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A PROJECT REPORT ON RATIO ANALYSIS UNDERTAKEN AT KRISHAK BHARATI CO-OPERATIVE LIMITED SURAT MASTER OF BUSINESS ADMINISTRATION (FINANCE)

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR AWARD OF MASTER OF BUSINESS ADMINISTRATION OF TILAK MAHARASHTRA UNIVERSITY, PUNE.

SUBMITTED BY HUZAIFA A SOPARIWALA PRN: 07208013498 OF

PAI INTERNATIONAL CENTER FOR MANAGEMENT EXECELLENCE TILAK MAHARASHTRA UNIVERSITY GULTEKDI, PUNE 411037. 1


PREFACE

I have really enjoyed working on this project. In the starting phase, I found this work difficult, but with ample guidance of all staff members of the Krishak Bharati Cooperative Limited, Surat. I was able to complete my work successfully. It is the responsibility of the Management of an organization to guide each newly joined individual to remove his anxiety in an organizational environment and help him in settling down. In this project I have covered the aspect relating to training followed by the management of an organization. Under this study I have put in my best efforts to make this project successful. While working on this project I got exposure to the training practice use by the organization.

2


ACKNOWLEDGEMENT Man’s quest for knowledge never ends. Theory and practice are essential and complementary to each other I am thankful for the assistance received from various individuals in making this project successfull. I find no words to express my gratitude towards those who are constantly involved with us throughout my project in

PAI

INTERNATIONAL CENTER FOR MANAGEMENT EXECELLENCE. I

would

like

to

give

my

special

thanks

and

regards

to

“Mr.T.S.Thomas” (General Manager, Surat Who has helped me to carry out this project as my project in charge under his guidance and blessing I was able to fulfill the requirements of my university. I would also like to thanks Mr.A.M.S.Belim, Mr.M.A,Patwa (F&A Department), for their most precious contribution and their help in my project. I am very much thankful to other staff members of “Kribhco, Surat”. Without their help I am not able to finish this project.

I am highly obliged to the management of Pai international center

for

management

execellence

For allocating me a very

interesting and challenging project. I am sincerely thankful to my project guide Prof. Prashant Gundawar and our Director Prof. R.Ganeshan for providing the resources for the project. Their guidance and support was a constant source of inspiration for me.

3


EXECUTIVE SUMMARY This summer project report is prepared at “KRISHAK BHARATI COOPERATIVE LIMITED.” at Surat on “RATIO ANALYSIS” as a part of curriculum of the MBA program. I have selected this topic to measures the financial position of the company and firm profit ability as well as its credit policy with the help of ratio analysis. Ratio analysis is a widely used of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that strengths and weakness of a firm as well as its historical

performance

and

current

financial

condition

can

be

determined.

The main Objectives are:  To know the financial condition of the company. 

To know the strength and weakness of the company

 To know that company has enough asset compare to its liabilities 

To study inventory management.

To study company’s ability to earn profit compare to its sales

To analyze the liquidity position of the company.

To study receivable management and company’s credit policy. To achieve these objectives, I have studied fifteen ratio analysis which are as below…

4


 Ratio analysis : o Current Ratio o Quick Ratio o Inventory Ratio o Inventory turnover Ratio o Debtor turnover ratio o Debtors conversion period o Current assets turn over ratio o Cash Ratio o Debt-equity ratio o Net-profit ability ratio o Gross-profit ability ratio o Return on capital employed o Inventory conversion period o Raw material conversion period o Work in progress conversion period o Finished good conversion period

Methodology: Descriptive research design has been used and data are collected through secondary data collection method. I have use Microsoft Excel for the data analysis.

5


TABLE OF CONTENTS

CHAPTER

TOPIC

NO.

PAGE NO.

1.

Industry profile

8

2.

Company profile

13

3.

Theory of Ratio Analysis

19

4.

Literature Review

24

5.

Research Methodology

26

6.

Data analysis & inference

30

7.

Conclusion & Recommendation

66

8.

9.

Suggestions & Limitation

Bibliography

68

70

6


INDUSTRY PROFILE

7


INTRODUCTION OF FERTILIZER INDUSTRY

Before

introducing

organization

KRIBHCO (a Fertilizer producing unit). I feel necessary to give an overview of the Indian Fertilizer Industries. “India lives in villages,� said Mahatma Gandhi decades ago. It is true even today. Like every developing economy, the economy of India is also agro-based. Agriculture accounts for nearly 1/4th of India's GDP and more importantly, about 2/3rd of the country's population is dependent on agriculture and allied activities for their livelihood. As per statistics nearly 175 lakhs MT of fertilizer nutrients are required every year in this country. The demand of fertilizers was so high that India had to import almost 30% of its requirement from other countries. Therefore, to achieve the economic growth, agriculture base of the country must be strengthened. To attain this objective, agriculture practices have to be improved from their traditional pattern to a higher technological track involving better irrigation and use of better quality seeds, fertilizers, insecticides & pesticides. Therefore, chemical fertilizers are key player in this process and fertilizer industries plays quite a major role in increasing food production in the country and also helps to modernize the out look of the common farmers and make them innovative and respective to the new technology change. India is basically an agricultural country which economy depends largely upon its agrarian produce. Agricultural sphere contributes about 25% to the country's GDP. As a result, Indian fertilizer industry has tremendous scope in and outside the country as it is one of the allied parts of agriculture. Today, Indian Fertilizer Industry is developing in terms of technology. Indian manufacturers are adopting advanced manufacturing processes to prepare innovative new products for Indian agriculture.

