have more information about the related methods regarding two points of view Dividend policy and Cost of capital which selected companies are going to be analyzed based on them, various works and theories regarding them are reviewed.

Dividend Policy
As introduced, dividend is the distribution of companys profits or surplus among shareholder members. This surplus may be paid out as dividends or reinvested in the business called retained earnings. The firm distributes its profits in order to benefit the shareholders in case of their financials. Hence, it is one of the important strategies that companies undertake. On the other hand, shareholders usually do not rely on such dividends because their major benefits from shares and stocks come from stock exchange and buying and selling shares which they earn or in the bad case, lose considerably. A companys dividend policy refers to the changes in value of the firm and consequently the price of its stock and shares when dividend increases or conversely decreases. Thus, it is a trade of between the retained earnings on one hand and the distribution of cash or other types of securities on other. In general, as Alex Tajirian explains in his book, dividend can be given to shareholders in four forms. These types of dividend are as follows:

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Cash dividend company distributes dividend to shareholders in form of cash. As an example, shareholders receive $0.50 for each of their shares. Stock dividend instead of having a cash outflow, company distributes the dividend in form of stock. For example, company gives one new stock to the respective shareholder for each ten shares he/she holds. Stock Repurchase to overcome the problem of leaving the cash in the regular form of dividend, company use a strategy to purchase the sold shares from shareholders. Property dividends in this form of dividend which is very rare, shareholders receive assets in the issuing company or other relevant subsidiaries. There are some critics regarding dividend payouts. Many financial researchers as well as managers and board members are in this belief that if the company retains the surplus and profits and reinvest them in the company and projects with positive net present value, it will result more benefits for the company rather than paying out as dividends. An important ration regarding dividends is Pay-out Ratio which give information about the amount of dividend has paid out by the company and the amount saved in order to increase the internal growth. Dividend payout ratio is calculated as:

In general, companies and individuals look for stocks and shares issued by companies with dividend payout ration between 40 to 60 percentages. This shows that good portion of the profit of the company is used to be paid out as dividend and a good portion is also used for reinvestment in the firm and increases the rate of internal growth. It is possible for companies to have dividend payout ration greater than 100% but it is difficult to sustain and hinders the growth of the company. Some of the theories regarding the corporate dividend policy are discussed in the following section. These theories are divided into two general categories Full information models (taxfactor) and models of information asymmetry.

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1. Full information models The discussion started with the Miller-Modigliani Proposition and later research finds the clientele effect is responsible for only nominal alteration in portfolio composition rather than the major differences predicted by Miller Masulis and Truemans model predicts that investors with differing tax liabilities will not be uniform in their ideal firm investment/dividend policy. They discuss that as liability on dividend increases, dividend payment decreases and earning investment would increase. Conversely if the liability on dividend decreases, dividend payment increases and earning investment decreases. Farrar and Selwyn work implies that investors tend to maximize after-tax income. This model suggests no dividend to be paid out rather stock repurchase should be used. This model was extended by Brennan later. In another work, Miller suggests a strategy if tax-sheltering of income by high-tax-bracket individuals. 2. Models of Information Asymmetry These models can be further divided into signaling models, Agency cost models, Free cashflow models, and Behavioral models. a) Signaling Models - The path of signaling models was all started from the work by Akerlof which used the car market and then generalized later by Spence and became a prototype of financial modeling of signaling. Many other researchers have worked on signaling that because of our limitation in this work, we refuse to explain. Examples of such works are Bhattacharya, Talmor, Hakansson, John and Williams, Miller and Rock, Bar-Yosef amd Juffman and so fourth. b) Agency Cost Models - The famous works in this field are Adam Smith, Scott, Carlos, Jensen & Meckling, Fama & Jensen which introduced the use of covenants to tackle the potential shareholders-bondholders conflict. c) Free Cash-flow Hypothesis Jensen combined te agency theory and Market information asymmetry.

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d) Behavioral Models Schillers model implies that investor behavior is influenced by societal nouns and attitudes. Based on the personal style of living and decision making,different investors act differently in the same situations. Schillers work explains this phenomenon. Michaels work implies that the managers like investors are influenced by other managers in other firms in making decisions in case of dividend payouts. Other works in this field that worth mentioning here are Ho and Robinson and Frankfurter and Lane. As the summary and conclusion of this section, this can be said that policy of dividend payout is still a puzzle for managers and stakeholders. Managers decrease dividend only when necessary in the event of the poor earnings with insufficient reserve to find the dividend.

Cost of Capital
Cost of capital is referred to cost of obtaining funds for, or conversely, the return necessary to ensure a positive net present value to a capital budgeting project. In general, Capital is used for funding the business which returns for those who financed the business by their money. Hence, they expect their return on capital to be greater than cost of capital. The cost of capital is an opportunity cost of finance, because it is the minimum return which an investor requires. Managers use this measure in order to estimate the long-term capital budgeting projects, mergers and acquisitions analysis and etc. For shareholders it is the dividend they expect to receive plus a capital gain on the value of their shares, while for loan holders it is the rate of interest which is quoted on the loan. Failure to pay such required return will result in the providers of finance transferring their holdings to other opportunities with a better rate of return. Cost of capital includes Cost of Debt and Cost of Equity. Cost of debt A company uses different forms of debt (such as bonds and loans), hence these debts must be paid back in a particular rate of return. Cost of debt is a measure which helps to give an idea to the investors about the rate of return and riskiness of the company. Therefore for comparing different companies, investors can use this measure cost of debt to identify riskier investments in companies. Normally, risky companies have higher cost of debt.

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Since the Cost of capital is the payout rate of the debts, it can be calculated based on beforetax and after-tax. To calculate the after tax rate of cost of capital, we simply multiply the before-tax rate by one minus marginal tax:

Cost of equity In finance, the cost of equity refers to the minimum rate of return a firm must offer the shareholders to compensate them for standing the risk of investment as well as the delay in their returns. The cost of equity is generally the rate of return on an investment that is required by ordinary shareholders. This return includes both dividend and capital gains. Therefore the cost of equity is the cost of capital which equate the current market price of the share with the discounted value of all future dividends in perpetuity. In other words, it reflects the opportunity cost of investment for individual shareholders and is calculated as follows:

There are some other methods that the cost of equity can be calculated by. An example of such methods is CAPM (Capital Assessment Pricing Model). Which is used to theoretically determination of required rate of return on an asset.

Another way of calculating the cost of equity is to take the Risk free return (return of the government bond) and adding to that the companys Beta (as published frequently by certain investment services companies) times the difference of an Average stock return minus the Risk-free return:

In above equation, risk free return refers to interest rate that would be returned on an investment which was completely free of risk. Beta is a figure regarding a stock or portfolio which describes the relation of its returns with the financial market as a whole.stock returns are usually calculated for holding periods month, quarter or a year.

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Another way of calculating the cost of equity can be resulted by the reformation of above equation into: In this formula, risk free premium is the minimum difference a person or an investor is willing to take an uncertain bet, between the expected value and the certain value that he/she is indifferent to. In other words, risk premium is the expected rate of return above the risk free interest rate. Equity Beta in the above formula is a measure that reflects the systematic business risk and financial risk of a company. And last but not least, the riskless rate is the rate of return regarding a risk-free investment. Now that the concepts and calculations of different dimensions that we want to analyze on our three companies are defined and explained, we are going to have a brief introduction of those companies as well as the analysis of their financial reports in the next chapter, followed by a comparison of the overall performance of each company and required recommendation to improve their performance in the market.

