Financial performance using ratio analysis at emami ltd edited by Sanjay Gupta

A STUDY ON FINANCIAL PERFORMANCE USING RATIO ANALYSIS AT EMAMI LTD

TABLE OF CONTENTS ACKNOWLEDGEMENT……………………………….i ABSTRACT……………………………………………...ii LIST OF TABLES………………………………………..iii LIST OF CHARTS………………………………………..iv CHAPTER TITLE I INTRODUCTION 1.1 COMPANY PROFILE 1.2 INTRODUCTION TO THE STUDY

PAGE NO 1 9

REVIEW OF LITERATURE

III

OBJECTIVES OF STUDY

RESEARCH METHODOLOGY

DATA ANALYSIS AND INTERPRETATION

FINDINGS OF THE STUDY

VII

7.1 SUGGESTION AND RECOMMENDATIONS 7.2 CONCLUSION

70 71

VIII

8.1 LIMITATIONS OF THE STUDY 8.2 SCOPE FOR FURTHER STUDY

72 73

ANNEXURE BIBLIOGRAPHY……………………………………

ABSTRACT In this project, titled “A STUDY ON FINANCIAL PERFORMANCE USING RATIO ANALYSIS AT EMAMI LTD”. This aim is to analysis the liquidity and profitability position of the company using the financial tools. This study based on financial statements such as Ratio Analysis, Comparative balance sheet. By using this tools combined it enables to determine in an effective manner. The study is made to evaluate the financial position, the operational results as well as financial progress of a business concern. This study explains ways in which ratio analysis can be of assistance in long-rang planning, budgeting and asset management to strengthen financial performance and help avoid financial difficulties. The study not only throws on the financial position of a firm but also serves as a stepping stone to remedial measures for Emami Limited. This project helps to identify and give suggestion the area of weaker position of business transaction in “EMAMI LTD”.

LIST OF TABLES Table No

Name of Tables

Page No.

5.1

Current Ratio

5.2

Quick ratio

5.3

Cash ratio

5.4

Average Collection Period

5.5

Inventory Turnover Ratio

5.6

Working Capital Turnover Ratio

5.7

Fixed Assets Turnover Ratio

5.8

Proprietary Ratio

5.9

Debt to Equity Ratio

5.10

Interest Coverage Ratio

5.11

Gross Profit Ratio

5.12

Net Profit Ratio

5.13

Return on Investment

5.14

Return on Equity

5.15

Return on Total Assets

5.16

Comparative Balance Sheet as on 31st March

2001– 2002 5.17

Comparative Balance Sheet as on 31st March

2002– 2003 5.18

Comparative Balance Sheet as on 31st March

2003– 2004 5.19

Comparative Balance Sheet as on 31st March

2004– 2005 5.20

Comparative Balance Sheet as on 31st March 2005– 2006

LIST OF CHARTS Chart No. 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15

Name of Charts Current Ratio Quick ratio Cash ratio Average Collection Period Inventory Turnover Ratio Working Capital Turnover Ratio Fixed Assets Turnover Ratio Proprietary Ratio Debt to Equity Ratio Interest Coverage Ratio Gross Profit Ratio Net Profit Ratio Return on Investment Return on Equity Return on Total Assets

Page No. 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56

CHAPTER - I INTRODUCTION 1.1 COMPANY PROFILE 1.1.1 HISTORY OF THE COMPANY : Emami, which started as a cosmetics manufacturing company in the year 1974, advancing with increased momentum has expanded into Emami Group of Companies of today. Even though cosmetics and toiletries continue to be the main thrust area, the other companies in the Emami Group are performing equally brilliantly. From health care institution to medicines, from real estate to retailing and, from paper to writing instruments, Hospital, Emami is creating one success story after another. 1.1.2 Vision and Mission : Vision A company, which with the help of nature, caters to the consumersâ&#x20AC;&#x2122; needs and their inner cravings for dreams of better life, in the fields of personal and health care, both in India and throughout the world. Mission

7 •

To sharpen consumer insights to understand and meet their needs with value-added differentiated products which are safe, effective & fast.

•

To integrate our dealers, distributors, retailers and suppliers into the Emami family, thereby strengthening their ties with the company.

•

To recruit, develop and motivate the best talents in the country and provide them with an environment which is demanding and challenging.

•

To strengthen and foster in the employees, strong emotive feelings of oneness with the company. To uphold the principals of corporate governance and move towards

•

decentralization to generate long term maximum returns for all stake owners. •

To contribute whole heartedly towards the environment and society and to emerge as a model corporate citizen.

1.1.3 Values: Respect for people: We treat individuals with dignity and respect. We continue to be honest, open and ethical in all our interactions with dealers, distributors, retailers, suppliers, shareholders, customers and with each other. Consumers delight: We maximizing that our business can succeed only if we can create and keep customers. We manufacture products that offer value for money, which are differentiated and deliver safe, effective and fast solutions. Integrity: People at every level are expected to adhere to the highest standards of business ethics. Anything less is unacceptable. Our ethical conduct transcends beyond policies. It is ingrained in our corporate tradition that is transferred from one generation of employees to another. We comply with applicable government laws and regulations in the geographies where we are present. Quality:

8 We are committed to excellence in everything we do. Our credo: There is always a better way- We must think creatively, continuously innovate and pursue new ideas to achieve uncommon solutions to common problems. Teamwork: Teamwork is the cornerstone of our business that helps deliver value to our customers. We work together across titles, job responsibilities and organizational structure to share knowledge and expertise. The right environment: It is our responsibility to create an environment that helps employees realize their full potential.

Leadership: We recognize that we can be a leading company through active delegation and by creating leaders at every level of the organisation.

Community development: We continue to contribute to the communities in which we operate and address social issues responsibly. Our products are safe to make and use. We conserve natural resources and continue to invest in a better environment. Transparency and shareholder value: We are committed to be driven by our conscience and regulatory standards, to deliver value to our shareholders, commensurate with our management and financial strength.

Board of Directors The efficient functioning of this reputed company rests with the following personalities.

9 Shri R S Agarwal, Chairman Shri R S Goenka, Director Shri Sushil Kr. Goenka, Managing Director Shri A V Agarwal, Director Shri Mohan Goenka, Director Shri H V Agarwal, Director Shri Viren J Shah, Director Shri K K Khemka, Director Shri S N Jalan, Director Shri Vaidya S Chaturvedi, Director Shri K N Memani, Director Shri S K Todi, Director

Management team •

Smt. P. Sureka, Brand Director

•

Shri Manish Goenka, Brand Director

•

Shri Prasant Goenka, Brand Director

•

Shri Dhiraj Agarwal, Media Director

•

Shri Hari Gupta, President – Sales

•

Shri Ashok Dasgupta, President – Operation

•

Shri R.D. Daga, Chief of Legal Affairs

•

Shri R.K. Surana, Sr. V.P. – Purchase & Development

•

Shri N.H. Bhansali, Sr. V.P. – Finance

•

Shri S. Rajagopalan, Sr. V.P. – Production

10 •

Shri R.C. Gattani – Sr. V.P. – Projects & Development

•

Shri D. Poddar, V.P. – Co-ordination

•

Shri A.B. Mukherjee, V.P. – Logistics

•

Shri A. Ghose, V.P. – Ayurvedic Division

•

Shri A.K. Rajput, V.P. –Operations

•

Shri S. Grover, V.P. – Rural Marketing

•

Shri S.K. Mandal, G.M. – Systems

•

Shri Vimal Kr. Pande, G.M. – Sales

•

Shri P.N. Balakrishnan, G.M. –Technical

•

Shri A.K. Joshi, Company Secretary

•

Shri H.K.Goenka, G.M. – Works

•

Dr. Neena Sharma, G.M. – Ayurveda (R&D)

•

Shri Raj Kr. Gupta, G.M. – Purchase

•

Shri T.R. Rajan, G.M. – Production

•

Ms. Ratna Sinha – Head HR The most fascinating fact about the team is that though individual member of the team

functions independently and professionally in their own areas but actually they are very closely knit by a bond of fellow feeling. All the members of the Emami team happily co-exist as if family members.

1.1.4 Profile of the Organization:

11 Emami Limited is in the business of manufacturing personal, beauty and health care products. The company manufactures herbal and Ayurvedic products through the use of modern scientific laboratory practices. This blend enables the company to manufacture products that are mild, safe and effective. The company's product basket comprises over 20 products, the major being Boroplus Antiseptic Cream, Navratna Oil, Boroplus Prickly Heat Powder, Sona Chandi Chyawanprash and Amritprash, Mentho Plus Pain Balm, Fast Relief, Golden Beauty Talc, Madhuri Range of Products and others. The products are sold across all states in India and in countries like Nepal, Sri Lanka, the Gulf countries, Europe, Africa and the Middle East, among others.

1.1.5 Manufacturing: Emamiâ&#x20AC;&#x2122;s products are manufactured in Kolkata, Puducherry, Guwahati and Mumbai. The company commenced operations at its fully automated manufacturing unit in Amingaon, Guwahati in 2003-04.

1.1.6 Network: The company's dispersed manufacturing facilities are complemented with a strong product throughput, facilitated by a robust distribution network of over 2100 direct distributors and 3.9 lakhs retail outlets. With a view to reach its products deeper into the country, direct selling has been extended to rural villages. As a result, rural sales increased substantially in 2003-04 compared to the previous year. Emami is headquartered in Kolkata. The company's branch offices are located across 27 cities in India.

1.1.7 Promoters: Emami is promoted by Shri R.S.Agarwal and Shri R.S.Goenka, Kolkata based industrialists. Emamiâ&#x20AC;&#x2122;s shares are listed on the Calcutta Stock Exchange, Bombay Stock Exchange and National Stock Exchange.