8


ď ś Growth of Fertilizer Industry One of the most significant achievement of the post Independence period of our Country has been the ability to achieve self-sufficiency in food grain production. This achievement is due to the rapid growth and improvement of Fertilizer industry. The Fertilizer industry is growing at the rate of 4% for the last 10 years and has been contributing a significant part of G.D.P. The growth and importance of Fertilizer industry in India can be divided in to three distinct phases, these are given below. 1. Pro Green Revolution Period: This period is described in 1952-1953 era where increased growth of food grains took place however this increased production in food grains took place due to increased irrigation methods. In this phase the land under agriculture was made more, during this period about 80% of the country's population was involved in Agriculture either directly or indirectly. During this period the fertilizer's which were manufactured were Super Phosphate & Ammonium Sulphate. Irrigation was thought to be heart of Agriculture. 2. Green Revolution Period: During this phase Government stated the programmed aimed at making our country self sufficient in Food Products. This was the period between the years 1959-1960. This plan laid the emphasis on production of High Yielding Varieties. To make this plan a success there was a high need to make soil fertile by providing it with nutrients like Phosphorus, Nitrogen and Potassium. During this phase Fertilizer industry tried to play a vital role, became one of the most important, and inherits part of our economy.

9


3. The Post Green Revolution Period: The world's population along with Indian population has kept on growing at an alarming rate; the fertilizer companies all over India are trying to expand their scale of operations in order to increase the production rate. The demand for fertilizers per year is increasing. The current demand of fertilizers in India is 18 million tones. - According to Fertilizer Association of India.

 Fertilizer Industry Scenario in India

In India, First of all in 1906, A Single Super Phosphate (SSP) manufacturing unit was set up at Ranipat near Chennai (Madras) with annual capacity of 6000 tones per annum.

1. Public Sector  The Fertilizer And Chemicals Travancore Ltd. (FACT)  Hindustan Fertilizer Corporation Ltd. (HFC)  Madras Fertilizer Ltd. (MFL)  Hindustan Copper Ltd. (HCL)  Naively Lignite Corporation Ltd. (NLC)  Pyrites, Phosphates And Chemicals Ltd. (PPCL)  Pradeep Phosphates Ltd. (PPL)  Rashtriya Chemicals And Fertilizers Ltd. (RCFL)  National Fertilizer Ltd. (NFL)

10


2. Co-operative Sector There are only two fertilizer manufacturing societies in Co-operative sector.  Indian Farmers Fertilizers Co-Operative Ltd. (IFFCO)  Krishak Bharati Co-Operative Ltd. (KRIBHCO)

3.

Private Sector

There are 17 companies in private sector, which are producing fertilizer.  Gujarat Narmada Valley Fertilizer Co. Ltd. (GNFC)  Hindustan Lever Ltd. (HLL)  Hari Fertilizer  ICI India Ltd.  Indo Gulf Fertilizers & Chemicals Corporation Ltd.  Mangalore Chemicals & Fertilizers Ltd. (MCFL)  Southern Petro Chemicals Industries Corporations Ltd.  Nagarjuna Fertilizer & Chemical Ltd. (NFCL)  Shri Ram Fertilizer & Chemicals Ltd.  Tuticorian Alkali Chemicals & Fertilizer Ltd.  Zuari Agro Chemicals Ltd.  Bindali Agro Chemicals Ltd.  Chambal Fertilizer & Petrochemical Corporations Ltd. (DEPCL)  E.D.I. PASSY (I) LTD.  Gujarat State Fertilizer Company (GSFC

11


COMPANY PROFILE

12


 KRISHAK BHARTI CO-OPERATIVE LTD

 Introduction:Name: -

K Krriisshhaakk B Bhhaarraattii C Coo--ooppeerraattiivvee LLttdd..

Joint Sector: -

Government, IFFCO and NCDC.

Foundation stone laid by smt.Indira Gandhi: - 5th February1982 Trial production of Urea: -

26TH November , 1985

Start of commercial Production: -

1st March 1986

Year of Business: -

25 years

Legal Status: No. of Employees: -

Multi state co-operative society 2567

Manufacturing and Marketing: -

Urea, Ammonia and Bio-fertilizer.

Urea – Ammonia Plant Location: -

Distance from Surat, Hazira Guj.

13


KRIBHCO Network: A. Head office

Fertilizer plant, Noida, Delhi

B. (i) Plant

Surat (Gujarat)

(ii) Bio fertilizer plant

Surat (Gujarat)

(iii) Seed processing plant

Andhra Pradesh, Gujarat,

Haryana, U.P.

M.P, Punjab, Rajasthan, C. Zonal offices

Bhopal, Bangalore, Lucknow and Chndigarh

D. State marketing offices

Jaipur, Mumbai,

Ahmedabad, Banglore,

Patna,

Chennai, Lucknow,

Chandigarh, Bhopal, Hyderabad, Guwahati, Dehurdun, Kolkata.

14


ď ś OBJECTIVES OF KRIBHCO

MAIN:1. To increase the urea installed capacity, maintaining its market share. 2. To ensure optimum utilization of existing plant and machinery, through proper maintenance. 3. To diversify into other core sector like power, LPG terminal/port, chemicals etc.

OTHERS:1. To enlarge product mix through product development 2. To continue and intensify efforts towards rural development and Cooperative movements.

ď ś MISSION

1. To contribute to agriculture & rural development in the regions. 2. Services to members of cooperatives society by selecting financing. Managing society desirable and commercial profitable investment opportunity preferable at multiple locations.

15


 VISION

We want to be a world class organization that represents the farmer community and maximizes returns to them through specialization in agricultural inputs and products and other diversified businesses that maximize stakeholder value.

 MILESTONES / RECORDS:-

KRIBHCO has achieved a milestone in handling of OMIFCO urea: - Total quantity received up to 12.08.2006 - 1001133.890 MT - Total quantity dispatched up to 08.09.2006 - 1002323.700 MT

 First, achieve record capacity utilization in the first year of commercial production - 93.5% and 97.4% for Ammonia and Urea plants.  First, achieve highest net profit of Rs. 126.80 Crore in the year 1987- 88 by any fertilizer organization.  First, to achieve 10 and 20 million tones of Urea production milestone within a short period of 6.4 years and 12.6 years from commencement of production.  First, the country to achieve 10 million tones of Ammonia production milestone within a period of 10.7 years from commencement of production.