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1.6 OBJECTIVES OF THE STUDY:


The objective of this study are 1. To study the Financial Position of the company by analyzing the financial statement of Mannarkkad Steels Pvt. Ltd, Wise Park, Kanjikode, Pallakkad. 2. To compare the Financial Position of Mannarkkad Steels (P) Ltd. Wise Park, Kanjikode, Palakkad through Operating Cycles, and to suggest the best strategies available. 3. To study the existing Capital Structure of the company to suggest the best possible sources of finance.

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1.7 SCOPE OF THE STUDY

1. Studying the financial statements analysis needs and its implication for the MANNARKKAD STEELS PVT. LTD. 2. Impact of ratio analysis for MANNARKKAD STEELS PVT. LTD. 3. To study how the short term funds and long term funds generated.

28

1.8 LIMITATIONS TO THE STUDY


This study is limited with regard to the following aspects. 1. The inherent defects in the supplied data will be reflected in the study. 2. Figures have been approximated whenever necessary. Time is a constraint to do elaborate the study. So study is limited to some ratios and other methods.

29

CHAPTER-II RESEARCH METHODOLOGY


The study is carried out using the Secondary Data collection from the published financial statements like Profit and Loss account and Balance Sheet contained in the annual reports of , MANNARKKAD STEELS PVT LTD. Wise Park, Kanjikode, Pallakkad and other relevant financial records.

2.1

DATA COLLLECTION
The companys annual reports and annual financial statement were used as sources

of data. The study is mainly based on secondary data obtained from the financial reports and other necessary records provided by the firm for the study. Observation is widely used in this study.

2.2 TOOLS OF ANALYSIS


Using the data collected by the above method they were put into analysis for further interpretations. Tools like Ratio Analysis, Operating Cycle and Capital Structure Analysis are used to interpret the financial accounts. Ratio relating to Liquidity, Leverage, Profitability, Activity Ratios are computed around and the performance has been judged. The ratios trend are analyzed and interpreted for the use of organization.

2.3 RESEARCH DESIGN


The research method adopted is Descriptive Research; as the facts are collected based on the state of affairs as it exits at present.

2.4 SAMPLE SIZE:


The period of study is from April 18th 2011 to June 2nd 2011. Financial Data used for the study comprises of financial years from 2005-2006, 2006-2007, 2007-2008, 2008-2009, and 2009-2010.

30

CHAPTER - III ANALYSIS AND INTERPRETATION


The study aims to find the present position of the company and the profitability of the company based on the management of working capital and the function of current assets and current liabilities. Secondary data has been used to obtain necessary information to the study. The data is obtained from financial statements of the company, company website, reference books and internet for other information related to the study. Ratio analysis is used to analyze the data collected and also by using percentage analysis, the data is analyzed, interpreted and recommendations have been made for further enhancement of business.

3.1 RATIO ANALYSIS


Ratio Analysis is one of the most powerful tools of financial analysis. It aims at making use of quantitative information for decision making. A ratio is an expression of relationship between two figures or two amounts. It is a yard-stick which measures relationship between two variables. Ratio are simply a means of highlighting in arithmetical term the relationship between figures drawn from various financial statements. Robert Anthony defines a ratio as simply one number expressed in terms of another, a great number of ratio can be computed from the basic financial statements- Balance Sheet and Profit and Loss Account. Ratio Analysis is the most important method of financial analysis. These are widely used as they are simple to calculate and easy to understand. Even a person, having a little knowledge of accounting, can make use of ratios. Ratio Analysis is not just comparing different numbers from the Balance Sheet, Income Statement and Cash Flow Statement. It is comparing the number against previous years, other companies, the industry, or even the economy in general. Ratio look at the relationships between individual values and relate them to how a company has performed in the past and might perform in the future. All stakeholders within the company need to be able to appreciate how the company is performing. Their understanding of how the firm is performing is enhanced through ratio analysis.

31

USES AND SIGNIFICANCE OF RATIO ANALYSIS


The ratio Analysis is one of the most powerful tools of financial analysis. It is used as a device to analyze and interpret the financial health of an enterprise. A financial analyst analyzes the financial statements with various tools of analysis before commenting upon the financial health or weaknesses of the enterprise. The use of ratios is not confined to financial managers only. There are different parties purposes. The supplier of goods on credit, banks, financial institutions, investors, shareholders and management all make use of Ratio Analysis as a tool in evaluating the financial position and performance of a firm for granting credit, proving loans or making investments in the firm. With the use of ratio analysis one can measure the financial condition of a firm and can point out whether the condition is strong, good, and questionable or poor, the conclusions can also be drawn as to whether the performance of the firm is improving or deteriorating. Thus, ratios have wide applications and are if immense use today.

LIMITATIONS OF RATIO ANALYSIS


The Ratio Analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from some serious limitations.] 1) Limited use of a Single ratio A single ratio usually does not convey much of sense. To make a better interpretation a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any meaningful conclusion. 2) Lack of adequate standards There are no well accepted standards or rules of thumb for al ratios which can be accepted as norms. It renders interpretation of the ratios difficult. 3) Inherent limitations of accounting Like financial statements, ratios also suffer from the inherent weaknesses of accounting records such as their historical nature. Ratio of the past is not necessarily true indicators of the future.

32

4)

Change of accounting procedure Change in accounting procedure by a firm often makes ratio analysis misleading,

e.g., a change in the valuation of methods of inventories from FIFO to LIFO increase the cost of sales and reduces considerably the value of closing stocks which makes stock turnover ratio to be lucrative and an unfavorable gross profit ratio. 5) Window dressing Financial Statements can easily be window dressed to present a better picture of its financial and profitability position to outsiders. Hence, one has to be very careful in making a decision from ratios calculated from such financial statements. But it may be very difficult for an outsider to know about the window dressing made by a firm. 6) Personal bias Ratios are only means of financial analysis and not an end in itself. Ratios have to be interpreted and different people may interpret the same ratio in different ways. 7) Incomparable Not only industries differ in their nature but also in the firms of the similar business widely differ in their size and accounting procedures, etc. It makes comparison of ratios difficult and misleading. Moreover comparisons are made difficult due to differences in definitions of various financial terms used in the ratio analysis. 8) Absolute figures distortive Ratios devoid of absolute figures may prove distortive as ratio analysis is primarily a quantitative analysis and not a quantitative analysis. 9) Price level changes While making ratio analysis, no consideration is made to the changes in price levels and this makes the interpretation of ratios invalid. 10) Ratios no substitutes Ratio analysis is merely a tool of financial statements. Hence, ratios become useless if separated from the statements from which they were computed.

33

CLASSIFICATION OF RATIOS:Ratios may be classified in a number of ways depending upon one or the other similarity. Some important classifications are given below:

I.