1.1.8 IT BACKBONE

12 INTEGRATED INFORMATION TECHNOLOGY An efficient information technology network is necessary for a dynamic FMCG company where the market demands change faster than perhaps in any other industry. At Emami, the integration of information technology transpires on a continuous basis. This ensures that the company responds to changing market place realities faster than its competitors and that its products reach retail shelves just when they are required. In turn, this enhances brand loyalty and retains customers. A successful implementation of the ERP in the offices, factories and depots increased the company’s overall efficiency. It enabled single-point data entry and multi-point information access. The status of raw materials, packing materials, finished goods, indents and sales information gets constantly updated through ERP. This has become possible due to the Point to Point Leased Line connections. As Emami is growing rapidly, the augmented business requirement calls for a Standard ERP system. This would provide Real-Time information to the Management, which would facilitate to take quick decision. The information could also be available through email and Mobile phones. So Emami would be implementing a Standard ERP system very shortly. Sales Forecasting, Demand Planning, Process Management, Supply Chain Management, Primary and Secondary Sales, I-Supplier, I-Expenses, I-Sales will be an integral part of the Standard ERP system. Emami adopts the latest Technology for IT and communication system.

1.1.9 SALES AND DISTRIBUTION NETWORK Our Marketing & Distribution Network: Wide, penetrative and all encompassing. That is how Emami has planned its distribution network. The success of Emami has been largely due to its superior products that have reached the consumers even in the remotest regions of the country and abroad. Current Distribution Infrastructure: 

5 Regions



25 Depots / C&F Agents

13 

2,182 Direct Distributors



899 Distributors for Rural Coverage



Over 3,86,940 Retail outlets

Distribution Network Four Mother depots •

Kolkata

•

Vijayawada

•

Delhi

•

Nagpur

1.1.10 INTERNATIONAL MARKETING DIVISION Vision: To contribute profitably to the growth of the company, representing it with pride across the globe, with a single-minded focus and dedication to establishing and building global brands. Global Presence of Emami: Over the last 7 years, Emami’s presence has increased from merely few countries in CIS to over 50 countries spanning across SAARC, Gulf, CIS, North America, Europe and Africa. The company now is shifting its focus from broad basing (entering new markets) to increasing the number of successful products in existing markets to improve upon its operational efficiency. Product Portfolio: The Product Portfolio can be broadly divided into three Umbrellas’. •

Emami – The products under this Umbrella Brand promise care for the skin. The range consists of Skin care, Hair care, Dental care & Men’s care products.

•

Himani – Products under this Umbrella Brand promise cure. The range consists of OTC medicines.

14 •

Ayucare – A range of new Life style enhancing products comprising of Single ingredient herbs, food supplements, Neem & Aloe Vera range, Ayurvedic tea, Massage oil, Essential oils & blends.

•

Emma – This range comprises of customized products as per the specific needs put-up by the consumer. Typically these are all mass marketed products sold to price conscious buyers. The range presently consists of Creams, Lotions & Shampoos.

Future Strategy: Company’s business plan for International market comprises of the following key factors. •

Investment in potential markets for key Brands leading to Higher Possibility of Returns in terms of Turnover and Market Development in the long run.

•

Adding new products for various key markets.

•

Customization of product offerings under the same brand – clubbing of familiar products under the same brand.

•

Manufacturing facilities in High Tariff markets to make prices more consumerfriendly.

•

Acquisition – In certain markets, company may consider buying existing brands instead of trying to build one.

Brand Building Activities: Company spends on Media (TV and/or Press) Advertising in select countries in CIS, SAARC, Indo-China and USA, Australia & UK. All the markets are supported with POPs, Displays and other promotional material as per the requirement.

1.2 INTRODUCTION TO THE STUDY Financial Management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. Though it was a branch of economics till 1890 as a separate or discipline it is of recent origin. Financial Management is concerned with the duties of the finance manager in a business firm. He performs such varied tasks as budgeting, financial forecasting, cash management, credit administration, investment analysis and funds procurement. The recent trend towards globalization of business activity has created new demands and opportunities in managerial finance. Financial statements are prepared and presented for the external users of accounting information. As these statements are used by investors and financial analysts to examine the firm’s performance in order to make investment decisions, they should be prepared very carefully and contain as much investment decisions, they should be prepared very carefully and contain as much information as possible. Preparation of the financial statement is the responsibility of top management. The financial statements are generally prepared from the accounting records maintained by the firm. Financial performance is an important aspect which influences the long term stability, profitability and liquidity of an organization. Usually, financial ratios are said to be the parameters of the financial performance. The Evaluation of financial performance had been taken up for the study with “EMAMI LIMITED” as the project. Analysis of Financial performances are of greater assistance in locating the weak spots at the Emami limited eventhough the overall performance may be satisfactory. This further helps in  Financial forecasting and planning.  Communicate the strength and financial standing of the Emami limited.  For effective control of business.

CHAPTER â&#x20AC;&#x201C; II REVIEW OF LITERATURE 2.1 Financial statements Analysis: The financial statements provide some extremely useful information to the extent that the balance sheet mirrors the financial position on a particular date in terms of the structure of assets, liabilities and ownersâ&#x20AC;&#x2122; equity, and so on and the profit an loss account shows the results of operations during a certain period of time in terms of the revenues obtained and the cost incurred during the year. Thus, the financial statements provide a summarized view of the financial position and operations of a firm. Therefore, much an be learnt about a firm from a careful examination of its financial statements as invaluable documents performance reports. The analysis of financial statements is thus, an important aid to financial analysis. The focus of financial analysis is on key figures in the financial statements and the significant relationship that exists between them. The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firmâ&#x20AC;&#x2122;s position and performance. The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusion. In brief, the financial analysis is the process of selection, relation and evaluation.

2.2 Ratio Analysis: Ratio analysis is a widely-use tool of financial analysis. It can be used to compare the risk and return relationships of firms of different sizes. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weakness of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items and variables. These ratios are expressed as (i) percentages, (ii) fraction and (iii) proportion of numbers. These alternative methods of expressing items which are related to each other are, for purposes of financial analysis, referred to as ratio analysis. It should be noted that computing the ratios does not add any information not already inherent in the above figures of profits and sales. What the ratio do is that they reveal the relationship in a more meaningful way so as to enable equity investors, management and lenders make better investment and credit decisions.

2.3 TYPES OF RATIOS: 2.3.1 Liquidity Ratios: The importance of adequate liquidity in the sense of the ability of a firm to meet current/short-term obligations when they become due for payment can hardly be overstresses. In fact, liquidity is a prerequisite for the very survival of a firm. The short-term creditors of the firm are interested in the short-term solvency or liquidity of a firm. The short-term creditors of the firm are interested in the short-term solvency or liquidity of a firm. But liquidity implies from the viewpoint of utilization of the funds of the firm, that funds are idle or they earn very little. A proper balance between the two contradictory requirements, that is, liquidity and profitability, is required for efficient financial management. The liquidity ratios measures the ability of a firm to meet its short-term obligations and reflect the short-term financial strength and solvency of a firm. A. Current Ratio: The current ratio is the ratio of total current assets to total current liabilities. It is calculated by dividing current assets by current liabilities: Current assets Current Ratio = ________________ Current liabilities The current assets of a firm, as already stated, represent those assets which can be, in the ordinary course of business, converted into cash within a short period of time, normally not exceeding one year and include cash and bank balances, marketable securities, inventory of raw materials, semi-finished (work-in-progress) and finished goods, debtors net of provision for bad and doubtful debts, bills receivable and prepaid expenses. The current liabilities defined as liabilities which are short-term maturing obligations to be met, as originally contemplated, within a year, consist of trade creditors, bills payable, bank credit, provision for taxation, dividends payable and outstanding expenses.

18 B. Quick Ratio The liquidity ratio is a measure of liquidity designed to overcome this defect of the current ratio. It is often referred to as quick ratio because it is a measurement of a firmâ&#x20AC;&#x2122;s ability to convert its current assets quickly into cash in order to meet its current liabilities. Thus, it is a measure of quick or acid liquidity. The acid-test ratio is the ratio between quick assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. Quick assets Quick Ratio = ____________________ Current liabilities The term quick assets refers to current assets which can be converted into cash immediately or at a short notice without diminution of value. Included in this category of current assets are ( i ) cash an bank balance ; (ii) short-term marketable securities and (iii) debtors/receivables. Thus, the current which are included are: prepaid expenses and inventory. The exclusion of expenses by their very nature are not available to pay off current debts. They merely reduce the amount of cash required in one period because of payment in a prior period. C. Cash Ratio: This ratio is also known as cash position ratio or super quick ratio. It is a variation of quick ratio. This ratio establishes the relationship absolute liquid asserts and current liabilities. Absolute liquid assets are cash in hand, bank balance and readily marketable securities. Both the debtors and bills receivable are excluded from liquid assets as there is always an uncertainty with respect to their realization. In other words, liquid assets minus debtors and bills receivable are absolute liquid assets. In this form of formula: Cash in hand & at bank + Marketable securities Cash Ratio = ________________________________________ Current liabilities

2.3.2 Activity Ratios: Activity ratios are concerned with measuring the efficiency in asset management. These ratios are also called efficiency ratios or asset utilization ratios. The efficiency with which the assets are used would be reflected in the speed and rapidity with which assets are converted into sakes. The greater is the rte of turnover or conversion, the more efficient is the utilization of asses, other thongs being equal. For this reason, such ratios are designed as turnover ratios. Turnover is the primary mode for measuring the extent of efficient employment of assets by relating the assets to sales. An activity ratio may, therefore, be defined as a test of the relationship between sales and the various assets of a firm. A. Average collection period: In order t know the rate at which cash is generated by turnover of receivables, the debtors turnover ratio is supplemented by another ratio viz., average collection period. The average collection period states unambiguously the number of daysâ&#x20AC;&#x2122; average credit sales tied up in the amount owed by the buyers. The ratio indicates the extent to which the debts have been collected in time. In other words, it gives the average collection period. Prompt collection of book debts will release such funds which may, then, put to some other use. The ratio may be calculate by 360 days Average collection period = _____________________ Debtors turnover ratio