16


 AWARDS:-

KRIBHCO receives Gold star award of Excellence from Institute of Economic Studies for its overall excellent performance. KRIBHCO receives the Rajbhasha Award from Honb'le Minister of Chemical and Fertilizers for 2002-03, 2003-04, 2004-05. KRIBHCO was awarded First prize for Production, Promotion, and marketting of Bio-fertilizers for the year 2004-05 on 1st of December '05 by FAI. IIIE - ENTERPRISE EXCELLENCE Award for the year 2003-04 KRIBHCO has won INDIRA GANDHI RAJBHASHA PURUSKAR (2nd) for 200304. KRIBHCO -Hazira - Pot Plants exhibition received the 2nd prize in the first National Horticulture exhibition and flower show for the year 2002. FAI – Best Video Film Award 1987, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1998 FAI Technical Innovation Award: 2001-02 to two KRIBHCO Officers. SHIELD & CERTIFICATE awarded by Rajbhasha Vibhag, Home Ministry, GOI for PROMOTION OF HINDI AS AN OFFICIAL LANGUAGE for the year 1993-94. "RAJBHASHA SHIELD" for OUTSTANDING WORK IN OFFICIAL LANGUAGE for the year 1994-95 by Official Language Implementation Committee, Surat. 'Best House Keeping' Award to KRIBHCO’s Hazira Complex from Baroda Productivity Council – Awarded 5 times from 1988-89 to 1991-92.

17


RATIO ANALYSIS

18


1. RATIO ANALYSIS

Ratio analysis is a widely used of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that 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 variables.

The 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 ratio does not add any information not already inherent in the above figures of profits and sales. What ratios do is that they reveal the relationship in a more meaningful way so as to enable us to draw conclusions from them.

The rational of ratio analysis lies in the fact that it makes related information comparable. A single figure by itself has no meaning but when expressed in terms of a related figure, it yields significant inferences. For instance, the fact that net profits of a firm amount to say, Rs. 10 lacks throws no light on its adequacy or otherwise. Figure of net profit has to be considered in relation to other variables. How does it stand relation to sales? What does it represent by way of return on total assets used or total capital employed? If therefore net profits are shown in terms of their relationship with items such as sales, assets, capital employed equity capital and so on; meaningful conclusions can be drawn regarding their adequacy.

Ratio is very useful to for grasping the message of the financial statement and understanding them. It helps to enlarge and understand the financial health and travel of the business, it past performance makes it possible to forecast about future state of the business. The ratio use to measure the effectiveness of the employment of resources is termed as Activity Ratio or Turnover Ratio.

19


These ratios are important measures of ratio analysis. Ratio

Formulae

Result Interpretation On average, you turn over the value of your entire stock every x days. You may need to break this

Stock Turnover (in days)

Average

down into product groups for effective stock

Stock * 365/ = Cost

of days

Goods Sold

x management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It takes you on average x days to collect monies

Receivables Debtors Ratio

365/

(in days)

Sales

*

due to you. If you’re official credit terms are 45 = days

x day

and

it

takes

you

65

days...

why?

One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days.

On average, you pay your suppliers every x days. Creditors Payables

365/

Ratio

Cost of Sales

(in days)

(or Purchases)

If you negotiate better credit terms this will

*

increase. If you pay earlier, say, to get a discount = days

x this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer.

20


Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. Total

For example, 1.5 times means that you should be

Current

able to lay your hands on $1.50 for every $1.00

Current

Assets/

=

Ratio

Total

times

x

you owe. Less than 1 time e.g. 0.75 means that you could have liquidity problems and be under

Current

pressure to generate sufficient cash to meet

Liabilities

oncoming demands.

(Total Current Assets

-

Quick Ratio Inventory)/ Total

= times

x

Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Current Liabilities Working Capital Ratio

(Inventory + Receivables As - Payables)/ Sales

% A high percentage means that working capital needs are high relative to your sales.

Sales

21


Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoice discounting etc. Debtor concentration - degree of dependency on a limited number of customers. Once ratios have been established for your business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors. When planning the development of a business, it is critical that the impact of working capital be fully assessed when making cash flow forecasts. Our financial planning software packages - Ex-Plan and Cash flow Plan - can facilitate this task as they provide for the setting of targets for receivables, payables and inventory.

ADVANTAGES OF RATIO ANALYSIS:  With the help of the ratio you can predict financial position of the company.  After showing the ratio its easy for bank to work with a company  We can compare two firm after seen there ratio  Its help to forecasting and make future plan of the company  With the help of the ratio we can locate the weak spot or problem of the company  Its also help in cost control in the firm  With the help of the ratio employee can know about the company and its helping in their job.

22


LITRERATURE REVIEW

23


Review of previous study Ratio-analysis is a concept or technique which is as old as accounting concept. Financial analysis is a scientific tool. It has assumed important role as a tool for appraising the real worth of an enterprise, its performance during a period of time and its pit falls. Financial analysis is a vital apparatus for the interpretation of financial statements. It also helps to find out any cross-sectional and time series linkages between various ratios.

Unlike in the past when security was considered to be sufficient consideration for banks and financial institutions to grant loans and advances, nowadays the entire lending is need-based and the emphasis is on the financial viability of a proposal and not only on security alone. Further all business decision contains an element of risk. The risk is more in the case of decisions relating to credits. Ratio analysis and other quantitative techniques facilitate assessment of this risk.

Trend ratio involve a comparison of the ratio of a firm over time, that is present ratio are compared with past ratio for the same firm. The comparison of the profitability of a firm, say year 1 though 5 is an illustration of a trend ratio. Trend ratio indicate the direction of change in the performance-improvement, deterioration or constancy-over the years.

24


RESEARCH METHODOLOGY

25


Problem Statement:

How to measure the financial position of the company with the help of ratio analysis?

Objective of Study: 

To know the financial condition of the company.

Interpret the financial statement so that the strength and weakness of a firm

Historical performance and current financial condition can be determined.

To analyze the liquidity position of the company.

Throw light on a long term solvency of a firm.

Research Design: A research design is the specification of method and procedure for accruing the information needed. It is overall operational pattern of frame work of project that stipulates what information is to be collected for source by that procedures

Descriptive Research design is appropriate for this study.

Descriptive study is used to study the situation. This study helps to describe the situation. A detail descriptive about present and past situation can be found out by the descriptive study. In this involves the analysis of the situation using the secondary data.

26


Data Collection: This research study is based on secondary data, means data that are already available i.e. the data which have been already collected and analyzed by some one else.