Statement wise classification

This classification is based on the statement from which items are taken. a) Balance Sheet Ratios:- These ratios deal with relationship between items or groups of items which are both in the balance Sheet. E.g. current Ratio, Acid Test Ratio, Debt Equity Ratio, etc. b) Income Statement Ratios:- These ratios focus on the relationship between the two items or group of items, all of which are drawn from the revenue statement. These ratios are also known as Operating Ratio. E.g. gross Profit Ratio, Stock Turnover Ratio, Net Profit Ratio, etc. c) Combined Ratios:- these ratios depict the relationship between two items, one of which is drawn from the Balance Sheet and the other from the revenue statement. E.g : Debtors Turnover Ratios, Asset Turnover Ratio, Turn on Capital Employed, etc. II. Classification According to Nature

This mode of classification includes in its fold four different types of accounting ratios which are as follows: a) Liquidity Ratios:- These ratios portray the capacity of the business unit to meet its shortterm resources. E.g. current Ratio, Acid Test Ratio, etc. b) Leverage Ratios:- These ratios are also called efficiency ratios. These ratios measure the owners stake in the business vis--vis that of outsiders. The long term solvency of the business can be examined by using leverage ratios. E.g : Debt-Equity Ratio, Proprietary Ratio, etc. c) Activity Ratios: These ratios evaluate the use of the total resources of the business concern along with the use of the components of total assets. More precisely, they are intended to measure the effectiveness of the assets management. The efficiency with which the assets are used would be reflected in the speed and rapidity with which the assets are converted into sales. The greater the rate of turnover, the more efficient the management would be E.g. stock Turnover Ratio, fixed Assets Turnover Ratio, etc. d) Profitability Ratios: The profitability of a business concern can be measured by the profitability Ratios. These ratios highlight the result of business activities by which alone the overall efficiency of a business unit can be judged.
34

III.

Classification according to importance

It is evident that some ratios are more important than others. This classification has been recommended by the British Institute of Management. a) Primary ratios:- As the success of any business undertaking id measured by the quantum of profit earned by it, the ratio which relates the profit to capital employed is termed as primary ratio. E.g Return on capital employed, operating profit ratio, etc. b) Secondary ratios: This classification is effected to facilitate inter firm comparison and to focus on some factors responsible for the success of the unit. When such factors are isolated by means of ratios, they are called secondary ratios.

35

3.2

COMPARATIVE FINANCIAL STATEMENTS

The comparative financials statements are statements of the financial position at different periods of time. The two comparative financial statements are: (I) Comparative Balance Sheet (ii) Comparative incomes statement.

I COMPARATIVE BALANCE SHEET

The Comparative Balance Sheet analysis is the study of the trend of the same items, group of items and computer items in two or more Balance Sheets of the same enterprise on different dates. The change in periodic balance sheet items reflects the conduct of the business. The comparative balance sheet has two columns for recording the data of original balance sheet, a third column for recording increase of decrease in figures and a fourth column for showing the percentage of increase or decrease in values.

While interpreting comparative balance sheet, the interpreter is expected to study the following aspects.

1. 2. 3.

Current financial position and liquidity position. Long term financial position. Profitability of the business.

36

MANNARKKAD STEEL PVT LTD : KANJIKKODE PALAKKAD BALANCE SHEET (Rs. In Lakhs) 31.03.2008 31.03.2007 31.03.2006

Particulars SOURCE OF FUNDS Share Capital Reserve & Surplus Grant - In - Aid LOAN FUNDS Secured Loans Corp./Unit account(Credit) Profit of the year

31.3.2010

31.3.2009

6,474.68 1,012.28

6,584.76 1,178.97

6,718.48 1,344.13

6,969.51 1,509.29

Nil 1,642.89

1,234.25 41,105.39 -

483.88 32,606.05 1,495.34

788.30 25,942.27 1,892.93

434.37 37,634.50 2,494.31

1,263.20 35,707.39 947.06

TOTAL APPLICATION OF FUNDS FIXED ASSETS Goss block Less : Depreciation

49,826.60

42,349.00

36,686.11

49,041.98

39,560.54

17,990.95 8,782.63

17,901.27 8,281.18

18,085.90 8,022.49

17,440.93 7,313.26

9,401.36 6,903.97

Net Block Cap.WIP & Mac In transit

9,208.32 -

9,620.09 1.47

10,063.41 17.45

10,127.67 252.31

2,497.39 283.76

9,208.32

9,621.56

10,080.86

10,379.98

2,781.15

37

INVESTEMENTS CURRENT ASSETS , LOANS & ADVANCES Inventories Sundry Debtors Cash & Bank Balances Loans & Advances 1,578.67 20,647.60 239.37 1,434.48 1,432.50 22,012.91 3.19 1,224.43 2,720.90 35,108.12 75.55 1,969.52 2,402.26 27,141.28 127.24 1,791.96 2,631.35 20,547.63 852.94 1,521.01

Less : Current Liabilities Provisions

26,470.33 1,034.66

29,751.00 678.64

48,686.04 576.46

24,879.45 368.63

15,186.17 31.65

Total Current Liabilities

27,504.99

30,429.64

49,262.50

25,248.08

15,217.82

NET CURRENT ASSETS Corp. Office/ unit account( debit) Loss for the year

(3,604.87)

(5,756.61)

(9,388.41)

6,214.66

10,335.11

41,606.20 2,616.95

38,484.05

35,993.66

32,447.35

26,444.28

TOTAL

44,223.15

38,484.05

35,993.66

32,447.35

26,444.28

38

INTERPRETATION

1. Current liabilities have come down from Rs.30.43Cr. in 2008-09 to Rs.27.50Cr. in


2009-10. this shows improving trend in curtailing the current liabilities.

2. However, there is withdrawal of working capital by Corporate Office to the tune


of Rs.14.88 cr.

3. The current Assets, cash and bank balance shows an increase from Rs.0.75Cr in 2007
08 to Rs.2.39Cr in 2009-10.

4. The Negative Net Current Asset is shown from the period 2007-08 to 2009-10,
which is due to withdrawal of working capital by corporate office as stated at 3 above.

5. The above trend is to be taken into consideration for conclusion in the


performance study.

39

2. COMPARATIVE INCOME STATEMENT It is statement prepared to compare the various items of income statements of different periods and to ascertain the changes i.e. the increase or decrease that have taken place in the income statements from one period to another. The income statement or profit and loss account gives the result of the operations of a business. The comparative Income Statement gives an idea of the progress of a business over a period if time. The change in absolute data in money values and percentage can be determined to analyze the profitability of the business. It is prepared just like Comparative balance Sheet.

40

MANNARKKAD STEEL Pvt. Ltd. PROFIT & LOSS ACCOUNT Particulars INCOME Sales(net of sales - tax and excise duty) Services Total Sales & Services Transfer Price margin Interest Earned Others Transfer From Grant in aid 0.57 264.27 166.69 16,133.76 39.35 315.93 165.16 20,427.37 1.17 44.79 243.87 26,556.37 30.82 182.18 21,850.29 53.23 229.87 15,557.75 31.3.2010 31.3.2009 31.03.2008 31.03.2007 31.03.2006

15,139.20 563.03 15,702.23

18,814.63 1,092.30 19,906.93

25,734.66 531.88 26,266.54

21,385.42 251.87 21,637.29

14,445.15 829.50 15,274.65

41

EXPENDITURE Consumption of Raw materials & Production Stores Purchase for direct sales Stores & Spares parts Sundry Charges on installation and maintenance of X'ges Cost & Expenses on Tools Packing & Forwarding Charges salaries, Wages& Ex-gratia Co's contribution to P.F/others Workmen & staff welfare expenses Power, Light & Water charges Maintenance & Repairs Depreciation Interest D.R.E Written off Voluntary Retirement Scheme Others 11,646.70 644.61 9.07 11,975.35 389.90 12.02 17,155.85 1,455.73 33.34 10,412.37 2,576.78 21.53 7,066.00 1,194.24 12.60

384.07 29.84 1,339.84 522.00

727.65 0.47 57.74 1,295.59 513.43

210.11 2.22 117.79 1,228.12 339.18

247.75 0.39 56.68 1,286.38 462.85

78.90 1.63 51.15 1,183.24 49.07

104.08

88.48

96.60

87.71

87.65

191.93 96.26 391.37 3,516.93 180.82 19,057.52

168.28 118.97 403.03 4,138.20 (1,400.76) 18,488.35

169.50 100.57 416.66 3,300.21 78.71 188.60 24,893.19

223.23 81.38 409.29 2,800.67 48.58 550.75 19,266.34

218.09 64.14 409.11 2,995.92 160.86 44.10 1,007.99 14,624.69

LESS:

42

Accretion/Decretion Inter Unit Transfers Total cost of sales Profit for the year before tax Prior period adjustments

83.29 237.27 18,741.96

(231.88) 132.48 18,587.75

(68.40) 27.51 24,934.08

(54.06) 97.52 19,222.88

(246.89) 249.36 14,622.22

(2,608.20) (8.75)

1,839.62 (344.28)

1,622.29 270.64

2,627.41 (133.10)

935.53 11.53

Profit before tax

(2,616.95)

1,495.34

1,892.93

2,494.31

947.06

INTERPRETATION 1. The cost of raw material consumption for the year 2009-10 has increased to 78.34%. Whereas the same was 62.18% for 2008-09. 2. Allocation of interest by Corporate Office is not in proportion to the working capital allotment by Corporate Office. This lump sum amount constituted a major role for the net loss for the year 2009-10. 3. The Gross profit during the year 2008-2009 has gone up by 9.29%, even though a sale has come down by 24.06%. This indicates that there has been a substantial reduction in cost of goods sold. 4. The main reason for reduction in cost of production is due to reduction in consumption of raw material i.e. 62.18%, where as it was 70.98% during 2007-08. 5. The Gross profit during the year 2009-10 has come down drastically due to the sale turnover reduction. The consumption of raw material is also highest among the previous years under study, i.e. 78.34%, 6. As against the increase in gross profit of 9.29% the operating net profit has also increased by 9.29%. This indicates that the operating expenses have been at the same level during the year. 7. However the net profit subject to prior period adjustment has gone up by 13.40% which is due to increase in non-operating income by 79.59%.

43

RATIO ANALYSIS
Ratio analysis is powerful tool of financial analysis. Ratio analysis is the process of determining and interpreting numerical relationship based on financial statements. For this purpose ratios are calculated. Accounting ratios are relationships expressed in mathematics terms between which are connected with each other in some manner. According to Sir Robert Antony, Ratio is simply nothing but one number expressed in terms of another. A ratio is a means of highlighting in arithmetical terms the relationship between two or more variables in the basic financial statements such as income statement or Position statement. A ratio as a financial analysis can be expressed as percentage, fraction or a stated comparison between numbers. Ratio analysis helps to reveal the relationship between two variables in a meaningful way so as to draw conclusion from them. Ratio analysis makes related information comparable. A single figure by itself has no meaning, but when expressed in terms of related figure will yield significant inferences. Ratios can be classified into your broad groups. 1. Liquidity ratios. 2. Solvency or capital structure or Leverage Ratios. 3. Activities Ratios and 4. Profitability ratios. The following chart shows the ratios, which are calculated to analysis the financial performance of MANNARKKAD STEELS PVT Ltd.

44

A. CURRENT RATIO
INTRODUCTION This ratio is an indicator of the firms commitment to meet its short term liabilities. Current ratio = Current Assets to Current Liabilities. This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses. CURRENT RATIO= CURRENT ASSET CURRENT LIABILITY
Table 4.1

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

CURRENT ASSET 25558.93 31462.74 39874.09 24673.03 23900.12

CURRENT LIABILITY 15217.82 25248.08 49262.50 30429.64 27504.99

Current ratio 1.68:1 1.25:1 0.81:1 0.81:1 0.87:1

Chart 4.1

60000 50000 40000 30000 20000 10000 0 20052006 2006- 2007- 20082007 2008 2009 20092010 CURRENT ASSET CURRENT LIABILITY

INTERPRETATION:The current ratio is ranging from 0.81 -1.68. It is at the highest in 2005-2006, i.e. (1.68) and lowest in 2007-2008 and 2008-2009 (0.81).The average current ratio for the period of study is 1.084: 1 .The standard thumb rule is 2:1.
45

B. QUICK RATIO
INTRODUCTION It shows the ability of firms to meet its current liability with its most liquid assets. Quick ratio is a ratio between quick assets and current liabilities. 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 (0.5:1) is considered to represent a satisfactory current financial condition. A quick ratio of (0.5:1) or more does not necessarily imply sound liquidity position of dead stock is fairly low. QUICK RATIO=
Table 4.2

QUICK ASSET CURRENT LIABILITY QUICK ASSETS 22921.58 29060.48 37153.19 23240.33 22321.45 CURRENT LIABILITY 15217.82 25248.08 49262.50 30429.64 27504.99 QUICK RATIO 1.51:1 1.15:1 0.75:1 0.76:1 0.81:1

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Chart 4.2

6000 5000 4000 3000 2000 1000 0 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010

QUICK CURRENT

INTERPRETATION:The ideal quick ratio is 1:1. The quick ratio of the company ranging from 0.75 to 1.51.The average quick ratio of the company for the period under study is 0.996:1.The current year quick ratio is only 0.81. The average quick ratio of the company is satisfactory.

46

C.TURNOVER RATIOS
INTRODUCTION Funds of creditors and owners are invested in various assets to generate sales and profits. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called turnover ratio. Because, they indicate the speed with which assets are being converted or turned over into sales. Activity ratios, thus, involve a relationship between sales and assets. A proper balance between sales and assets generally reflects that assets are managed well. 1. Debtors Turnover Ratio 2. Creditors Turnover Ratio 3. Average Collection Period 4. Average Payment Period

47

1) INVENTORY OR STOCK TURNOVER RATIO

INTRODUCTION This ratio indicates the number of times the stock has been turned over during the period. This ratio is calculated by dividing the cost of goods sold by average inventory. This ratio shows how fast the inventory is sold. This ratio generally reflects the efficiency of inventory management. STOCK TURN OVER RATIO= SALES AVERAGE STOCK

AVERAGE STOCK=OPENING STOCK + CLOSING STOCK 2

Table 4.3

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Chart 4.3
30000 25000 20000 15000 10000 5000 0 20052006

NETSALES 15274.65 21637.29 26266.54 19906.93 15702.23

AVERAGE INVENTORY 2222.71 2516.81 2561.58 2076.70 1505.59

RATIO 6.87:1 8.60:1 10.25:1 9.59:1 10.43:1

NETSALES AVERAGE INVENTORY

20062007

20072008

20082009

20092010

INTERPRETATION:Average stock turnover ratio of the company is 9.148. It shows increasing trend in previous year, where the highest is during 2008-09.i.e.10.43. It indicates that the company is efficient in utilizing its inventory in generating sales.