B. Inventory Turnover Ratio: This ratio indicates the number of times inventory is replaced during the year. It measures the relationship between the cost of goods sold and the inventory level. The ratio can be computed in Cost of goods sold Inventory Turnover Ratio = ___________________ Average Inventory

20 The average inventory figure may be of two types. In the first place, it may be the monthly inventory average. The monthly average can be found by adding the opening inventory of each month from, in case of the accounting year being a calendar year, January through January an dividing the total by thirteen. If the firmâ&#x20AC;&#x2122;s accounting year is other than a calendar year, say a financial year, (April and March), the average level of inventory can be computed by adding the opening inventory of each month from April through April and dividing the total by thirteen. This approach has the advantage of being free from bias as it smoothens out the fluctuations in inventory level at different periods. This is particularly true of firms in seasonal industries. However, a serious limitation of this approach is that detailed month-wise information may present practical problems of collection for the analyst. Therefore, average inventory may be obtained by using another basis, namely, the average of the opening inventory may be obtained by using another basis, namely the average of the opening inventory and the closing inventory. C. Working Capital Turnover Ratio: This ratio, should the number of times the working capital results in sales. In otherwords, this ratio indicates the efficiency or otherwise in the utilization of short tern funds in making sales. Working capital means the excess of current over the current liabilities. In fact, in the short run, it is the current liabilities which play a major role. A careful handling of the short term assets and funds will mean a reduction in the amount of capital employed, thereby improving turnover. The following formula is used to measure this ratio: Sales Working capital turnover ratio = _____________________ Net Working Capital

D. Fixed Assets Turnover Ratio: As the organisation employs capital on fixed assets for the purpose of equipping itself with the required manufacturing facilities to produce goods and services which are saleable to the customers to earn revenue, it is necessary to measure the degree of success achieved in this bearing. This ratio expresses the relationship between cost of goods sold or sales and fixed assets. The following is used for measurement of the ratio.

21 Sales Fixed Assets Turnover =________________ Net fixed assets In computing fixed assets turnover ratio, fixed assets are generally taken at written down value at the end of the year. However, there is no rigidity about it. It may be taken at the original cost or at the present market value depending on the object of comparison. In fact, the ratio will have automatic improvement if the written down value is used. It would be better if the ratio is worked out on the basis of the original cost of fixed assets. We will take fixed assets at cost less depreciation while working this ratio.

2.3.3 Financial Leverage (Gearing) Ratios The long-term lenders/creditors would be judge the soundness of a firm on the basis of the long-term financial strength measured in terms of its ability to pay the interest regularly as well as repay the instalment of the principal on due dates or in one lump sum at the time of maturity. The long term solvency of a firm an be examined by using leverage or capital structure ratios. The leverage or capital structure ratios may be defined as financial ratios which throw light on the long-term solvency of a firm as reflected in its ability to assure the long-term lenders with regard to (i) periodic payment of interest during the period of the loan and (ii) repayment of principal on maturity or in predetermined instalments at due dates. A. Proprietary Ratio: This ratio is also known as ‘Owners fund ratio’ (or) ‘Shareholders equity ratio’ (or) ‘Equity ratio’ (or) ‘Net worth ratio’. This ratio establishes the relationship between the proprietors’ funds and total tangible assets. The formula for this ratio may be written as follows. Proprietors’ funds Proprietary Ratio = _____________________ Total tangible assets Proprietors funds mean the sum of the paid-up equity share capital plus preference share capital plus reserve and surplus, both of capital and revenue nature. From the sum so arrived

22 at, intangible assets like goodwill and fictitious assets capitalized as “Miscellaneous expenditure” should be deducted. Funds payable to others should not be added. It may be noted that total tangible assets include fixed assets, current assets but exclude fictitious assets like preliminary expenses, profit & loss account debit balance etc. B. Debt to Equity Ratio The relationship between borrowed funds and owner’s capital is a popular measure of the long-term financial solvency of a firm. The relationship is shown by the debt-equity ratios. This ratio reflects the relative claims of creditors and shareholders against the assets of the firm. The relationship between outsiders’ claims and owner’s capital can be shown in different ways and, accordingly, there are many variants of the debt-equity ratio. Total debt Debt to Equity Ratio = ____________ Total equity The debt-equity ratio is, thus, the ratio of total outside liabilities to owners’ total funds. In other words, it is the ratio of the amount invested by the owners of business. C. Interest Coverage Ratio It is also known as ‘time interest-earned ratio’. This ratio measures the debt servicing capacity of a firm insofar as fixed interest on long-term loan is concerned. It is determined by dividing the operating profits or earnings before interest and taxes (EBIT) by the fixed interest charges on loans. Thus, EBIT Interest Coverage Ratio =_______________ Interest charges It should be noted that this ratio uses the concept of net profits before taxes because interest is tax-deductible so that tax is calculated after paying interest on long-term loan. This ratio, as the name suggests, indicates the extent to which a fall in EBIT is tolerable in that the ability of the firm to service its interest payments would not be adversely affected. For

23 instance, an interest coverage of 10 times would imply that even if the firmâ&#x20AC;&#x2122;s EBIT were to decline to one-tenth of the present level, the operating profits available for servicing the interest on loan would still be equivalent to the claims of the lendors. On the other hand, a coverage of five times would indicate that a fall in operating earnings only to upto one-fifth level can be tolerated. Form the point of view of the lenders, the larger the coverage, the greater is the ability of the firm to handle fixed-charge liabilities and the more assured is the payment of interest to tem, However, too high a ratio may imply unused debt capacity. In contrast, a low ratio is a danger signal that the firm is using excessive debt and does not have to offer assured payment of interest to the lenders.

2.3.4 Profitability Ratios The main object of a business concern is to earn profit. A company should earn profits to survive and to grow over a long period. The operating efficiency of a business concern is ultimately adjudged by the profits earned by it. Profitability should distinguished from profits. Profits refer to the absolute quantum of profit, whereas profitability refers to the ability to earn profits. In other words, an ability to earn the maximum from the maximum use of available resources by the business concern is known as profitability. Profitability reflects the final result of a business operation. Profitability ratios are employed by the management in order to assess how efficiently they carry on business operations. Profitability is the main base for liquidity as well as solvency. Creditors, banks and financial institutions are interest obligations and regular and improved profits enhance the long term solvency position of the business. A. Gross Profit Margin The gross profit margin is also known as gross margin. It is calculated by dividing gross profit by sales. Thus, Gross profit Gross Profit Margin = ________________ Sales

*100

24 Gross profit is the result of the relationship between prices, sales volume and cost. A change in the gross margin can be brought about by changes in any of these factors. The gross margin represents the limit beyond which fall in sales price are outside the tolerance limit. Further, the gross profit ratio/margin can also be used in determining the extent of loss caused by theft, spoilage, damage, and so on in the case of those firms which follow the policy of fixed gross profit margin in pricing their products. A high ratio of gross profit to sales is a sign of good management as it implies that the cost of production of the firm is relatively low. It may also be indicative of a higher sales price without a corresponding increase in the cost of goods sold. It is also likely that cost of sales might have declined without a corresponding decline in sales price. Nevertheless, a very high and rising gross margin may also be the result of unsatisfactory basis of valuation of stock, that is, overvaluation of closing stock and/or undervaluation of opening stock. A relatively low gross margin is definitely a danger signal, warranting a careful and detailed analysis of the factors responsible for it. The important contributory factors may be (i) a high cost of production reflecting acquisition of raw materials and other inputs on unfavorable terms, inefficient utilization of current as well as fixed assets, and so on; and (ii) a low selling price resulting from severe competition, inferior quality of the product, lack o f demand, and so on. A through investigation of the factors having a bearing on the low gross margin is called for. A firm should have a reasonable gross margin to ensure adequate coverage for operating expenses of the firm and sufficient return to the owners of the business, which is reflected in the net profit margin. B. Net Profit margin: It is also known as net margin. This measures the relationship between net profits and sales of a firm. Earnings after interest and taxes Net Profit Margin =______________________________ *100 Net Sales A high net profit margin would ensure adequate return to the owners as well as enable a firm to withstand adverse economic conditions when selling price is declining, cost of production is rising and demand for the product is falling.

25 A low net profit margin has the opposite implications. However, a firm with low profit margin can earn a high rate of return on investment if it has a higher turnover. This aspect is covered in detail in the subsequent discussion. The profit margin should, therefore, be evaluated in relation to the turnover ratio. In other words, the overall rate of return is the product of the net profit margin and the investment turnover ratio. Similarly, the gross profit margin and the net profit margin should be jointly evaluated. C. Return on Investment: The basic objective of making investments in any business is to obtain satisfactory return on capital invested. The nature of this return will be influenced by factors such as, the type of the industry, the risk involved, the risk of inflation, the comparative rate of return on giltedged securities and fluctuations in external economic conditions. For this purpose, the shareholders can measure the success of a company in terms of profit related to capital employed. The return on capital employed can be used to show the efficiency of the business as a whole. The overall performance and the most important, therefore, can be judged by working out a ratio between profit earned and capital employed. The resultant ratio, usually expressed as a percentage, is called rate of return or return on capital employed to express the idea, the purpose is to ascertain how much income the use of Rs.100 of capital generates. The return on “capital employed” may be based on gross capital employed or net capital employed. The formula for this ratio may be written as follows. Operating profit Return on Investment =_________________ Capital Employed

D. Return on Equity (ROE) This is also known as return on net worth or return on proprietors’ fund. The preference shareholders get the dividend on their holdings at a fixed rate and before dividend to equity shareholders, the real risk remains with the equity shareholders. Moreover, they are the owners of total profits earned by the firms after paying dividend on preference shares. Therefore this ratio attempts to measure the firm’s profitability in terms of return to equity

26 shareholders. This ratio is calculated by dividing the profit after taxes and preference dividend by the equity capital. Thus

Net profit after taxes and preference dividend Return on Equity =__________________________________________ Equity capital E. Return on Total Assets This ratio is also known as the profit-to-assets ratio. This ratio establishes the relationship between net profits and assets. As these two terms have conceptual differences, the ratio may be calculated taking the meaning of the terms according to the purpose and intent of analysis. Usually, the following formula is used to determine the return on total assets ratio. Net profit after taxes and interest Return on Total Assets =_________________________________ *100 Total assets

2.4 Comparative Balance sheet: Comparative balance sheets as on two or more different dates can be used for comparing assets, liabilities, capital and finding out any increase or decrease in those items. In the words of Foulke â&#x20AC;&#x153;comparative balance sheet analysis is the study of the trend of the same items, group of items and computed items in two or more balance sheets of the same business enterprise on different datesâ&#x20AC;?. Such analysis often yields valuable information as regards progress of business concern. While the single balance sheet represent balances of accounts drawn at the end of an accounting period, the comparative balance sheet represent not nearly the balance of accounts drawn on two different dates, but also the extent of their increase or decrease between these two dates. The single balance sheet focuses on the financial status of the concern as on a particular date, the comparative balance sheet focuses on the changes that have taken place in one accounting period. The changes are the direct outcome of operational activities, conversion of assets, liability and capital form into others as well as a various interactions among assets, liability and capital.