Secondary data are used for the study of Ratio analysis of this company. To collect the data I have refer – Company annual report, annual magazine, last 5 year balance sheet, and cash flow statements.

Secondary Data Sources

External Sources

Internal Sources

Procedure Manuals

ERP Reports

Other Reports

Reference Books

World Wide Web

Another source of secondary data was in the form of reference books and Literature Review published by third parties but available to the public. The World Wide Web (Internet) was also an important source of information related to inventory management.

27


Method of Analysis: 

Ratio analysis : o Current Ratio o Quick Ratio o Inventory Ratio o Inventory turnover Ratio o Debtor turnover ratio o Current assets turn over ratio o Cash Ratio o Debt equity ratio o Debtor’s conversion period o Net profit ability ratio o Gross profit ability ratio o Return on capital employed o Inventory conversion period o Raw material conversion period o Work in progress conversion period o Finished goods conversion period

28


DATA ANALYSIS

AND

INTERPRETATION

29


1) Ratio Calculations {1.1} Current Ratio

Current Ratio =

Current Assets Current Liabilities

Current Assets For year 04-05 = 171,204.66 05-06 = 142,100.26 06-07 = 157,699.67 07-08 = 185,178.30 Current Liabilities For year 04-05 = 29,982.54 05-06 = 29,724.31 06-07 = 34,234.82 07-08 = 49,858.31 Current Ratio For year

04 - 05 =

05 - 06 =

06 - 07 =

07 - 08 =

171,204.66 29,982.54

142,100.26 29,724.31

157,699.67 34,234.82

185,178.30 49,858.31

= 5.71 : 1

= 4.78 : 1

= 4.61: 1

= 3.71: 1

30


Current Ratio

6

5.71 4.78

5

4.61 3.71

Value

4 3

Ratio

2 1 0 2004-05

2005-06

2006-07

2007-08

Year

Interpretation: The ideal level of current ratio is 2:1.we shown too much higher ratio its good for the company. Higher the current ratio, the larger is the amount of rupees available per rupees of current liabilities, the more is the firm’s ability to meet current obligation and greater is safety of fund of short term creditors. Company’s current ratio is far better than its ideal level. So kribhco may take some liabilities like bank overdraft, it’s not necessary but if management want. Overall higher the better for company prestige

31


{1.2} Quick Ratio Quick Assets

Quick Ratio =

Current Liabilities- Bank OD

Quick Assets = Current asset – Inventories For year 04 - 05 = 171,204.66 – 14,670.07 = 156,534.59 05 - 06 = 142,100.26 – 15,289.98 = 126,810.28 06 - 07 = 157,699.67 – 25,090.64 = 132,609.03 07 - 08 = 185,178.30 – 21,404.82 = 163,773.48 Quick Ratio For year

04 – 05 =

05 - 06 = 06 – 07 = 07 – 08 =

156,534.59 29,982.54 126,810.28 29,724.31 132,609.03 34,234.82

= 5.22 : 1

= 4.27 : 1

= 3.87 : 1

163,773.48 49,858.31

= 3.28 : 1

32


Quick Ratio 6

5.22

5

4.27

3.87

Value

4

3.28

3

Ratio

2 1 0 2004-05

2005-06

2006-07

2007-08

Year

Interpretation: Ideal level of this ratio is 1:1.compare to current ratio stock is deducted from current assets because we can’t convert stock into cash in short period of time. we can predict the position more accurately compare to current ratio, Higher the ratio higher the company liquidity position.

We can see that Quick ratio of the year 2008 is 3.28:1 which is lesser then all previous years indicate company’s bad liquidity position.

33


{1.3} Debt equity Ratio Long term debt

Debt equity ratio

Share holders equity

Long term debt=total liabilities-current liabilities For years 04-05= 2095.42 05-06=2204.01 06-07=2312.54 07-08=2603.26

Share holders equity=equity/preference share capital+ discount on share For year 04 - 05 = 2,691.57 + 5,519.91 / 2 = 4,105.74 05 - 06 = 5,519.91 + 6,376.20/ 2 =

5,948.05

06 - 07 = 6,376.20 + 14,696.98/ 2 =

10,536.59

07 - 08 = 14,696.98 + 11,020.20/ 2 = 12,858.59

Debt equity Ratio For year

04 – 05 =

05 – 06 =

06 – 07 =

2095.42 4105.74

2204.01 5,948.05

2312.54

= 0.51

= 0.37

= 0.22

10,536.59

07 – 08 =

2603.26 12,858.59

= 0.20

34


0.6 0.5 0.4 0.3 0.2 0.1 0

ratio debt equity ratio

year

Interpretation: The D/E ratio is an important tool of financial analysis to appraise the financial structure of a firm. It has important implication from the view point of the creditors, owners, and the firm itself. The ratio reflect the relative contribution of creditors and owners of business in its financing. A high ratio shows a large share of financing by the creditors of the firm, a low ratio implies a small claim of creditors. We can see that in above ratio that in 2004 ratio is 0.51 it implies that every rupee of outside liabilities, the firm has two rupees owners capital. in 2005 ratio decrease to 0.37 after every year its decreasing 0.22 and 0.20 respectively.

35


{1.4} Inventory Ratio Inventory

Inventory Ratio =

Current Assets

Inventory Ratio For year

14,670.07

04 - 05 =

171,204.66

15,289.98

05 - 06 =

142,100.26

25,090,64

06 - 07 =

157,699.67

21,404.82

07 - 08 =

185,178.30

=0.09:1

=0.11:1

=0.16:1

=0.12:1

Value

Inventory Ratio 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

0.16 0.12

0.11 0.09

Ratio

2004-05

2005-06

2006-07

2007-08

Year

36


Interpretation: This ratio shows a relation between sales and inventory. It shows the no of time an inventory is converted in to sales over a year. Altogether the inventory turnover ratio means lesser the stock as compare to sales where as lesser the inventory turnover ratio means more inventory in stock.