48

2) DEBTORS TURNOVER RATIO

INTRODUCTION Debtors turnover ratio or receivables turnover ratio is obtained by dividing the net credit sales by average debtors outstanding during the year. Net credit sales means sales less sales returns, average debtors mean average of opening and closing debtors. DEBTORS TURNOVER RATIO= SALES AVERAGE DEBTORS AVERAGE DEBTORS= OPENING DEBTORS + CLOSING DEBTORS 2
Table 4.4

YEAR

NET CREDIT SALES

AVERAGE DEBTORS

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Chart 4.4

15274.65 21637.29 26266.54 19906.93 15702.23

20819.73 23844.46 31124.70 28560.52 21330.26

DEBTORS TURNOVER RATIO ( IN TIMES) .73 .91 .84 .70 .74

AVERAGE COLLECTION PERIOD ( IN DAYS) 498 402 433 521 493

35000 30000 25000 20000 15000 10000 5000 0 20052006 20062007 20072008 20082009 20092010

NET CREDIT SALES AVERAGE DEBTORS

INTERPRETATION:Debtors turn over ratio is high in the year 2006-2007i.e. (0.91) and low in the year 20082009i.e. (.70) current years debtors turnover ratio is (.74) and average collection period is high (521), this in turn adversely affect the liquidity position of the company
49

3) CREDITORS TURN OVER RATIO INTRODUCTION This ratio indicates the velocity which the creditors are turned around over in relation to purchase. creditors. CREDITORS TURNOVER RATIO = CREDIT PURCHASE AVERAGE CREDITORS It measures the average credit period enjoyed from

AVERAGE CREDITORS = OPENING CREDITORS+CLOSING CREDITORS 2 AVERAGE PAYMENT PERIOD = 365 CREDITORS TURNOVER RATIO

Table 4.5

YEAR

NET CREDIT PURCHASE

AVERAGE CREDITORS

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

8846.14 12755.05 19715.28 11625.40 12309.99

11652.04 10584.81 15483.85 15592.05 12699.71

CREDITORS TURNOVER RATIO ( IN TIMES) 0.76 1.21 1.27 0.75 0.97

AVERAGE PAYMENT PERIOD ( IN DAYS) 481 303 287 487 376

25000 20000 15000 10000 5000 0 20052006 20062007 20072008 20082009 20092010 NET CREDIT PURCHASE AVERAGE CREDITORS

Chart 4.5

Interpretation: The creditors turn over ratio of the company is low during the year 2008-2009, (0.75). It is highest during the year 2007-2008(1.27). Average of this ratio for the period under study is .992.
50

4) FIXED ASSETS TURN OVER RATIO:INTRODUCTION This ratio indicate the extend to which investment in fixed assets contribute towards sales. The term fixed asset for this ratio is the depreciated value of fixed asset.

FIXED ASSET TURN OVER RATIO = SALES FIXED ASSET


Table 4.6

YEAR

NETSALES

FIXED ASSET

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

15274.65 21637.29 26266.54 19906.93 15702.23

2781.15 10379.98 10080.86 9621.56 9208.32

FIXED ASSET TURN OVER RATIO (IN TIMES) 5.49 2.08 2.61 2.07 1.71

30000 25000 20000 15000 10000 5000 0 20052006 Chart 4.6 20062007 20072008 20082009 20092010 NET SALES FIXED ASSET

Interpretation: Fixed asset turnover ratio is highest during the year 2005-2006i.e. (5.49) and lowest during the year 2009-2010 (1.71). Average fixed asset ratio for the period of study is 2.792 current years ratio is far below average.

51

5. CURRENT ASSET TURN OVER RATIO INTRODUCTION it indicates the number of times current assets are converted to sales. CURRENT ASSET TURN OVER RATIO = SALES CURRENT ASSET
Table 4.7

YEAR

NETSALES

CURRENT ASSET

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

15274.65 21637.29 26266.54 19906.93 15702.23

25558.93 31462.74 39874.09 24673.03 23900.12

CURRENT ASSET TURN OVER RATIO (IN TIMES) 0.60 0.69 0.66 0.81 0.66

50000 40000 30000 20000 10000 0 20052006 20062007 20072008 20082009 20092010 NETSALES CURRENT ASSET

Chart 4.7

Interpretation: Current ratio is highest in the year 2008-2009 i.e. (0.81) and lowest in the year 20052006 i.e.(0.60). The average of this ratio is 0.684 for the period of study. Current asset turnover ratio is satisfactory.

52

6. NET WORKING CAPITAL TURN OVER RATIO INTRODUCTION This ratio shows the number of times working capital is turned over in a stated period. NET WORKING CAPITAL TURNOVER RATIO= SALES NET WORKING CAPITAL NET WORKING CAPITAL= CURRENT ASSET - CURRENT LIABILITY
Table 4.8

YEAR

NETSALES

WORKING CAPITAL

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Chart 4.8

15274.65 21637.29 26266.54 19906.93 15702.23

10335.11 6214.66 (9388.41) (5756.61) (3604.87)

WORKING CAPITAL TURN OVER RATIO( IN TIMES) 1.48 3.48 (2.80) (3.46) (4.36)

30000 25000 20000 15000 10000 5000 0 -5000 -10000 -15000

NETSALES WORKING CAPITAL 20052006 20062007 20072008 20082009 20092010

Interpretation: The ratio is high during the year 2006-2007 and declining in working capital due to increased creditors. On the contrary, from 2007-2008 to 2009-2010 the working capital turnover ratio is negative working capital as a result of increase in sundry creditors.

53

7. TOTAL ASSET TURN OVER RATIO INTRODUCTION It shows the number of times total assets are turned over in a stated period. TOTAL ASSET TURN OVER RATIO= SALES TOTAL ASSET
Table 4.9

YEAR

NETSALES

TOTAL ASSET

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Cahrt 4.9

15274.65 21637.29 26266.54 19906.93 15702.23

28334.08 41842.72 49954.95 34294.29 33108.44

TOTAL ASSET TURN OVER RATIO (IN TIMES) 0.54 0.52 0.53 0.58 0.47

60000 50000 40000 30000 20000 10000 0 20052006 20062007 20072008 20082009 20092010 NETSALES TOTAL ASSET

Interpretation: Total asset turn over ratio is at its lowest during 2009-2010 i.e. (0.47) and highest during the period 2008-2009 (0.58). The average of this ratio for the period under study is 0.528 Current years ratio lies below this. It means idle utilization of fixed asset. The traditional standard for this ratio is 2 times. Current years ratio is much below standard.

54

C. PROFITABLITY RATIO
INTRODUCTION These ratios measure the results of business operations or overall performance and effectiveness of the firm. 1) GROSS PROFIT RATIO:It indicates the average spread between the cost of goods sold and sales revenue. GROSS PROFIT RATIO= SALES COST OF GOODS SOLD X 100 SALES
Table 4.10

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

GROSS PROFIT 4352.09 5704.27 5860.83 6079.68 1273.77

NETSALES 15274.65 21637.29 26266.54 19906.93 15702.23

GROSS PROFIT RATIO(%) 28.49 26.36 22.31 30.54 8.11

30000 25000 20000 15000 10000 5000 0 2005- 2006- 2007- 2008- 20092006 2007 2008 2009 2010
Chart 4.10

GROSS PROFIT NETSALES

Interpretation: Gross profit ratio is highest during 2008-2009(30.54%) and it is lowest during 20092010(8.11). Current years gross profit ratio is below the average i.e. (23.16%).

55

2) NET PROFIT RATIO


INTRODUCTION This ratio is the over all measure of the firms ability to turn each rupee sales in to net profit. NET PROFIT RATIO =NET PROFIT* 100 SALES
Table 4.11

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

NET PROFIT 947.06 2494.37 1892.93 1495.34 (2616.95)

NETSALES 15274.65 21637.29 26266.54 19906.93 15702.23

GROSS PROFIT RATIO (%) 6.20 11.53 7.21 7.51 (16.67)

30000 25000 20000 15000 10000 5000 0 -5000


Chart 4.11

NET PROFIT NETSALES

20052006

20062007

20072008

20082009

20092010

Interpretation:

Net profit is the lowest during the year 2009-2010 i.e. (16.67%) and highest during the year 2006-2007 i.e. 11.53%. The average net profit ratio of the company for the last five years is 3.156. The current years net profit ratio has become negative.