2.5 Tips to improve your financial health. Author: Bill Hudley Spend less money, or save more money or do both. If the annual income does nothing more than remain constant, your financial condition will improve. The above statement may sound come across as flippant, but itâ&#x20AC;&#x2122;s a fact of life, regardless. Needless to say we all have different personalities and different responses to needs and desires in life. A very important yardstick, in my view, is the growth rate of personal assets. If you sit down to all of the savings accounts, investment accounts and properly values and the total value is greater than the same time of the previous year, it stands to improve that the financial health in tact and possibly improved.

2.6 Steps to Improve Financial Performance Author: Terry Peltes Given the challenges facing physicians, successful practices must take proactive steps to combat negative trends and improve their overall financial performance. To improve practice operations, processes can be streamlined to reduce costs; productivity improvements can be implemented by physicians and employees to increase revenue; a reporting structure can be created that allows for better decision making by physicians and employees; and a rewards system can be implemented to recognize hard-working employees. To determine how you can improve your medical practice's performance, consider the following management procedures. 1) Internal Cost Reduction Strategies Cost reduction strategies focus on reducing the internal costs generated by medical services provided to the marketplace.

28 2) External Cost Reduction Strategies These strategies include the cost of services purchased from outside consultants or vendors. 3) Asset and Credit Management Strategies These strategies ensure that you are getting the most value from the resources invested in your practice. 4) Personnel Resources When managed properly, personnel costs and productivity can have a substantial impact on practice profitability. 5) Management Reporting The use of timely, relevant, properly formatted reports to manage your practice cannot be overstated. This is a crucial link between setting financial and operational goals and managing the practice to achieve them. 6) Revenue Enhancement Physicians can improve their financial performance by improving their ability to negotiate favorable managed care contracts and reducing practice expenses as a percentage of revenue.

2.7 Excellence in Financial Management Author: Matt H. Evans Ratio analysis can be used to determine the time required to pay accounts payable invoices. If the average number of days is close to the average credit terms, this may indicate aggressive working capital management; i.e. using spontaneous sources of financing. However, if the number of days is well beyond the average credit terms, this could indicate difficulty in making payments to creditors.

2.8 Analyze Investments Quickly With Ratios Author: Jonas Elmerraji The information you need to calculate ratios is easy to come by: Every single number or figure you need can be found in a company's financial statements. Once you have the raw data, you can plug in right into your financial analysis and put those numbers to work for you. Everyone wants an edge in investing but one of the best tools out there frequently is frequently misunderstood and avoided by new investors. When you understand what ratios tell you, as well as where to find all the information you need to compute them, there's no reason why you shouldn't be able to make the numbers work in your favor.

CHAPTER – III OBJECTIVES 3.1 Primary Objective: To evaluate the financial efficiency of “EMAMI LIMITED”.

3.2 Secondary Objectives: i.

To analyse the liquidity solvency position of the firm.

ii.

To study the working capital management of the company.

iii.

To understand the profitability position of the firm.

iv.

To assess the factors influencing the financial performance of the organisation.

To understand the over all financial position of the company.

CHAPTER – IV RESEARCH METHODOLOGY

4.1 METHODOLOGY: The project evaluates the financial performance one of the company with help of the most appropriate tool of financial analysis like ratio analysis and comparative balance sheet. Hence, it is essentially fact finding study.

4.2 Primary Data: Primary data is the first hand information that is collected during the period of research. Primary data has been collected through discussions held with the staffs in the accounts department. Some types of information were gathered through oral conversations with the cashier, taxation officer etc.

4.3 Secondary Data: Secondary data studies whole company records and company’s balance sheet in which the project work has been done. In addition, a number of reference books, journals and reports were also used to formulate the theoretical model for the study. And some information were also drawn from the websites.

4.4 Tools used in analysis: •

Ratio analysis

•

Comparative balance sheet

4.5 Period of study: The study covers the period of 2001-2002 to 2005-2006 in Emami Limited.

CHAPTER – V DATA ANALYSIS AND INTERPRETATION 5.1 FINANCIAL PERFORMANCE EVALUATION USING RATIO ANALYSIS Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “The Indicated Quotient of Two Mathematical Expressions” and as “The Relationship between Two or More Things”. In financial analysis, a ratio is used as a benchmark for evaluating the financial position and performance of firm. The absolute accounting figures reported in the financial statement do not provide a meaningful understanding of the performance and financial position of a firm. The relationship between two accounting figures, expressed mathematically is known as a financial ratio. Ratios help to summaries large quantities of financial data and to make qualitative about the firm’s financial performance. The point to note is that a ratio reflecting a quantitative relationship helps to form a qualitative judgment. Such is the nature of all financial ratios. 5.1.1 Significance of Using Ratios: The significance of a ratio can only truly be appreciated when: 1. It is compared with other ratios in the same set of financial statements. 2. It is compared with the same ratio in previous financial statements (trend analysis). 3. It is compared with a standard of performance (industry average). Such a standard may be either the ratio which represents the typical performance of the trade or industry, or the ratio which represents the target set by management as desirable for the business.

5.2 Types of Ratios 5.2.1 Liquidity Ratios •

Liquidity refers to the ability of a firm to meet its short-term financial obligations when and as they fall due.

•

The main concern of liquidity ratio is to measure the ability of the firms to meet their short-term maturing obligations. Failure to do this will result in the total failure of the business, as it would be forced into liquidation.

33 A. Current Ratio The Current Ratio expresses the relationship between the firm’s current assets and its current liabilities. Current assets normally include cash, marketable securities, accounts receivable and inventories. Current liabilities consist of accounts payable, short term notes payable, short-term loans, current maturities of long term debt, accrued income taxes and other accrued expenses (wages).

Current assets Current Ratio = ________________ Current liabilities Significance: It is generally accepted that current assets should be 2 times the current liabilities. In a sound business, a current ratio of 2:1 is considered an ideal one. If current ratio is lower than 2:1, the short term solvency of the firm is considered doubtful and it shows that the firm is not in a position to meet its current liabilities in times and when they are due to mature. A higher current ratio is considered to be an indication that of the firm is liquid and can meet its short term liabilities on maturity. Higher current ratio represents a cushion to short-term creditors, “the higher the current ratio, the greater the margin of safety to the creditors”. Table: 5.1

Interpretation:

CURRENT RATIO Current

Current

Year

Ratio

Liabilities

Ratio

2001 – 2002

Rs. in lakhs 9956.81

Rs. in lakhs 775.49

12.83

2002 – 2003

8825.79

644.26

13.69

2003 – 2004

9726.73

1154.12

8.43

2004 – 2005

9884.64

1501.76

6.56

2005 – 2006

11949.47

3905.45

3.06

34 As a conventional rule, a current ratio of 2:1 is considered satisfactory. This rule is base on the logic that in a worse situation even if the value of current assets becomes half, the firm will be able to meet its obligation. The current ratio represents the margin of safety for creditors. The current ratio has been decreasing year after year which shows decreasing working capital. From the above statement the fact is depicted that the liquidity position of the Emami limited is satisfactory because all the five years current ratio is not below the standard ratio 2:1.

Chart no.: 5.1

B. Quick Ratio

CURRENT RATIO

35 Measures assets that are quickly converted into cash and they are compared with current liabilities. This ratio realizes that some of current assets are not easily convertible to cash e.g. inventories. The quick ratio, also referred to as acid test ratio, examines the ability of the business to cover its short-term obligations from its “quick” assets only (i.e. it ignores stock). The quick ratio is calculated as follows Quick assets Quick Ratio = ____________________ Current liabilities Significance: The standard liquid ratio is supposed to be 1:1 i.e., liquid assets should be equal to current liabilities. If the ratio is higher, i.e., liquid assets are more than the current liabilities, the short term financial position is supposed to be very sound. On the other hand, if the ratio is low, i.e., current liabilities are more than the liquid assets, the short term financial position of the business shall be deemed to be unsound. When used in conjunction with current ratio, the liquid ratio gives a better picture of the firm’s capacity to meet its short-term obligations out of short-term assets. Table: 5.2

Interpretation:

QUICK RATIO Quick

Current

Year

Assets

Liabilities

2001 – 2002

Rs. in lakhs 6918.43

2002 – 2003

Ratio

Rs. in lakhs 775.49

8.92

4848.16

644.26

7.52

2003 – 2004

6629.47

1154.12

5.74

2004 – 2005

6210.06

1501.76

4.13

2005 – 2006

8287.01

3905.45

2.12

36 As a quick ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. It is a more rigorous and penetrating test of the liquidity position of a firm. But the liquid ratio has been decreasing year after year which indicates a high operation of the business. From the above statement, it is clear that the liquidity position of the Emami limited is satisfactory. Because the entire five years liquid ratio is not below the standard ratio of 1:1.