As we can see that in the year 2006-07 ratio is 16 % that is higher than 2004-05 & 2005-06 that is 11 % and 9 % respectively and also 2007-08 is 12 %. That means investment in inventory is increase over the last 2 years, which gives bad indication and in 2007-08 is good indication because investment is increase from 2004 to 2006 year.The position of year shows a downward trend, which means that the enterprise is investing more in its inventories as compare to its sale. Taking 1998 -99 has shown a 7.63 % of down fall whereas the investment in inventory for the same year has shown a mere 4.19 % of downfall. This means there is proportionately more fall in sales in inventory. A similar position follows in the year 1999 - 00 and 2000 - 01. In 1999 -00 the decrease in sale 11.45 % where the inventory is increase with 23.17 %. In 2000 - 01 the pies is decrease with 0.85 % and inventory is increase with 39.52 %. This shows that the enterprise is fail to control the inventory which is not good for enterprise. Here the inventory ratio decreases during the year here the inventory turnover ratio decrease from 8.86 times to 6.31 times. This is not a good sign for the enterprise. The number of days the inventory is held is increase. Presently it is about 57 days Where as it was about its days in 1997 -'98 so we can say that the enterprise is suffering for its position. The ratio is not -satisfactory.

37


{1.5} Current Asset Turnover Ratio

Current Asset Turnover Ratio =

Total Sales Current Asset

Current Assets For year 04-05 = 171,204.66 05-06 = 142,100.26 06-07 = 157,699.67 07-08 = 185,178.30 Total Sales For year 04 -05 =

92,421.96

05 - 06 = 125,729.74 06 - 07 = 134,397.10 07 - 08 = 138,488.33 Current Asset Turnover Ratio For year

04 – 05 =

05 – 06 =

06 – 07 =

07 – 08 =

92,421.96 171,204.66

125,729.74 142,100.26

134,397.10 157,699.67

138,488.33 185,178.30

= 0.54 : 1

= 0.88: 1

= 0.85 : 1

= 0.75 : 1

38


Value

Current assets Turn over Ratio 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

0.88

0.85 0.75

0.54 Ratio

2004-05

2005-06

2006-07

2007-08

Year

Interpretation: This ratio indicates the efficiency with which current asset turn into sales. A higher ratio implies by and large more efficient use of fund. Thus a high turnover ratio indicates reduced lock-up of fund in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm.

Current assets turn over ratio is good for the years of 2005-06, 2006-07, 2007-08 that is 0.88:1, 0.85:1 and 0.75:1 respectively. For the year 2004-05 it was decrease because company’s current assets are higher than its liability. But we can say that the company’s position is better then the last few years that is 200506 and 2006-07.

39


{1.6} Cash Ratio

Cash Ratio =

Cash in Hand + Cash at bank + Current investment Liquid Assets

Cash in Hand + Cash at bank + Current investment For year 04 - 05 = 124,761.99+14,670.07 = 139,432.06 05 - 06 = 93,558.64 +15,289.98 = 108,848.62 06 - 07 = 80,241.37 +25,090.64 = 105,332.01 07 - 08 = 90,504.27 +21,404.82 = 111,909.09 Liquid Assets = Current Liabilities – Proposed Dividend – Tax on Dividend For year 04 - 05 = 29,982.54-7,450.02 = 22,532.52 05 - 06 = 29,724.31-7,846.69 = 21,877.62 06 - 07 = 34,234.82-7,891.44 = 26,343.38 07 - 08 = 49,858.31-7,920.50 = 41,937.81 Cash Ratio For year

04 – 05 =

05 – 06 =

06 – 07 =

07 – 08 =

139,432.06 22,532.52

108,848.62 21,877.62

105,332.01 26,343.38

111,909.09 41,937.81

= 6.18:1

= 4.98:1

= 3.99(8):1

=2.67:1

40


Cash Ratio 7

6.18

6

4.98

Value

5

3.99

4 2.67

3

Ratio

2 1 0 2004-05

2005-06

2006-07

2007-08

Year

Interpretation:

The cash ratio is perhaps the most stringent measure of liquidity indeed. One can argue that it is overly stringent lack of immediate can may not matter it. The firm can starch its payment or borrow many of short notice cash and bank balance and short term marketable security and liable assets of firm financial analysis looks at cash ratio which is define. Management has to maintain a level of cash ratio so that cash is required urgently they can get it. Too high level of cash loss the opportunity to earn interest on that capital. We can see that Cash ratio is initially high in the year of 2004-05 that is 6.18. But its start decreasing from next year. it was

4.98. and next years also decrease. In

current year is 2.67:1 thought its cash and bank balance is high. This level is well and good for the company.

41


{1.7} Debtor’s Turnover Ratio Credit Sales

Debtor’s Turnover Ratio =

Ave. Debtors

Credit Sales= Credit sale are 75% 0f Total sale. For year 04 - 05 = 55,453.18 05 - 06 = 75,443.84 06 - 07 = 80,638.26 07 - 08 = 83,093

Ave. Debtors = (Opening of debtors + Closing of Debtors) / 2 For year 04 - 05 = 20,719.65 + 7,723.20 / 2 = 14,221.43 05 - 06 = 7,723.20 + 14,079.60 / 2 = 10,901.40 06 - 07 = 14,079.60 + 35,736.84 / 2 = 24,908.22 07 - 08 = 35,736.84 + 61,285.98 / 2 = 20,961.41

Debtor’s Turnover Ratio For year

04 – 05 =

05 – 06 =

06 – 07 =

07 – 08 =

55,453.18 14,221.43

75,443.84 10,901.40

80,638.26 24,908.22

83,093 20,961.41

= 3.90 : 1

= 6.92 : 1

= 3.24 : 1

= 3.96: 1

42


Value

Debtor Turn over Ratio 8 7 6 5 4 3 2 1 0

6.92

3.96

3.9 3.24

2004-05

2005-06

2006-07

Ratio

2007-08

Year

Interpretation: The analysis of the debtor’s turnover ratio supplements the information regarding the liquidity of one item of current asset of the firm. The ratio measure how rapidly debts are collected. A higher ratio is indicator of shorter time lag between credit sales and cash sales. As we can see in the year 2007-08 debtor’s turnover ratio is highest. But for the year 2006-07 this ratio is 16.49: 1 which is also higher then the 2005-06 & 2004-05. So we can say that company might face some problem in collecting the money in the year of 2005-06. But the result is quit well.