56

3) RETURN ON CAPITAL EMPLOYED INTRODUCTION This ratio is an indicator of the earning capacity employed in the business. RETURN ON CAPITAL EMPLOYED= NET PROFIT CAPITAL EMPLOYED
Table 4.12

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

DEBIT 3942.98 5294.98 5193.14 4755.28 772.32

CAPITAL EMPLOYED 13116.26 16594.64 692.45 3864.95 5603.45

ROCE(in%) 30.06 31.90 749.96 123.03 13.78

Chart 4.12

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 20052006 20062007 20072008 20082009 20092010

EBIT CAPITAL EMPLOYED

Interpretation: The return on Cap employed is at its highest during 07-08 i.e. 749.96% and it is at its lowest during the year 2009-10. i.e. 13.78 the average return on capital employed is 189.75%

57

8. OPERATING PROFIT RATIO INTRODUCTION This ratio indicates the portion remaining out of every rupee worth of sales after meeting all operating cost. OPERATING PROFIT RATIO = OPERATING PROFIT *100 SALES
Table 4.13

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Operating profit 4218.84 5624.37 6216.73 5518.04 1687.01

Sales 15274.65 21637.29 26266.54 19906.93 15702.23

Operating profit ratio (%) 27.62 25.99 23.66 27.72 10.74

30000 25000 20000 15000 10000 5000 0 20052006 20062007 20072008 20082009 20092010

Operating profit sales

Chart 4.13

Interpretation: The ratio is highest during the year 2008-2009 i.e. (27.72) and lowest during the year 2009- 2010 is 10.74. The average of this ratio of the period under study is 23.146. The current ratio is below the average.

58

5. RETURN ON TOTAL ASSET INTRODUCTION It is an indicator of earning potential of total asset of an organization. RETURN ON TOTAL ASSET =
Table 4.14

NET PROFIT *100 TOTAL ASSET TOTAL ASSET 28334.08 41842.72 49954.95 34294.59 33108.44 ROTA(%) 3.34 5.96 3.79 4.36 (7.90)

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 60000 50000 40000 30000 20000 10000 0 -10000 20052006

EBIT 947.06 2494.37 1892.93 1495.34 (2616.95)

EBIT TOTAL ASSET

20062007

20072008

20082009

20092010

Chart 4.14

Interpretation: This ratio is its highest during the year 2006-2007 i.e. 5.96 and lowest during 2009-2010 (7.90). The average of this ratio for the period of study is 1.91.

59

6. VALUE ADDED PER EMPLOYEE INTRODUCTION This ratio is considered to be the most important by the corporate world in the recent past. It is calculated by, VALUE ADDED PER EMPLOYEE = VALUE ADDED NUMBER OF EMPLOYEES VALUE ADDED= VALUE OF PRODUCTION-(RAW MATERIAL CONSUMPTION+POWER CHARGE) Table 4.15 YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

VALUE ADDED 6803.91 8482.02 7457.44 7286.08 3555.16

NO. OF EMPLOYEES 683 607 623 605 588

VALUE ADDED (RS) 9.96 12.72 11.97 12.04 6.04

10000 8000 6000 4000 2000 0 20052006


Chart 4.15

VALUE ADDED NO. OF EMPLOYEES

20062007

20072008

20082009

20092010

Interpretation: From the above table it is clear that the number of employees of the company is decreasing year by year. The value added per employee is highest in the year 20062007 i.e. 12.72 and lowest during the year 2009-2010 i.e. 6.04. Current years value added per employee has decreased when compared to previous year. The situation is very much unfavorable from company point of view and needs improvement in production.

60

D. STRUCTURED HEALTH RATIO


1) CURRENT ASSET TO FIXED ASSET RATIO This ratio shows proportion between current asset and fixed assets.

CURRENT ASSET TO FIXED ASSET RATIO = CURRENT ASSET FIXED ASSET


Table 4.16

YEAR

CURRENT ASSET 25558.93 31462.74 39874.09 24673.03 23900.12

FIXED ASSET

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Chart 4.16

2781.15 10379.98 10080.86 9621.56 9208.32

CURRENT ASSET TO FIXED ASSET RATIO 9.19 3.03 3.96 2.56 2.59

50000 40000 30000 20000 10000 0 2005- 2006- 2007- 2008- 20092006 2007 2008 2009 2010 CURRENT ASSET FIXED ASSET

Interpretation: The ratio is at its highest in the year 2005-2006 i.e. 9.19 and the ratio is at lowest at 2008- 2009 i.e. 2.56 . The average of this ratio for the period under study is 4.266.

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2) CURRENT ASSET TO TOTAL ASSET RATIO It shows the ratio of current asset of the company to its fixed asset.

CURRENT ASSET TO TOTAL ASSET = CURRENT ASSET TOTAL ASSET


Table 4.17

YEAR

CURRENT ASSET

TOTAL ASSET

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


60000 50000 40000 30000 20000 10000 0

25558.93 31462.74 39874.09 24673.03 23900.12

28334.08 41842.72 49954.95 34294.59 33108.44

CURRENT ASSET TO TOTAL ASSET RATIO 0.90 0.75 0.80 0.719 0.721

CURRENT

ASSET

TOTAL ASSET

20052006

20062007

20072008

20082009

20092010

Chart 4.17

Interpretation: This ratio is at its highest during the year 2005-2006 i.e. 0.90 and the ratio is lowest in the year 2008-2009 ie.0 .719. The average is 0.778.

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E. OTHER RATIOS
1) RAWMATERIAL CONSUMPTION TO VALUE OF PRODUCTION

RAWMATERIAL CONSUMPTION TO VALUE OF PRODUCTION

= RAW MATERIAL CONSUMPTION x 100 VALUE OF PRODUCTION


Table 4.18

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

RAW MATERIAL CONSUMPTION 8260.24 12989.15 18611.58 12365.25 12291.31

VALUE OF PRODUCTION 15268.12 21680.76 26225.65 19807.53 16017.79

0.54 0.60 0.71 0.62 0.77

30000 25000 20000 15000 10000 5000 0 20052006 20062007 20072008 20082009 20092010 RAW MATERIAL CONSUMPTION VALUE OF PRODUCTION

Chart 4.18

Interpretation: The raw material consumption in relation to value of production is not satisfactory in all 5 years except 2005-2006. A manufacturing companys standard raw material consumption in relation to value of production is 60%. ITI is always keeping a raw material ratio above the standard fixed except the year 2005-2006. The ratio is lowest in 2005-2006 i.e.54% and highest in 2009-2010 i.e. 77%.

63

2) WORKING CAPITAL IN MONTHS OF VALUE OF PRODUCTION

WORKING CAPITAL IN MONTHS OF VALUE OF PRODUCTION

=
Tabel 4.19

WORKING CAPITAL x 100 VALUE OF PRODUCTION

YEAR 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Chart 4.19

WORKING CAPITAL 10335.11 6214.66 (9388.41) (5756.61) (3604.87)

VALUE OF PRODUCTION 15268.12 21680.76 26225.65 19807.53 16017.79

RATIO 0.68 0.29 (0.36) (0.29) (0.23)

100% 80% 60% 40% 20% 0% -20% -40% 2005- 2006- 2007- 2008- 20092006 2007 2008 2009 2010

VALUE OF PRODUCTION WORKING CAPITAL

64

TREND ANALYSIS
FIXED ASSET TURNOVER RATIO
Table 4.20

20052006 5.49

20062007 2.08

20072008 2.61

20082009 2.07

20092010 1.71

20102011 5.22

Interpretation: In the year 05-06 the fixed assets ratio is 5.49. But in the following years it is falling down. But as per the trend analysis, 2010 11 will have a fixed asset turnover ratio of 5.22. it has an upward trend and it shows that the management efficiently uses its fixed asset

Chart showing the Trend analysis of Fixed Asset Turnover Ratio


Chart 4.20
6
5 4 3

2
1 0

Series1

65

NET PROFIT RATIO


Table 4.21

20052006 6.2

20062007 11.53

20072008 7.21

20082009 7.51

20092010 -16.67

20102011 -24.03

Interpretation: In the year 2005-06 , 06-07, 07-08, 08- 09, the net profit ratio is in good position. But in the year 2009-10, net profit ratio is negative and as per the trend analysis 2010 -11 will also have a negative ratio. So the companys profitability is low and the shareholders return will get affected.