Chart no.: 5.2

C. Cash ratio:

QUICK RATIO

37 This is also known as cash position ratio or super quick ratio. It is a variation of quick ratio. This ratio establishes the relationship between absolute liquid assets and current liabilities. Absolute liquid assets are cash in hand, bank balance and readily marketable securities. Both the debtors and the bills receivable are exclude from liquid assets as there is always an uncertainty with respect to their realization. In other words, liquid assets minus debtors and bills receivable are absolute liquid assets. The cash ratio is calculated as follows Cash in hand & at bank + Marketable securities Cash Ratio = ________________________________________ Current liabilities Significance: This ratio gains much significance only when it is used in conjunction with the first two ratios. The accepted norm for this ratio is 50% or 0.5:1 or 1:2(i.e.,) Re. 1 worth absolute liquid assets are considered adequate to pay Rs.2 worth current liabilities in time as all the creditors are not expected to demand cash at the same time and then cash may also be realized from debtors and inventories. This test is a more rigorous measure of a firm’s liquidity position. This type of ratio is not widely used in practice. Table: 5.3

Interpretation:

CASH RATIO Cash in Hand

Current

Year

& at Bank

Liabilities

Ratio

2001 – 2002

Rs. in lakhs 130.54

Rs. in lakhs 775.49

0.17

2002 – 2003

141.15

644.26

0.22

2003 – 2004

46.11

1154.12

0.04

2004 – 2005

34.43

1501.76

0.02

2005 – 2006

82.12

3905.45

0.02

38 The acceptable norm for this ratio is 50% or 1:2. But the cash ratio is below the accepted norm. So the cash position is not utilized effectively and efficiently.

Chart no.: 5.3

5.2.2 Activity Ratio:

CASH RATIO

39 If a business does not use its assets effectively, investors in the business would rather take their money and place it somewhere else. In order for the assets to be used effectively, the business needs a high turnover. Unless the business continues to generate high turnover, assets will be idle as it is impossible to buy and sell fixed assets continuously as turnover changes. Activity ratios are therefore used to assess how active various assets are in the business. A. Average Collection Period: The average collection period measures the quality of debtors since it indicates the speed of their collection. •

The shorter the average collection period, the better the quality of debtors, as a short collection period implies the prompt payment by debtors.

•

The average collection period should be compared against the firm’s credit terms and policy to judge its credit and collection efficiency.

•

An excessively long collection period implies a very liberal and inefficient credit and collection performance.

•

The delay in collection of cash impairs the firm’s liquidity. On the other hand, too low a collection period is not necessarily favorable, rather it may indicate a very restrictive credit and collection policy which may curtail sales and hence adversely affect profit. 360 days Average collection period = _____________________ Debtors turnover ratio

Significance: Average collection period indicates the quality of debtors by measuring the rapidity or slowness in the collection process. Generally, the shorter the average collection period, the better is the quality of debtors as a short collection period implies quick payment by debtors. Similarly, a higher collection period implies as inefficient collection performance which, in turn, adversely affects the liquidity or short term paying capacity of a firm out of its current liabilities. Moreover, longer the average collection period, larger is the chances of bad debts. Table: 5.4

AVERAGE COLLECTION PERIOD

40 Debtors Turnover Ratio Year 2001 – 2002

Days 360

Rs. in lakhs 4211.03

Days 0.09

2002 – 2003

360

3100.98

0.12

2003 – 2004

360

4405.70

0.08

2004 – 2005

360

3524.79

0.10

2005 – 2006

360

3667.52

0.10

Interpretation: The shorter the collection period, the better the quality of debtors. Since a short collection period implies the prompt payment by debtors. Here, collection period decrease from 2003-2004 and increased slightly in the year 2005-2006. Therefore the average collection period of Emami ltd for the five years are satisfactory. Chart no.: 5.4

AVERAGE COLLECTION PERIOD

B. Inventory Turnover Ratio: This ratio measures the stock in relation to turnover in order to determine how often the stock turns over in the business. It indicates the efficiency of the firm in selling its product. It is calculated by dividing he cost of goods sold by the average inventory. Cost of goods sold Inventory Turnover Ratio = ___________________ Average Inventory Significance: This ratio is calculated to ascertain the number of times the stock is turned over during the periods. In other words, it is an indication of the velocity of the movement of the stock during the year. In case of decrease in sales, this ratio will decrease. This serves as a check on the control of stock in a business. This ratio will reveal the excess stock and accumulation of obsolete or damaged stock. The ratio of net sales to stock is satisfactory relationship, if the stock is more than three-fourths of the net working capital. This ratio gives the rate at which inventories are converted into sales and then into cash and thus helps in determining the liquidity of a firm.

42 Table: 5.5

INVENTORY TURNOVER RATIO Cost of goods

Average

Year

sold

Inventory

Ratio

2001 – 2002

Rs. in lakhs 11209.73

Rs. in lakhs 3732.19

3.0

2002 – 2003

11939.46

3508.00

3.4

2003 – 2004

13708.36

3537.44

3.88

2004 – 2005

12609.33

3385.92

3.72

2005 – 2006

17543.71

3668.52

4.78

Interpretation: A higher turnover ratio is always beneficial to the concern. In this the number of times the inventory is turned over has been increasing from one year to another year. This increasing turnover indicates immediate sales. And in turn activates production process and is responsible for further development in the business. This indicates a good inventory policy of the company. Thus the stock turnover ratios of Emami Limited, for the five years are satisfactory.

Chart no.: 5.5

INVENTORY TURNOVER RATIO

C. Working capital turnover ratio: This ratio shows the number of times the working capital results in sales. In other words, this ratio indicates the efficiency or otherwise in the utilization of short term funds in making sales. Working capital means the excess of current assets over current liabilities. In fact, in the short run, it is the current assets and current liabilities which pay a major role. A careful handling of the short term assets and funds will mean a reduction in the amount of capital employed, thereby improving turnover. The following formula is used to measure this ratio: Sales Working capital turnover ratio = _____________________

44 Net Working Capital Significance: This ratio is used to assess the efficiency with which the working capital has been utilized in a business. A higher working capital turnover indicates either the favorable turnover of inventories and receivables and/or the inadequate of net working capital accompanied by low turnover of inventories and receivables. A low ratio signifies either the excess of net working capital or slow turnover of inventories and receivables or both. This ratio can at best be used by making of comparative and trend analysis for different firms in the same industry and for various periods. Table: 5.6

WORKING CAPITAL TURNOVER RATIO Sales

Year Rs. in lakhs 2001 – 2002 18262.60

Net Working Capital Rs. in lakhs 9181.32

Ratio 1.99

2002 – 2003

19808.5

8181.53

2.42

2003 – 2004

21612.94

8572.61

2.52

2004 – 2005

21885.20

8382.88

2.61

2005 – 2006

30087.56

8044.02

3.74

Interpretation: The Working Capital Turnover Ratio is increasing year after year. It can be noted that the change is due to the fluctuation in sales or current liabilities. These higher ratio are indicators of lower investment of working Capital and more profit. Thus, Working Capital Turnover ratios for the five years are satisfactory.

45 Chart no.: 5.6

WORKING CAPITAL TURNOVER RATIO

D. Fixed Assets Turnover Ratio: The fixed assets turnover ratio measures the efficiency with which the firm has been using its fixed assets to generate sales. It is calculated by dividing the firmâ&#x20AC;&#x2122;s sales by its net fixed assets as follows: Sales Fixed Assets Turnover =________________ Net fixed assets

Significance:

46 This ratio gives an ideal about adequate investment or over investment or under investment in fixed assets. As a rule, over-investment in unprofitable fixed assets should be avoided to the possible extent. Under-investment is also equally bad affecting unfavorably the operating costs and consequently the profit. In manufacturing concerns, the ratio is important and appropriate, since sales are produced not only by use of working capital but also the capital invested in fixed assets. An increase in this ratio is the indicator of efficiency in work performance and a decrease in this ratio speaks of unwise and improper investment in fixed assets.

Table: 5.7

FIXED ASSETS TURNOVER RATIO Net Fixed

Year

Sales

Assets

Ratio

Rs. in lakhs 2001 – 2002 18262.60

Rs. in lakhs 25169.20

0.73

2002 – 2003 19808.50

23599.92

0.84

2003 – 2004 21612.94

23293.33

0.93

2004 – 2005 21885.20

21863.99

1.00

2005 – 2006 30087.56

20245.48

1.49

Interpretation: The fixed assets turnover ratio is increasing year after year. The overall higher ratio indicates the efficient utilization of the fixed assets. Thus the fixed assets turnover ratio for the five years are satisfactory as such there is no under utilization of the fixed assets.

Chart no.: 5.7

FIXED ASSETS TURNOVER RATIO

5.2.3 Financial Leverage (Gearing) Ratios •

The ratios indicate the degree to which the activities of a firm are supported by creditors’ funds as opposed to owners.

•

The relationship of owner’s equity to borrowed funds is an important indicator of financial strength.

•

The debt requires fixed interest payments and repayment of the loan and legal action

can be taken if any amounts due are not paid at the appointed time. A relatively high proportion of funds contributed by the owners indicates a cushion (surplus) which shields creditors against possible losses from default in payment.

A. Proprietary Ratio: This ratio is also known as ‘Owners fund ratio’ (or) ‘Shareholders equity ratio’ (or) ‘Equity ratio’ (or) ‘Net worth ratio’. This ratio establishes the relationship between the proprietors’ fund and total tangible assets. The formula for this ratio may be written as follows. Proprietors’ funds Proprietary Ratio = _____________________ Total tangible assets Significance: This ratio represents the relationship of owner’s funds to total tangible assets, higher the ratio or the share of the shareholders in the total capital of the company, better is the long term solvency position of the company. This ratio is of importance to the creditors who can ascertain the proportion of the shareholders’ funds in the total assets employed in the firm. A ratio below 50% may be alarming for the creditors since they may have to lose heavily in the event of company’s liquidation on account of heavy losses.