43


(1.8) Debtors conversion Period:

Debtors Conversion Period =

Debtors Credit Sales

x 360

Debtors For year 04 – 05 = 7,723.20 05– 06 = 15,252.95 06– 07 = 35,736.84 07– 08 = 61,285.98 Credit Sales = 60% 0f Total sale For year 04 – 05 = 55,453.18 05 – 06 = 75,443.84 06 – 07 = 80,638.26 07 – 08 = 83,093 Debtors Conversion Period For year

04 - 05 =

05 - 06 =

06 - 07 =

7723.20 55,453.18 15252.95 75,443.84 35736.84 80,638.26

x 360

= 50.14 Days

x 360

= 72.78 Days

x 360

= 159.54 Days

x 360

= 265.52 Days

61285.98 07 – 08 =

83,093

44


Days

Debtor's conversion period 180 160 140 120 100 80 60 40 20 0

159

96 Days

30

2004-05

44

2005-06

2006-07

2007-08

Years

Interpretation:

It measures how long it takes to collect amounts from debtors. The actual collection period can be compared with the stated credit terms of the company. If it is longer than those terms, then this indicates some insufficiency in the procedures for collection debts. This ratio indicates the speed with which debtors/accounts receivable are being collected. The higher the turnover ratio and the shorter the average collection period, the better is the trade credit management and the better is the liquidity of debtors. On the other hand, low turnover ratio and long collection period reflect delayed payment by debtors. In general, therefore, short collection period (high turnover ratio) is preferable.

Here we can see that for the year 2007-08 debtors conversion period is 266 days, which is higher compare to others. But here we can see that for the last three years company receive the money within their decided well specified period. Here for the year 2004-05 Debtors conversion period is less. But for the year 2005-06 debtor’s conversion period increase by 23 days and than increase year by year. Company need to control receivable management.

45


{1.9} Inventory Turnover Ratio Cost of Goods Sold

Inventory Turnover Ratio =

Ave. Inventory

Cost of Goods Sold = Total Sales – Gross Profit For year 04 -05 = 92,421.96 – 20,551.76 = 71,870.20 05 - 06 = 125,729.74 – 29,730.20 = 95,999.54 06 - 07 = 134,397.10 – 24,916.88 = 1,09,480.22 07 - 08 = 138,488.33 – 29,492.74 = 1,08,995.59 Ave. Inventories = (Opening stock of inventory + Closing stock of Inventory)/ 2 For year 04 - 05 = 2,691.57 + 5,519.91 / 2 = 4,105.74 05 - 06 = 5,519.91 + 6,376.20/ 2 =

5,948.05

06 - 07 = 6,376.20 + 14,696.98/ 2 =

10,536.59

07 - 08 = 14,696.98 + 11,020.20/ 2 = 12,858.59

Inventory Turnover Ratio For year

04 – 05 =

05 – 06 =

06 – 07 =

07 – 08 =

71,870.20 4,105.74

95,999.54 5,948.05

1,09,480.22 10,536.59

1,08,995.59 12,858.59

= 17.50 : 1

= 16.14 : 1

= 10.39 : 1

= 8.48 : 1

46


Value

Inventory Turn over Ratio 20 18 16 14 12 10 8 6 4 2 0

17.5

16.14 10.39 8.48

2004-05

2005-06

2006-07

Ratio

2007-08

Year

Interpretation:

Inventory stock turnover ratio measure how quickly inventory is sold. It is a test of efficient inventory management. To judge whether the ratio of a firm is satisfactory or not, higher ratio shows efficient use of inventory.

As we can see from the graph that in the year 2004-05 ratio is 17.50: 1 which higher then all the previous years, so we can say that inventory is converted into finished goods highest in this year which indicate the highest efficient use of the inventory. But in case of Kribhco the Ratio is decreased year by year.

47


{1.10} Net profit ability Ratio Net profit

Net Profit Ability Ratio

Total sales

Net profit for the year 04-05= 140.59 05-06=192.45 06-07=193.24 07-08=209.24 Sales for the year

04-05=924.22 05-06=1257.30 06-07=1343.97 07-08=1384.88

04-05

05-06

06-07

07-08

140.59 924.22

192.45 1257.30

193.24 1343.97

209.20 1384.88

15.21

15.30

14.38

15.10

48


18 16 14 12 10

ratio ratio

8

ratio ratio

6

ratio year

4 2 0 net profit

Interpretation: The net profit margin is indicate of managment’s ability to operate the business with sufficient success not only to recover from revenues of the period, the cost of merchandise or services, the expenses of operating the business and the cost of the borrowed funds, but also to leave a margin of reasonable compensation to the owners for providing their capital at risk. The ratio of net profit to sales essential expresses the cost price effectiveness of the operation. In 2004 company’s profit is 15% and after 4 also they maintain this profit margin.so company has stable profit margin in this 4 years.

49


{1.11} Gross profit ability Ratio Gross profit

Gross Profit Ability Ratio

Total sales

Gross profit for the year 04-05= 272.14 05-06=231.53 06-07=280.20 07-08=185.83 Sales for the year

04-05=924.22 05-06=1257.30 06-07=1343.97 07-08=1384.88

04-05

05-06

06-07

07-08

272.14 924.22

231.53 1257.30

280.20 1343.97

185.83 1384.88

29%

18%

21%

13%

50


35 30 25 20

Series3

15

Series2 Series1

10 5 0 1

2

3

4

5

6

Interpretation: Gross profit is the result of the relationship between prices, sales volume and costs. A change in the gross margin can be brought about by changes in any of these factors. The gross margin represent the limit beyond which fall in sales prices are outside the tolerance limit. In this company in 2004-05 gross profit margin is 29%,its good for the every company, but after one year its was fallen down to 18%. In 2007-08 margin was very low compare to previous year.