Chart showing the Trend Analysis of Net Profit Ratio


Chart 4.21
15 10 5 0 -5

Series1
-10 -15 -20 -25 -30

66

RETURN ON CAPITAL EMPLOYED


Table 4.22

20052006 30.06

20062007 31.9

20072008 749.96

20082009 123.03

20092010 13.78

20102011 -51.87

Interpretation: In the year 2005-06, return on capital employed is 30.06. then in the following years it is increasing and reach 749.96 in 2007 -08. But in the year 2009 10, it again decreases. As per the trend analysis return on capital employed will be -51.87. Chart showing the trend analysis of Return on Capital Employed
Chart 4.22
800 700 600 500 400

300
200 100 0 -100

Series1

67

CURRENT ASSET TO TOTAL ASSET RATIO


Table 4.23

20052006 0.9

20062007 0.75

20072008 0.8

20082009 0.719

20092010 0.721

20102011 0.9015

Interpretation: In the year 2005-06 , current assetto total asset ratio is 0.9. then it is 0.75 . but as per the trend analysis in the year 2010- 11 , the ratio will be 0.9015.

Chart showing the trend analysis of Current Asset to Total Asset Ratio
Chart 4.23
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Series1

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COMPARITIVE FINANCIAL STATEMENT Balance sheet compare from 2006 to 2010


MANNARKKAD STEEL PVT LTD :KANJIKKODE PALAKKAD BALANCE SHEET (Rs. In Lakhs) 31.03.2008 31.03.2007 31.03.2006

Particulars SOURCE OF FUNDS Share Capital Reserve & Surplus Grant - In - Aid LOAN FUNDS Secured Loans Corp./Unit account(Credit) Profit of the year

31.3.2010

31.3.2009

6,474.68 1,012.28

6,584.76 1,178.97

6,718.48 1,344.13

6,969.51 1,509.29

Nil 1,642.89

1,234.25 41,105.39 -

483.88 32,606.05 1,495.34

788.30 25,942.27 1,892.93

434.37 37,634.50 2,494.31

1,263.20 35,707.39 947.06

TOTAL APPLICATION OF FUNDS FIXED ASSETS Goss block Less : Depreciation

49,826.60

42,349.00

36,686.11

49,041.98

39,560.54

17,990.95 8,782.63

17,901.27 8,281.18

18,085.90 8,022.49

17,440.93 7,313.26

9,401.36 6,903.97

Net Block Cap.WIP & Mac Intransit

9,208.32 -

9,620.09 1.47

10,063.41 17.45

10,127.67 252.31

2,497.39 283.76

9,208.32

9,621.56

10,080.86

10,379.98

2,781.15

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INVESTEMENTS CURRENT ASSETS , LOANS & ADVANCES Inventories Sundry Debtors Cash & Bank Balances Loans & Advances 1,578.67 20,647.60 239.37 1,434.48 1,432.50 22,012.91 3.19 1,224.43 2,720.90 35,108.12 75.55 1,969.52 2,402.26 27,141.28 127.24 1,791.96 2,631.35 20,547.63 852.94 1,521.01

Less : Current Liabilities Provisions

26,470.33 1,034.66

29,751.00 678.64

48,686.04 576.46

24,879.45 368.63

15,186.17 31.65

Total Current Liabilities

27,504.99

30,429.64

49,262.50

25,248.08

15,217.82

NET CURRENT ASSETS Corp. Office/ unit account( debit) Loss for the year

(3,604.87)

(5,756.61)

(9,388.41)

6,214.66

10,335.11

41,606.20 2,616.95

38,484.05

35,993.66

32,447.35

26,444.28

TOTAL

44,223.15

38,484.05

35,993.66

32,447.35

26,444.28

INTERPRETATION 1. The fixed asset of the company is an increasing trend except in the year 20082009. It is at its highest in the year 2007-2008 (i.e. 2.13 times on 2002-03). 2. There is not much variation in the trend of total current asset. The current asset of 3103-2003 is Rs.214.88 Cr and of 2009-10 is Rs.239.00Cr. 3. The is much variation in the current liability. It was Rs.152.17 Cr for 2005-06 and Rs.275.04 for 2009-10.

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4.

Corporate Office/ Unit Account balance as on 31-03-2006 is Rs.357.07 Cr. The total net profit transferred to corporate office account amounts to Rs.68.29crores. Hence the total balance should be Rs.425.37 Cr. But the balance as on 31-03-2010 shows only

Rs.411.05Cr. It denotes that the working capital to the tune of Rs.14.31 Cr is withdrawn by Corporate Office. 5. Thus the major variation is noticed in Corporate Office/ Unit Account is the reason for considerable reduction in net current asset (working capital). 6. During the period 2007-08 to 2009-10 (3 years) the working capital shows negative figure. Hence interest allocated by Corporate Office is not in proportion. Allocation of interest for these three periods amounts to (33.00+41.38+35.16) = Rs.109.54crores.

7. The increase in loan funds is less than the increase the fixed assets. It means loan funds
have been used maximum to finance fixed assets of the company.

71

CHAPTER IV FINDINGS
1. The Current Ratio for the firm is consistently showing an ascending trend from 1.37 to 2.31 in the observed years. Even though in the current year the Current Ratio is little lesser than the required, the ratio seems healthy and expected to grow in the following years. 2. The Quick Ratio shows that the liquid assets are in par with the Current Liabilities though the ratio did decline in the year 2008 but it showed a favorable increase in the following years. 3. For a healthy financial condition of a firm the Total Asset to Debt Ratio is preferably less. The results also prove that the ratio is decreasing consistently which shows a positive performance in reducing the debts of the firm. 4. Fixed Asset Ratio shows the utilization of the long term funds of the firm in investing in the Fixed Assets. The results show that the ratio is decreasing but the Fixed Assets. The results show that the ratio is decreasing but the total Fixed Asset has considerably increased in the observed years. 5. The interest Coverage Ratio shows the ability of the firm in paying the various interests for the debts too the funding agencies. In the result the beginning years of observation have positive interest coverage than the recent years. 6. The Inventory Turnover Ratio clearly shows the ability of the cost the good sold has been considerably deceased and the stock has been consistently maintained. 7. The Working Capital Turnover ratio shows the extent of utilization of the Working Capital by the firm for the production process. From the results it is inferred that the firm utilized the Working Capital better on the early years than the recent years. 8. Even though there is decrease in the net sales of the firm the company continuously invests on the Fixed Assets which help the company in the long run. 9. From the results we see that the firm is doing good as it has maintained a good Gross Profit Ratio for the years that are studied. It indicates that the firm is running efficiently and has good prospects. 10. The results of the Operating Ratio shows no greater alteration in the ratio which shows that there is no big change in the proportion of the net sales compared with the Operating Expenses.