Table: 5.8

PROPRIETARY RATIO Proprietors Fund

Total Tangible Assets

Year 2001 – 2002

Rs. in lakhs 27653.24

Rs. in lakhs 35932.12

Ratio 0.77

2002 – 2003

27629.57

33237.8

0.83

2003 – 2004

27906.09

33710.84

0.83

2004 – 2005

31683.74

37139.68

0.85

2005 – 2006

33521.63

40904.75

0.82

Interpretation: This ratio is particularly important to the creditors and it focuses on the general financial strength of the business. A ratio of j50% will be alarming for the creditors. As such the proprietary ratio of the five years is above 50%. Therefore it indicates relatively little danger to the creditors, etc. And a better performance of the company. Chart no.: 5.8

PROPRIETARY RATIO

B. Debt to Equity ratio This ratio indicates the extent to which debt is covered by shareholders’ funds. It reflects the relative position of the equity holders and the lenders and indicates the company’s policy on the mix of capital funds. The debt to equity ratio is calculated as follows: Total debt Debt to Equity Ratio = ____________ Total equity

50 Significance: The importance of debt-equity ratio is very well reflected in the words of Weston and brigham which are reproduced here: “Debt-equity ratio indicates to what extent the firm depends upon outsiders for its existence. For the creditors, this provides a margin of safety. For the owners, it is useful to measure the extent to which they can gain the benefits of maintaining control over the firm with a limited investment:” The debt-equity ratio states unambiguously the amount of assets provided by the outsiders for every one rupee of assets provided by the shareholders of the company.

Table: 5.9

DEBT TO EQUITY RATIO Total Debt

Year 2001 – 2002

Interpretation:

Total Equity

Rs. in lakhs Rs. in lakhs 7241.39 27653.24

Ratio 0.26

2002 – 2003

4628.27

27629.57

0.17

2003 – 2004

4221.63

27906.09

0.15

2004 – 2005

3474.18

31683.74

0.11

2005 – 2006

3216.67

33521.63

0.10

The debt to equity ratio is decreasing year after year. A low debt equity ratio is considered favorable from management. It means greater claim of shareholders over the assets of the company than those of creditors. For the company also, the servicing of debt is less burdensome and consequently its credit standing is not adversely affected. Therefore debt to equity ratio is satisfactory to the company.

Chart no.: 5.9

C. Interest coverage ratio

DEBT TO EQUITY RATIO

52 The times interest earned shows how many times the business can pay its interest bills from profit earned. Present and prospective loan creditors such as bondholders, are vitally interested to know how adequate the interest payments on their loans are covered by the earnings available for such payments. Owners, managers and directors are also interested in the ability of the business to service the fixed interest charges on outstanding debt. The ratio is calculated as follows: EBIT Interest Coverage Ratio =_______________ Interest charges Significance: It is always desirable to have profit more than the interest payable. In case profit is either equal or lesser than the interest, the position will be unsafe. It will show that there this nothing left for the shareholders and the position of the lendors is also unsafe. A high ratio is a sign of low burden of dept servicing and lower utilization of borrowing capacity. From the points of view of creditors, the larger the coverage, the greater the ability of the firm to handle fixed charges liabilities and the more assessed the payment of interest to the creditors. In contrast the low ratio signifies the danger the signal that the firm is highly dependent on borrowings and its earnings cannot meet obligations fully. The standard for this ratio for an industrial undertaking is 6 to 7 times. Table: 5.10

INTEREST COVERAGE RATIO EBIT

Year Rs. in lakhs 2001 – 2002 1767.75

Interest on Fixed Loans Rs. in lakhs 7241.39

Ratio 0.24

2002 – 2003

2087.49

4628.27

0.45

2003 – 2004

2260.62

4221.63

0.54

2004 – 2005

3037.66

3474.18

0.87

2005 – 2006 Interpretation:

5030.58

3216.67

1.56

53 The Interest coverage ratio is increasing year after year. A high ratio is a sign of low burden of dept servicing and lower utilization of borrowing capacity. Therefore this ratio is satisfactory to the company.

Chart no.: 5.10

5.2.4 Profitability Ratios

INTEREST COVERAGE RATIO

54 Profitability is the ability of a business to earn profit over a period of time. Although the profit figure is the starting point for any calculation of cash flow, as already pointed out, profitable companies can still fail for a lack of cash. •

A company should earn profits to survive and grow over a long period of time.

•

Profits are essential, but it would be wrong to assume that every action initiated by management of a company should be aimed at maximizing profits, irrespective of social consequences.

The ratios examined previously have tendered to measure management efficiency and risk. A. Gross Profit Margin •

Normally the gross profit has to rise proportionately with sales.

•

It can also be useful to compare the gross profit margin across similar businesses although there will often be good reasons for any disparity.

•

Gross profit Gross Profit Margin = ________________

*100

Sales Significance: The gross profit ratio helps in measuring the results of trading or manufacturing operations. It shows the gap between revenue and expenses at a point after which an enterprise has to meet the expenses related to the non-manufacturing activities, like marketing, administration, finance and also taxes and appropriations. The gross profit shows the gap between revenue and trading costs. It, therefore, indicates the extent to which the revenue have a potential to generate a surplus. In other words, the gross profit reveals the mark up on the sales. Gross profit ratio reveals profit earning capacity of the business with reference to its sale. Increase in gross profit ratio will mean reduction in cost of production or direct expenses or sale at a reasonably good price and decrease in the will mean increased cost of production or sales at a lesser price. Higher gross profit ratio is always in the interest of the business.

Table: 5.11

GROSS PROFIT MARGIN

55 Year

Gross Profit

Net Sales

Ratio

2001 – 2002

Rs. in lakhs 7052.87

Rs. in lakhs 18262.60

38.62

2002 – 2003

7925.86

19808.5

40.01

2003 – 2004

7904.58

21612.94

36.57

2004 – 2005

9275.87

21885.20

42.38

2005 – 2006

12543.85

30087.56

41.69

Interpretation: In the year 2002, the Gross Profit Ratio was 39% but then it increased to 40%, which shows a good profit earning capacity of the business with reference to its sales. But in the year 2004, it decreased to 37% which may be due to increase in cost of production or due to sales at lesser price. But thereafter, for the succeeding two years, it has increased considerably, which indicates that the cost of production has reduced. Therefore the Gross Profit Ratio for the five years reveals a satisfactory condition of the business. Chart no.: 5.11

B. Net Profit Margin

GROSS PROFIT MARGIN

56 This is a widely used measure of performance and is comparable across companies in similar industries. The fact that a business works on a very low margin need not cause alarm because there are some sectors in the industry that work on a basis of high turnover and low margins, for examples supermarkets and motorcar dealers. What is more important in any trend is the margin and whether it compares well with similar businesses. Earnings after interest and taxes Net Profit Margin =______________________________ *100 Net Sales Significance: An objective of working net profit ratio is to determine the overall efficiency of the business. Higher the net profit ratio, the better the business. The net profit ratio indicates the management’s ability to earn sufficient profits on sales not only to cover all revenue operating expenses of the business, the cost of borrowed funds and the cost of merchandising or servicing, but also to have a sufficient margin to pay reasonable compensation to shareholders on their contribution to the firm. A high ratio ensures adequate return to shareholders as well as to enable a firm to with stand adverse economic conditions. A low margin has an opposite implication.

Table: 5.12

Interpretation:

NET PROFIT MARGIN Net Profit

Sales

Ratio

Year 2001 – 2002

Rs. in lakhs 2848.84

Rs. in lakhs 18262.60

15.60

2002 – 2003

2800.13

19808.5

14.14

2003 – 2004

2871.54

21612.94

13.29

2004 – 2005

3752.3

21885.20

17.15

2005 – 2006

5937.78

30087.56

19.74

57 In the year 2002 the Net Profit is 15.60%, but in the year 2002-2003 it was decreased to 14.14 and 13.29. Which may due to excessing selling and distribution expenses. But thereafter for the succeeding years it has been increasing which indicates a better performance of the company. Therefore the performance of the management should be appreciated. Thus an increase in the ratio over the previous periods indicates improvement in the operational efficiency of the business.

Chart no.: 5.12

C. Return on Investment (ROI)

NET PROFIT MARGIN

58 Income is earned by using the assets of a business productively. The more efficient the production, the more profitable the business. The rate of return on total assets indicates the degree of efficiency with which management has used the assets of the enterprise during an accounting period. This is an important ratio for all readers of financial statements. Investors have placed funds with the managers of the business. The managers used the funds to purchase assets which will be used to generate returns. If the return is not better than the investors can achieve elsewhere, they will instruct the managers to sell the assets and they will invest elsewhere. The managers lose their jobs and the business liquidates. Operating profit Return on Investment =_________________ Capital Employed

Significance: Return on capital employed shows overall profitability of the business. At first minimum return on capital employed should be determined and then the actual rate of return on capital employed should be determined and compared with the normal return. The return and capital employed is a fair measure of the profitability of any concern with the result that even the result of dissimilar industries may be compared. Table: 5.13

RETURN ON INVESTMENT Operating Profit

Year 2001-2002

Rs. in lakhs 2531

2002-2003-

Capital Employed Rs. in lakhs 35803

Ratio 7.07

2434

33355

7.30

2003-2004

2437.54

32556.72

7.49

2004-2005

3190.73

35637.92

8.95

2005-2006

4733.93

36999.30

12.79

Interpretation:

59 This ratio indicates that how much of the capital invested is returned in the form of net profit. This ratio is increasing year after year which indicates the capital employed is returned in the form of net profit. In the same manner, returns from capital employed for the succeeding years are good. Thus, the Return on Investment ratio for the five years shows the efficiency of the business which is very much satisfactory.