51


(1.12)Return on capital employed net profit

Return on capital employed

Share capital

Net profit for the year 04-05= 140.59 05-06=192.45 06-07=193.24 07-08=209.20 Share capital=equity/ preference share capital+ discount on share For the year 04-05= 2691.57+5519.91/2=4105.74 05-06=5519.91+6376.20/2=5948.05 06-07=6376.20+14698.98/2=10536.59 07-08=14696.98+11020.20/2=12858.59

04-05

05-06

06-07

07-08

140.59 4105.74

192.45 5948.05

193.24 10536.59

209.20 12858.59

3.4

3.2

1.8

1.6

52


4 3.5 3 2.5 2

ratio

1.5

year

1 0.5 0 capital employed

Interpretation: Here the profit related to the total capital employed. The term capital employed refers to long term funds supplied by the creditors and owners of the firm. It can be computed in two ways. First, It is equal to non-current liabilities plus owners of the firm. The Higher the ratio, the more efficient is the use of capital employed. in 2004-05 ratio of capital employed is 3.4% its better than other year. In 2007-08 ratio was decrease to 1.6%. its was half compare to 2004-05.

53


(1.14) Inventory Conversion Period Ave. Inventory

Inventory Conversion Period =

Cost of Good Sold

x 360

Ave. Inventories = (Opening stock of inventory + Closing stock of Inventory) / 2 For year 04 - 05 = (2691.57 + 5519.91 ) / 2 = 4105.74 05 – 06 = (5519.91 + 6376.20 ) / 2 = 5948.05 06 – 07 = (6376.20 + 14696.98 ) / 2 = 10536.59 07 – 08 = (14696.98 + 11020.20 ) / 2 = 12858.59 Cost of Sales = Total Sales – Gross Profit For year 04 – 05 = 92421.96 – 20551.76 = 71870.20 05 – 06 = 125729.74 – 29730.20 = 95999.54 06 – 07 = 134397.10 – 24916.88 = 109480.22 07 – 08 = 138488.33 – 29492.74 = 108995.59

Inventory Conversion Period For year

04 - 05 =

05 - 06 =

06 - 07 =

07 - 08 =

4105.74 71870.20 5948.05 95999.54 10536.59 109480.22 12858.59 108995.59

x 360

= 42.47 Days

x 360

= 34.65 Days

x 360

= 22.30 Days

x 360

= 20.57 Days

54


45 40 35 30 25 20

Series1

15

Series2

10 5 0 Year

2004-05

2005-06

2006-07

2007-08

Inventory Conversion period

Interpretation:

Inventory conversion period means, time taken to convert raw material in to finished goods to goods sold. It indicates how effectively and efficiently an inventory is controlled. Lesser the inventory conversion period more efficient and effective use of inventory.

Here we can see that for the year 2004-05 inventory conversion periods is 21 days which is less then the rest of year. As we can see from the graph for the year 2007-08 inventory conversion period is 42 days which is highest among the collected data. But as year passing it increases. And we can find that it was maximum for the year 2007-08. So we can say that they are able to substantially increase the inventory holding period from 21 days to 42 days. It may happen because the average inventory holding period has been increase and also the cost of goods sold decrease.

55


(1.14) Raw material conversion period

Raw Material Conversion Period =

Raw material Inventory

Raw Material consumption รท

360

Raw Material Inventories For year 04 - 05 = 5,519.91 05 - 06 = 6,376.20 06 - 07 = 14,696.98 07 - 08 = 11,020.20

Raw Material Consumption For year 04 - 05 = 39,150.61 05 - 06 = 47,231.80 06 - 07 = 47,310.96 07 - 08 = 65,404.97 Raw Material Conversion Period For year

04 - 05 =

5,519.91

รท

05 - 06 =

6,376.20

รท

06 - 07 =

14,696.98

รท

07 - 08 =

11,020.20

รท

39,150.61 360

47,231.80 360

47,310.96 360

65,404.97 360

= 50.75 Days

= 48.60 Days

= 80.98 Days

= 60.65 Days

56


Raw Material Conversion Period 111.83

120

Days

100 80 60 40

60.65

50.75

48.6

2004-05

2005-06

Days

20 0 2006-07

2007-08

Year

Interpretation:

Raw material conversion period indicate the smoothness of the production or we can say that how much time taken by the production to convert raw material in to finished good. Smaller the raw material conversion period higher the efficiency of production. In this case we can say that for the year of 2004-05 and 2005-06 raw material conversion periods are 51 days and 49 days respectively which is lower then the others years. Lowest conversion period is recorded for the year of 2004-05 because in this year raw material inventories is less and raw material consumption is highest. But as we can see that in the year 2006-07 & 2007-08 raw material inventories increase dramatically compare to previous year and consumption per day was reduced so here raw material conversion period is increase but we can control this by holding the inventories lower and increase the raw material consumption per day.

57


(1.15) work in process conversion period Work in Process Conversion Period =

Cost of Production

Work in process

รท

Inventory

360

Work in Process Inventories For year 04 - 05 = 36.96 05 - 06 = 40.94 06 - 07 = 46.13 07 - 08 = 61.77

Cost of Production For year 04 - 05 = 61,732.20 05 - 06 = 1,03,463.13 06 - 07 = 1,28,279.30 07 - 08 = 1,48,885.75 Work in Process Conversion Period

For year

04 - 05 =

36.96

รท

05 - 06 =

40.94

รท

06 - 07 =

46.13

รท

61,732.20 360

1,03,463.13 360

1,28,279.30

= 0.22 Days

= 0.14 Days

= 0.13 Days

360

07 - 08 =

61.77

รท

1,48,885.75 360

= 0.15 Days

58


Work in Process Conversion Period 0.25

0.22

Days

0.2

0.14

0.15

0.13

0.15 Days

0.1 0.05 0 2004-05

2005-06

2006-07

2007-08

Year

Interpretation: It indicates the work-in-process inventory (can say semi-finished good) converted in to finished goods. Its also contain the production cost holding by it. Here we can say that for the year 2004-05 due to high work in process inventory. Work in process conversion period is low even though the cost of production is too high compare to others. For next years it was decreased by day to day because, work in process inventory is high compare to all previous year. Work in process conversion period can be controlled by keeping work in process inventory low. But in case of Kribhco the Work-in-process conversion periods are not a single day r say it is minor because in Kribhco the duration in convert Semi finished goods to finished goods is very less