72

SUGGESTIONS AND RECOMMENDATIONS


1. Current Ratio, the standard norm for Current Ratio is 2:1, but in our observation the Current Ratio for the year 2010 is 1.88 which is not up to the favor and not satisfies the require standard completely. The Current Ratio over the last 4 years has been not satisfactory and highly fluctuating. The firm must improve the Current Ratio to enhance firms performance. 2. Standard norms of Liquid Ratio are 1:1 If Quick Ratio is 1:1 or more that the ideal ratio than the financial position of the firm is said to be good. The results shows that the Liquid Assets are in par with the Current Liabilities though the ratio did decline in the year 2008 but it showed a favorable increase in the following years. This indicates that the short term solvency of the firm is not disturbed and is healthy for the firm. 3. The standard or ideal Debt-Equity Ratio is 1:1. Some experts suggest 2:1 as standard ratio, however, lower the ratio better it is. This ratio is of particular importance to long term creditors. 4. Here as per the results obtained the ratios obtained are pretty high than the favorable which shows that the firm depends upon a great extend for external funds in its financing. So the firm shows a favorable situation. 5. Generally for Proprietary Ratio, a ratio of 0.5:1 or above (50% or more) is considered to be safe for the creditors. The higher the shareholders funds, lesser will be the possibility of insolvency. In this case since the ratios are almost negligible the shareholders funds may be increased to maintain long term solvency of the firm. But in th current year it shows high fluctuating, so the firm must concentrate to increase the shareholders fund for better performance. 6. In the year 2007-2008 the Total Asset to Debt Ratio is 4 and in the following years it was reducing. This indicates a healthy sign that the firm is reducing their total debts. For a healthy financial condition of a firm the Total Asset to Debt Ratio is preferably less. The results also prove that the ratio is decreasing consistently which shows a positive performance in reducing the debts of the firm. 7. In Fixed Asset Ratio, more availability of the fixed asset for the firm shows a healthy financial performance of the firm. The long term funds are increasing at the same time the fixed assets are also increasing. This shows a proper utilization of the funds in investing for the fixed asset.

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8. In Capital Gearing Ratio, it is used to known about the Capital Structure of the company. The term Capital Gearing or Leverage refers to the proportion between Fixed Income Bearing Funds and Equity Shareholders Funds. Here it shows the increasing trend of the company. The current year shows high efficiency of capital for the company. 9. The objective of calculating Stock/ Inventory Turnover Ratio to Known how efficiently the Stock or Inventory is utilized. Generally a ratio of 8 times is considered to be satisfactory. In the year 2007-08 the ratio was highly satisfactory but from the year 2008-09 onwards the ratio shows a declining trend and fluctuating. 10. But still below the expected limit which is not good for the firm in the long run. So the firm must improve their inventory. 11. A higher turnover ratio reflects better utilization of Working Capital and lower ratio shows inefficiency. The year 2007 shows a ratio shows the utilization of the Working Capital was highly satisfactory. 12. In Fixed Asset Turnover Ratio, the net sales are continuously decreasing due to various reasons. And the Fixed Assets are raised this indicates that the firm was investing on the fixed asset irrespective of the factor of reduces sales. This results in the decrease of the ratio. So the firm must care about their fixed assets and must improve their utilization properly. 13. In Gross Profit Ratio the ideal ratio is 30% to 35%. A high Gross Profit Ratio is a sigh of efficient production or purchase management. Hence from the above computation i see that the firm is doing good as it has maintained a good gross profit ratio for the years that are studied. It indicates that the firm is running efficiently and has good prospects. But in 200910 it shows a declining and fluctuating trend so the company must careful about the profit of the company. 14. When the Operating Ratio reduces then that infers the firms profitability percentage is increasing. Here the ratio is more or less similar in all the years of evaluation. 15. The Operating Profit Ratio shows the profit for the firm though the core and basic business operation of the firm. For better financial position the Operating Profit Ratio must increase. But here more or less they are similar in all the years and this infers that the firm must concentrate more to improve the Operating Profit.

74

CONCLUSION
The study on the Financial Performance of MANNARKKAD STEEL Pvt. Ltd. Help me to understand the various ratios and other methodologies that are used to evaluate the performance of a firm in the financial perspective. Even though there are various ratios available, for measuring the financial performance of a firm it is very important to choose the relevant ratios and other techniques of evaluation. The various analyses that are done on the financial performance of MANNARKKAD STEEL Pvt. Ltd shows the firm has done reasonably good on the earlier years. In the later years the firm has faced a greater decline in the performance. This is due to increase in department for the company and to lacks of utilizing the capital to the maximum. Concentrating more of generating profit through operating profit and also increase the shareholders fund will guide the firm to a better financial position.

75

BIBLIOGRAPHY
1. Dr. S.N. Maheshwari, Principles of Management Accounting , Sultan chand & Sons, New Delhi, 1996. 2. S.P. Gupta, Statistical Methods, Sultan Chand & Sons publications, New Delhi, 2004. 3. S.P. Jain, K.L Narang, Financial Management and Accounting, Kalyani Publishers, New Delhi, 1999 4. Prasanna Chandra, Financial Management, Tata McGraw Hill publishing company Ltd, New Delhi. 2001. 5. I.M. Pandey, Financial Management , Vikas publishing House Private Ltd, New Delhi, 1999 Website: En.wikipedia.org www.pazheri.com

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APPENDIX MANNARKKAD STEEL PVT LTD :KANJIKKODE PALAKKAD BALANCE SHEET (Rs. In Lakhs) 31.03.2008 31.03.2007 31.03.2006

Particulars SOURCE OF FUNDS Share Capital Reserve & Surplus Grant - In - Aid LOAN FUNDS Secured Loans Corp./Unit account(Credit) Profit of the year

31.3.2010

31.3.2009

6,474.68 1,012.28

6,584.76 1,178.97

6,718.48 1,344.13

6,969.51 1,509.29

Nil 1,642.89

1,234.25 41,105.39 -

483.88 32,606.05 1,495.34

788.30 25,942.27 1,892.93

434.37 37,634.50 2,494.31

1,263.20 35,707.39 947.06

TOTAL APPLICATION OF FUNDS FIXED ASSETS Goss block Less : Depreciation

49,826.60

42,349.00

36,686.11

49,041.98

39,560.54

17,990.95 8,782.63

17,901.27 8,281.18

18,085.90 8,022.49

17,440.93 7,313.26

9,401.36 6,903.97

Net Block Cap.WIP & Mac Intransit

9,208.32 -

9,620.09 1.47

10,063.41 17.45

10,127.67 252.31

2,497.39 283.76

9,208.32

9,621.56

10,080.86

10,379.98

2,781.15

77

INVESTEMENTS CURRENT ASSETS , LOANS & ADVANCES Inventories Sundry Debtors Cash & Bank Balances Loans & Advances 1,578.67 20,647.60 239.37 1,434.48 1,432.50 22,012.91 3.19 1,224.43 2,720.90 35,108.12 75.55 1,969.52 2,402.26 27,141.28 127.24 1,791.96 2,631.35 20,547.63 852.94 1,521.01

Less : Current Liabilities Provisions

26,470.33 1,034.66

29,751.00 678.64

48,686.04 576.46

24,879.45 368.63

15,186.17 31.65

Total Current Liabilities

27,504.99

30,429.64

49,262.50

25,248.08

15,217.82

NET CURRENT ASSETS Corp. Office/ unit account( debit) Loss for the year

(3,604.87)

(5,756.61)

(9,388.41)

6,214.66

10,335.11

41,606.20 2,616.95

38,484.05

35,993.66

32,447.35

26,444.28

TOTAL

44,223.15

38,484.05

35,993.66

32,447.35

26,444.28

78

79