Chart no.: 5.13

D. Return on Equity (ROE)

RETURN ON INVESTMENT

60 This ratio shows the profit attributable to the amount invested by the owners of the business. It also shows potential investors into the business what they might hope to receive as a return. The stockholders’ equity includes share capital, share premium, distributable and non-distributable reserves. The ratio is calculated as follows: Net profit after taxes and preference dividend Return on Equity =__________________________________________ Equity capital

Significance: This ratio measures the profitability of the capital invested in the business by equity shareholders. As the business is conducted with a view to earn profit, return on equity capital measures the business success and managerial efficiency. It reveals whether the firm has earned a reasonable profit to its equity shareholders or not by comparing it with its own past records, inter-firm comparison and comparison with the overall industry average. This ratio is of significant use in the ratio analysis from the standpoint of the owners of the firm.

Table: 5.14

RETURN ON EQUITY Net Profit after Tax

Year

and Preference

Equity Capital

Dividend

Rs. in lakhs

2001 – 2002

Rs. in lakhs 2848.84

561.50

5.07

2002 – 2003

2800.13

561.50

4.99

2003 – 2004

2871.54

1123.00

2.56

2004 – 2005

3752.3

1223.00

3.07

2005 – 2006

5937.78

1223.00

4.86

Interpretation:

Ratio

61 In the year 2002, the return on equity ratio is 5.07 but in the year 2003 it reduced to 4.99, which may due to capital investment . And in the year 2005-2006 it increased to 3.07 to .86. Therefore the return on equity ratio for the five years reveals a satisfactory condition of the business.

Chart no.: 5.14

E. Return on Total assets

RETURN ON EQUITY

62 This ratio is also known as the profit-to-assets ratio. This ratio establishes the relationship between net profits and assets. As these two terms have conceptual differences, the ratio may be calculated taking the meaning of the terms according to the purpose and intent of analysis. Usually, the following formula is used to determine the return on total assets ratio. Return on total assets = (Net profit after taxes and interest / Total assets) * 100 Significance: This ratio measures the profitability of the funds invested in a firm but doe not reflect on the profitability of the different sources of total funds. This ratio should be compared with the ratios of other similar companies or for the industry as a whole, to determine whether the rate of return is attractive. This ratio provides a valid basis for inter-industry comparison.

Table: 5.15

RETURN ON TOTAL ASSETS Net Profit after

Interpretation:

Year

Taxes and Interest

Total Assets

Ratio

2001 – 2002

Rs. in lakhs 2848.84

Rs. in lakhs 35156.63

8.10

2002 – 2003

2800.13

32593.54

8.59

2003 – 2004

2871.54

32556.72

8.82

2004 – 2005

3752.3

35637.92

10.53

2005 – 2006

5937.78

36999.3

16.05

63 The return on total assets ratio is increasing year after year . This increasing ratio indicates the effective funds invested. Therefore the return on Total

Assets ratio for the five years

reveals a satisfactory condition of the business.

Chart no.: 5.15

5.3 Comparative statement:

RETURN ON TOTAL ASSETS

64 Comparative study of financial statement is the comparison of the financial statement of the business with the previous yearâ&#x20AC;&#x2122;s financial statements and with the performance of other competitive enterprises, so that weaknesses may be identified and remedial measures applied. Comparative statements can be prepared for both types of financial statements i.e., Balance sheet as well as profit and loss account. The comparative profits and loss account will present a review of operating activities of the business. The comparative balance shows the effect of operations on the assets and liabilities that change in the financial position during the period under consideration. Comparative analysis is the study of trend of the same items and computed items into or more financial statements of the same business enterprise on different dates. The presentation of comparative financial statements, in annual and other reports, enhances the usefulness of such reports and brings out more clearly the nature and trends of current changes affecting the enterprise. While the single balance sheet represents balances of accounts drawn at the end of an accounting period, the comparative balance sheet represent not nearly the balance of accounts drawn on two different dates, but also the extent of their increase or decrease between these two dates. The single balance sheet focuses on the financial status of the concern as on a particular date, the comparative balance sheet focuses on the changes that have taken place in one accounting period. The changes are the direct outcome of operational activities, conversion of assets, liability and capital form into others as well as various interactions among assets, liability and capital.

Table: 5.16

Comparative Balance Sheets as on 31st March 2001 â&#x20AC;&#x201C; 2002

Change in Particulars

31st March

Absolute

Percentage

2001

2002

Figure

Increase or

Rs. in lakhs (1980.8) 592.11

Decrease 7.29 276.68

Rs. in lakhs 27150 214

Fixed Assets (A) Investment ( B ) Current Assets :

Rs. in lakhs 25169.20 806.11

Inventories

4426

3038.38

(1387.62)

31.35

Sundry Debtors

4151

4211.03

60.03

1.45

130.54

37.54

40.37

Loans and Advances Total current Assets (C)

2331 11001

2576.86 9956.81

245.86 (1044.19)

10.55 9.49

Total Assets ( A+B+C )

38365

35932.12

(2432.88)

6.34

812

561.50

(250.5)

30.85

27924

27091.4

(832.26)

2.98

202

262.00

29.70

28938

27915.24

(1022.76)

3.53

Secured loans

6769

6716.08

(52.92)

0.78

Unsecured loans Total Loan Funds ( B )

1968 8737

525.31 7241.39

(1442.69) (1495.61)

73.31 17.12

690

775.49

85.49

12.39

38365

35932.12

(2432.88)

6.34

Cash and Bank Balance

Shareholders Funds : Share Capital Reserves and Surplus Deferred Tax Total Shareholders Funds(A) Loan Funds :

Current

Liabilities

and

Provision( C) Total Liabilities (A+B+C )

Interpretation: The comparative balance sheet of the company reveals during 2002, that there has been a decrease in the fixed assets of Rs.(1980.8) lakhs, which indicates sale of fixed assets.

66 The cash or fund received through sale of fixed assets have increased the cash balance of the company. This excess cash balance is utilized for the repayment of loan, which is reduced from Rs.8737 lakhs to Rs.7241.39 lakhs for meeting out current liabilities and provision and also for making investment, which has been increased from Rs.214 lakhs to Rs.806 lakhs. The investment has increased from Rs.214 lakhs to Rs.806.11 lakhs, which indicates the investment has been properly made. The overall financial position of the company for the year (2001-2002) is satisfactory.

Table: 5.17

Comparative Balance Sheet as on 31st March 2002 â&#x20AC;&#x201C; 2003

Change in 31st March

31st March

Absolute

Percentage

2002

2003

Figure

Increase or

Rs. in lakhs 25169.20 806.11

Rs. in lakhs 23599.92 812.09

Rs. in lakhs (1569.28) 5.98

Decrease 6.23 0.74

Inventories

3038.38

3977.63

939.25

30.91

Sundry Debtors

4211.03

3100.98

(1110.05)

26.36

130.54

141.15

10.61

8.13

2576.86 9956.81

1606.03 8825.79

(970.83) (1131.02)

37.67 11.36

35932.12

33237.8

(2694.32)

7.50

561.50

27091.74

27068.07

(23.67)

0.09

262.00

335.70

73.7

28.12

27915.24

27965.27

50.03

0.18

Secured loans

6716.08

4505.38

(2210.7)

32.92

Unsecured loans Total Loan Funds ( B )

525.31 7241.39

122.89 4628.27

(403.42) (2613.12)

76.61 36.09

Current Liabilities and

775.49

644.26

(131.23)

16.92

35932.12

33237.8

(2694.32)

7.50

Particulars Fixed Assets (A) Investment ( B ) Current Assets :

Cash and Bank Balance Loans and Advances Total current Assets (C ) Total Assets ( A+B+C ) Shareholders Funds : Share Capital Reserves and Surplus Deferred Tax Total Shareholders Funds ( A ) Loan Funds :

Provision (C) Total Liabilities(A+B+C)

Interpretation: The comparative balance sheet of the company reveals during 2003, that there has been a decrease in the fixed assets of Rs.(1569.28) lakhs, which indicates sale of fixed assets. The

68 cash or fund received through sale of fixed assets have increased the cash balance of the company. The current assets have decreased by Rs.(1131.02) lakhs; this indicates firms better credit policy. Further the current liability also decreased by Rs.(131.23) lakhs, it indicates that firm have good liquidity position therefore they are able to pay liabilities within stipulated period. The fact depicts that the policy of the company is to pay all liabilities both in current and long-term liabilities within the stipulated period using both current assets and fixed assets. The investment has increased from Rs.806.11 lakhs to Rs.812.09 lakhs, which indicates the investment has been properly made. The overall financial position of the company for the year (2002-2003) is satisfactory.

Table: 5.18

Comparative Balance Sheet as on 31st March 2003 â&#x20AC;&#x201C; 2004 Change in 31st March

31st March

Absolute

Percentage

69 Particulars

2003

2004

Figure

Increase or

Rs. in lakhs 23599.92 812.09

Rs. in lakhs 23293.33 690.78

Rs. in lakhs (306.59) (121.31)

Decrease 1.30 14.94

Inventories

3977.63

3097.26

(880.37)

22.13

Sundry Debtors

3100.98

4405.70

1304.72

42.07

141.15

46.11

(95.04)

67.33

1606.03 8825.79 33237.8

2177.66 9726.73 33710.84

571.63 900.94 473.04

35.59 10.21 1.42

561.50

1123.00

561.50

100

Reserves and Surplus

27068.07

26783.09

(284.98)

1.05

Deferred Tax Total Shareholders

335.70 27965.27

429.00 28335.09

93.3 369.82

27.79 1.32

Secured loans

4505.38

4104.48

(400.9)

8.90

Unsecured loans Total Loan Funds ( B ) Current Liabilities and

122.89 4628.27 644.26

117.15 4221.63 1154.12

(5.74) (406.64) 509.86

4.67 8.79 79.14

Provision( C) Total Liabilities( A+B+C )

33237.8

33710.84

473.04

1.42

Fixed Assets (A Investment ( B ) Current Assets :

Cash and Bank Balance Loans and Advances Total current Assets ( C ) Total Assets( A+B+C ) Shareholders Funds : Share Capital

Funds ( A ) Loan Funds :

Interpretation: The comparative balance sheet of the company reveals during 2004, that there has been a decrease in the fixed assets of Rs.(306.59) lakhs, which indicates sale of fixed assets. The cash and bank balance have also decreased by Rs.(95.04) lakhs. This fact indicates that the firm has utilized both current and fixed assets for the repayment of long term loans as such there loan amount has reduced by Rs.(406.64) lakhs.