59


(1.16 )finished good conversion period

Finished Goods Conversion Period =

Finished Goods Inventory

Cost of Goods Sold รท

360

Finished Goods Inventories

For year 04 - 05 = 5,548.10 05 - 06 = 6,399.69 06 - 07 = 14,650.85 07 - 08 = 10,958.76

Cost of Goods Sold For year 04 - 05 = 58,870.52 05 - 06 = 1,02,611.14 06 - 07 = 1,02,028.14 07 - 08 = 1,52,577.84 Finished Goods Conversion Period

For year

04 - 05 =

5,548.10

รท

05 - 06 =

6,399.69

รท

06 - 07 =

14,650.85

รท

07 - 08 =

10,958.76

รท

58,870.52 360

1,02,611.14 360

1,02,028.14 360

1,52,577.84 360

=33.93 Days

=22.45 Days

=43.94 Days

=25.85 Days

60


Inventory Conversion = Raw material Conversion period + Work in progress conversion period + Finish goods conversion period

For year

04 - 05

=

50.75 + 0.22 + 33.93 = 84.90 Days

05 - 06

=

48.60 + 0.14 + 22.45 = 71.19 Days

06 – 07

=

80.83 + 0.13 + 43.94 = 124.90 Days

07 - 08

=

60.65 + 0.15 + 25.85 = 86.65 Days

61


Debtors Conversion Period For year

04 - 05 =

05 - 06 =

06 - 07 =

07 - 08 =

7,723.20 55,453.18

15,252.84 75,443.84

35,736.84 80,638.26

61,285.98 83,093

x 360

=50.14 Days

x 360

= 72.78 Days

x 360

=159.54 Days

x 360

=265.52 Days

Gross Operating Cycle Period = Inventory Conversion Period + Debtors’ conversion period

For year

04 - 05

=

351.65 + 50.14 = 106.4 Days

05 - 06

=

283.90 + 72.78 = 74.95 Days

06 - 07

=

144.19 + 159.54 = 57.22 Days

07 - 08

=

134.90 + 265.52 = 74.30 Days

62


Conclusion And Recommendations

63


Conclusion  From the study of ratio analysis, I have found that it is a very difficult task to maintain ideal ratios in such a big organization. There are various factors affecting while managing ratio analysis like credit policy, inventory management system , production cycle etc. But it is very important to manage it every situation.  Fertilizer is a product whose price is highly controlled by Government. of India Where by it may not be easily possible to increase the sales. Because the product is sold as per Government of India allocated area. But efforts can surely be made to reduce the cost factors. It is suggested that cost may highly be control through effective budgeting and continuous analysis there off.  IFFCO playing a big role in deciding price factors, so kribhco can’t set its own price and sale to directly to farmers  Kribhco’s current ratio is far more better than its ideal ratio, so in the future if kribhco can borrow some money from the market, if It’s necessary.  Kribhco’s net profit is almost 15% every year its very good for the company who’s main objective is to not earn a profit  In Kribhco all financial year have the double current assets compare to current liabilities & all years satisfy sound financial condition requirement & more liquidity of company indicate safe and sound position.  Inventory conversion period has continuously decreased from the year 2004-05 to 2007-08.  KRIBHCO have fix inventory management system.

64


 Liquidity position of a company can be ensured by the current ratio, it can be said that if the ratio is 2: 1 then the company’s liquidity position is sound. In the year 2004-05 only the company liquidity position is good.  KRIBHCO strongly follows the credit policy but Receivable period

is more

Compare to Creditor’s period.

65


Suggestions:  If KRIBHCO can directly contact to the farmers and sell them without interfere of government or IFFCO. So it can increase its profit margin

 In case of KRIBHCO they need to change their credit policy, because in this case we can see that the average creditor’s credit period is 30 days in raw materials and 10 days in case of spares. Where as debtor’s credit period (Bills receivable) is for 45 days. Here debtor’s credit period is more then creditor’s credit period which need to be modified.  It is possible because KRIBHCO is the only company in SAARC countries who are producing Urea and also have biggest Ammonia plant all over India. So we can say they have the monopoly in urea and also they are the market leader in case of Ammonia. So either they can increase the period of creditor’s credit period or decease the debtor’s credit period, they can shorten collection period.  KRIBHCO have the 60:40 ratio of credit to cash sales which also can be modified by taking advance payment from the customer and it can be used to maintain liquidity for daily cash need raw material conversion period.

 Net operating cycle period was increase which need to be maintain as low as possible by reduce raw material conversion period, debtor’s conversion period , finish good conversion period ect. It helps to keep down the Net operating cycle

66


. Limitations of Study:

During the study of this project some limitation I have found which are as below,  This research is based on the secondary data and during the study of working capital there are so many data required from various department which was not disclosed by the respective department, for example budget of the current financial year.  Some approx data provided from the various departments for the calculation purpose, e.g. Carrying cost, Ordering cost ECT, inter firm comparision which were not calculated by the respective departments.  Available information for the study of ratio analysis is limited,

67


BIBLIOGRAPHY

Books

1) I.M.PANDEY- 2000,FINANCIAL MANAGEMENT, EIGHT EDITION VIKASH PUBLISING HOUSE PRIVATE LTD. 2) R.S.N.PILLAI & BAGHAVATHI, – DEC. 2005, MANAGEMENT ACCOUNTING THIRD EDITION S.CHAND PUBLICATION. 3) DONALD R. COOPER & PAMELA S. SCHINDLER ,BUSINESS RESEARCH METHODS EIGHT EDITION , TATA Mc. GRAW-HILL EDITION. 4) M Y KHAN, P K JAIN 2008,FINANCIAL MANAGEMENT FIFTH EDITION-,TATA MCGRAW-HILL PUBLISHING COMPANY LIMITED.

Reports  Company Annual Report from 2004-05 to 2007-08.  Inventory statues report maintain by stores  Purchase Order records  Cash flow statements.

Websites  www.kribhco.net  www.kribhcoindia.com  www.kribhco.org.  WWW.KRIBHCOSURAT .COM  WWW.WIKIPEDIA.COM

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69


project report on ratio analysis