70 The current assets have increased by Rs.900.94 lakhs; this indicates firms flexible credit policy as such the debtors have been increase by Rs.1304.72. Further the current liability also increased by Rs.509.86 lakhs, it indicates that firm has not paid the liabilities within the stipulated period. The investment has reduced by Rs.(121.31) lakhs, which indicates an inflow of fund. The overall financial position of the company for the year (2003-2004) is satisfactory.

Table: 5.19

Comparative Balance Sheet as on 31st March 2004 â&#x20AC;&#x201C; 2005 Change in

Particulars Fixed Assets (A) Investment ( B ) Current Assets :

31st March

Absolute

Percentage

2004

2005

Figure

Increase or

Rs. in lakhs 23293.33 690.78

Rs. in lakhs 21863.99 5391.05

Rs. in lakhs (1429.34) 4700.27

Decrease 6.14 680.43

71 Inventories

3097.26

3674.58

577.32

18.64

Sundry Debtors

4405.70

3524.79

(880.91)

19.99

46.11

34.43

(11.68)

25.33

2177.66 9726.73 33710.84

2650.84 9884.64 37139.68

473.18 157.91 3428.84

21.73 1.62 10.17

1123.00

1223.00

100

8.90

Reserves and Surplus

26783.09

30460.74

3677.65

13.73

Deferred Tax Total Shareholders

429.00 28335.09

480.00 32163.74

51 3828.65

11.89 13.51

Secured loans

4104.48

3375.82

(728.66)

17.75

Unsecured loans Total Loan Funds(B) Current Liabilities and

117.15 4221.63 1154.12

98.36 3474.18 1501.76

(18.79) (747.45) 347.64

16.04 17.71 30.12

33710.84

37139.68

3428.84

10.17

Cash and Bank Balance Loans and Advances Total current Assets (C) Total Assets ( A+B+C ) Shareholders Funds : Share Capital

Funds(A) Loan Funds :

Provision(C) Total Liabilities (A+B+C)

Interpretation: The comparative balance sheet of the company reveals during 2005, that there has been a decrease in the fixed assets of Rs.(1429.34) lakhs, which indicates sale of fixed assets and an inflow of cash. This cash is utilized in meeting out long term liabilities as such the loan amount has reduced by Rs.(747.45) lakhs. Current assets have been increased by Rs.157.91 lakhs, which indicates that its working capital position is good, but the debtors have decreased, by Rs.(880.91) lakhs which indicates by Rs.347.64 lakhs, which indicates that the liabilities have not paid within the stipulated period.

The investment has increased by Rs.4700.27 lakhs, which indicates an outflow of fund and a timely investment by the company. The overall financial position of the company for the year (2004-2005) is satisfactory.

Table: 5.20

Comparative Balance Sheet as on 31st March 2005 â&#x20AC;&#x201C; 2006 Change in

Particulars

Fixed Assets (A) Investment ( B ) Current Assets :

31st March

Absolute

Percentage

2005

2006

Figure

Increase or

Rs. in lakhs 21863.99 5391.05

Rs. in lakhs 20245.48 8709.80

Rs. in lakhs (1618.51) 3318.75

Decrease 7.40 61.56

Inventories

3674.58

3662.46

(12.12)

0.33

Sundry Debtors

3524.79

3667.52

142.73

4.05

34.43

82.12

47.69

138.51

Cash and Bank Balance

73 Loans and Advances Total current Assets ( C ) Total Assets ( A+B+C ) Shareholders Funds :

2650.84 9884.64 37139.68

4537.37 11949.47 40904.75

1886.53 2064.83 3765.07

71.17 20.89 10.14

1223.00

Reserves and Surplus

30460.74

32298.63

1837.89

6.03

Deferred Tax Total Shareholders Funds

480.00 32163.74

261.00 33782.63

(219) 1618.89

45.63 5.03

Secured loans

3375.82

3124.08

(251.74)

7.46

Unsecured loans Total Loan Funds ( B ) Current Liabilities and

98.36 3474.18 1501.76

92.59 3216.67 3905.45

(5.77) (257.51) 2403.69

5.87 7.41 160.06

37139.68

40904.75

3765.07

10.14

Share Capital

(A) Loan Funds :

Provision( C) Total Liabilities (A+B+C)

Interpretation: The comparative balance sheet of the company reveals during 2006, that there has been a decrease in the fixed assets of Rs.(1618.51) lakhs, which indicates sale of fixed assets and an inflow of cash. The long term loan has reduced by Rs.(257.51) lakhs, which indicates the repayment of loan. This fact depicts that the loan is relayed through the cash received by sale of fixed assets. The current asset has increased by Rs.2064.83 lakhs which indicate a firmâ&#x20AC;&#x2122;s better credit policy. The current liability has also increased by Rs.2403.69 lakhs, which indicates that the payment of liabilities is not made within the stipulated period. The investment has increased by Rs.3318.75 lakhs as such the investment of the company on the shares in its subsidiary company has increased, which indicates on outflow of cash.

The overall financial position of the company for the year (2005-2006) is satisfactory.

CHAPTER â&#x20AC;&#x201C; VI FINDINGS OF THE STUDY 1) The current ratio is above 2 in all the five years. The same level of current assets and current liabilities may be maintained since the current assets are less profitable, when compared to fixed assets. 2) The liquid ratio is decreasing year after year. Though the ratio is above 1 in all the five years, it is preferable to improve upon the situation. This may be due to the fact that the stock is major composition of current assets, which excludes liquid assets. The firm should try to clear the stocks. 3) The cash ratio is decreasing year after year. So it shows that the cash position is not utilized effectively and efficiently. 4) The average collection period is decreasing year after year so it shows the better is the quality of debtors as a short collection period and implies quick payment by debtors.

75 5) The inventory turnover ratio fro the five years indicated a good inventory policy and efficiency of business operations of the company. 6) The working capital turnover ratio has been increasing during the five years, which indicates that there is lowest investment of the working capital and more profit. More profit is in the sense that there is higher ratio. 7) The proprietary ratio in all the five years is above the satisfactory level, that is, 50%. It indicates the creditors are in a safer side and there is no pressure from them. 8) The debt to equity ratio is decreasing year after year, which indicates , the servicing of debt is less burdensome and consequently its credit standing is not adversely affected. 9) The Net Profit for the five years has been increasing which shows that the selling and distribution expenses are under control and there is a good operational efficiency of the business concern. 10) Comparative balance sheet proves that the financial performance for each succeeding year is very much satisfactory as compared with its previous year during the period of 2001-2006. 11) It can be stated that the working capital management of the company seems to be satisfactory. But in certain years there is decrease in working capital, which is due to higher amount of current liabilities especially, increasing in provision for dividend and taxation and creditors. The company should try to decrease the current liabilities and provision by making timely payment.

CHAPTER â&#x20AC;&#x201C; VII SUGGESTION, RECOMMENDATION AND CONCLUSION 7.1 SUGGESTION AND RECOMMENDATION 1. The liquidity position of the company can be utilized in a better or other effective purpose. 2. The company can be use the credit facilities provided by the creditors. 3. The debt capital is not utilized effectively and efficiently. So the company can extend its debt capital. 4. Efforts should be taken to increase the overall efficiency in return out of capital employed by making used of the available resource effectively. 5. The company can increase its sources of funds to make effective research and development system for more profits in the years to come.

7.2 CONCLUSION The study is made on the topic financial performance using ratio analysis with five years data in Emami Limited. The current and liquid ratio indicates the short term financial position of Emami Ltd. whereas debt equity and proprietary ratios shows the long term financial position. Similarly, activity ratios and profitability ratios are helpful in evaluating the efficiency of performance in Emami Ltd. The financial performance of the company for the five years is analyzed and it is proved that the company is financially sound.

CHAPTER –VIII LIMITATIONS AND SCOPE FOR FURTHER STUDY 8.1 LIMITATIONS As the study is based on secondary data, the inherent limitation of the secondary data would have affected the study. The figures in a financial statements are likely to be a least several months out of date, and so might not give a proper indication of the company’s current financial position.

78 This study need to be interpreted carefully. They can provide clues to the company’s performance or financial situation. But on their own, they cannot show whether performance is good or bad. It requires some quantitative information for an informed analysis to be made.

8.2 SCOPE FOR FURTHER STUDY This study covers the financial performance of the company and activity engaged in manufacturing cables. Financial performance covers the aspects like liquidity, leverage, activity, and profitability of “EMAMI LIMITED”. This study further compares the financial statement to know the relative financial position of the company. Finally, a trend analysis also is carried out to evaluate the trends in financial statements of the company.

BIBLOGRAPHY BOOKS M Y Khan and P K Jain

Financial Management Fourth Edition-2006,

Tata McGraw-Hill Publishing Company Limited, New Delhi. A. Murthy

Management Accounting First Edition-2000, S. Viswanathan (Printers

&Publishers), PVT., LTD. S.M. Maheswari

Management Accounting, Sultan Chand & Sons Educational

Publishers, New Delhi.

WEBSITES www.encyclopedia.com www.emamigroup.com