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Chapter –IV
FINANCIAL APPRAISAL OF PTL
FINANCIAL ANALYSIS OF PTL
A financial statement is a systematic collection of data according to some
logical and consistent accounting procedures. Its purpose is to convey an idea about
some important financial aspects of a business firm. It may show a position at a
moment of time as in the case of the balance sheet, or may reveal a series of activities
over a given period of time as in the case of income statement.
The information contained in these financial statements is used by various
interested parties like management, creditors, investors, government and others to
form judgment about the operative performance and financial position of the firm.
The users of financial statements can get better insight about financial strengths and
weaknesses of the firm if they properly analyze the information given in these
statements.
The process of identifying the financial strengths and weaknesses of the firm
by properly establishing relationship between the items of balance sheet and profit
and loss account is called financial analysis. Such analysis is the starting point for
making effective plans. Forecasting, which is an important pre-requisite of effective
planning, requires understanding of the past to anticipate the future. Financial data can
be used to analyze a firm’s past performance and assess its present financial strength.
The nature of analysis will differ depending upon the purpose of the analyst. The
present analysis is undertaken to evaluate performance of PTL.
Tools of Financial Analysis
Following are the major tools which can be used to analyze a firm’s financial
position.
Financial statements.
Trend Analysis.
Funds and cash flow analysis.
Ratio analysis.
In the present study a combination of these tools has been used.
Types of Financial Analysis
There are some of the methods which can be adopted by an analyst to
comment upon the performance of a particular unit in comparison with its competitors
or over a given period of time. These are:
1. Time Series Analysis.
The most common way to evaluate the performance of a firm is to compare its
current position with its past position. When financial position over a period of time is
compared, it is known as the tike series (or trend) analysis. It gives an indication of
the direction of the change and reflects whether the firm’s financial performance has
improved, deteriorated or remained constant over a period of time. The analyst should
first determine the change, and then he should try to find out the reasons for the
change. The change, for example, may be affected by mere changes in the accounting
policies, without a material change in the firm’s performance.
2. Cross- Sectional Analysis:
Another way of comparison is to compare the financial position of one form
with some selected first in the same industry at the same point of time. This kind of
comparison is known as the cross - sectional analysis. It indicates the relative
financial position and performance of the firm. A firm can easily resort to such a
comparison as it is to get the published financial statements of the similar firms.
3. Performa Analysis.
Analysis of present financial position with the help of projected financial
statements for the future is known as Performa analysis. Future financial position can
be development from the projected financial statements. The comparison of current or
past ratios with future ratios shows the firm’s relative strengths and weaknesses in the
past and the future. If the future ratios indicate weak financial position, corrective
action should be initiated.
4. Industry Analysis.
To determine the financial condition and performance of a firm, its ratios may
be compared with average ratios of the industry of which the firm is a member. This
sort of analysis, known as the industry analysis is considered to be best analysis as it
helps to ascertain the financial standing and capability of firm vis-à-vis other firms in
the same industry.
In the present study, the financial and social performance of PTL is measured.
For this purpose, an analysis of following aspects is done:
1. Profitability analysis.
2. Working capital management.
3. Capital structure analysis.
4. Market performance.
5. Investment pattern.
Key Financials of PTL (Rs. In Lacs)
Particulars 2006 2007 2008Share capital 6
076 6076
6076
Reserve & Surplus 50827 58624
60408
Sales 95855 95885 96959
Net Profit 12935 7798 6517
EPS 21.29 12.84 10.73
Dividend 105% Nil 50%
R & D expenditure (%) of sales
0.79 0.89 0.96
PROFITABILITY ANALYSIS
Profit is the ultimate output of a company and the company will have no future
if it fails to make adequate profits. P.F. Ducker has rightly commented on importance
of profitability of a concern for its survival when he writes,” profits is a condition of
survival. It is the cost of future. It is the cost of staying in the business.” If an
undertaking does not earn profit it cannot expand or diversify, it cannot pay handsome
rewards to various factors of production and it is doomed to fail at last. In fact, profit
is a yardstick by which efficiency of a business unit is measured. The higher the
profit, the more efficient is the business considered. Though changes in total profits
may indicate changes in efficiency, they will not indicate true state of efficiency of a
business or profitability unless profits are related with the size of investment.
Therefore overall efficiency of the business can be measured in terms of profits
related to investments made in the business. The profitability is also evaluated in
terms of return on capital contributed by creditors and owners because if the company
is unable to earn a satisfactory return on investment, its very survival is threatened. To
comment on the overall financial performance of PTL, following two important
profitability ratios are calculated.
1. Profits in relation to sales.
2. Profits in relation to investments.
Relevant financial information which has been used for conducting profitability
analysis is as follows:
Profitability in relation to sales
A company should be able to produce adequate profit on each rupee of its
sales. If sales do not generate sufficient profits, it would be very difficult for
the firm to cover operating expenses and interest charges. To measure the
profitability in relation to sales, following ratios are calculated.
1. Gross Profit Ratio
2. Operating Ratio
3. Operating profit Ratio
4. Expenses Ratio
5. Net Profit Ratio
6. Cash Profit Ratio
Gross Profit Ratio:
This ratio measures the relationship of gross profit to net sales. It reflects the
efficiency with which a firm produces its products. So as higher the gross profit ratio
better the result.
Gross Profit ratio= Gross Profit * 100
Net Sales
In croresParticular 2006 2007 2008Gross Profit 130.7 114.9 99.4Net Sales 958.55 958.85 969.59G.P. Ratio 13.6% 11.9% 10.3%
G/P Ratio of the company is decreasing from 2004 to 2008 which is due to increasing
input costs. But it is quite good i.e. 10.3% with the increasing inflation.
2006 2007 2008
0
200
400
600
800
1000
1200
G.P
Net Sales
2006 2007 20080.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
G.P. Ratio
Operating Ratio:
This ratio establishes the relationship between cost of goods sold and other operating
expenses on the one hand and sales on the other hand. In other words, it measures the
cost of operations per rupee of sales.
Operating Ratio= Operating cost * 100
Net Sales in crores
Particular 2006 2007 2008Operating Cost 833 848.6 872.6Net Sales 958.55 958.85 969.59Operating Cost Ratio 86.9% 88.5% 90.0%
2006 2007 2008
750
800
850
900
950
1000
Operating Cost
Net Sales
2006 2007 2008
85
86
87
88
89
90
91
Opearing Cost ratio
Operating ratio
Operating ratio: Operating ratio indicates the percentage of net sales that is
consumed by operating cost. Higher the operating ratio, the less favorable it is,
because, it would have a small margin to cover interest, income tax, dividend and
reserves. There is no rule of thumb for this ratio as it may differ from firm to firm
depending upon the nature of its business and its capital structure. However, 75 to 85
percent may be considered to be good ratio in case of manufacturing undertaking. So
from the analysis of operating ratio of the company PTL, in every FY from 2004 to
2008 the operating ratio is increasing and in the current year it increases up to 90%
shows only 10% margin left for other charges. It should increase its operating
efficiency.
Operating Profit Ratio:
This ratio is calculated by dividing operating profit by sales.
Operating Profit Ratio= Operating profit * 100
Sales
This ratio can also be calculated as:
Operating Profit Ratio= 100 - Operating Ratio
Operating Profit Ratio of PTL
Particular 2006 2007 2008Operating Profit Ratio
13.1% 11.5% 10.0%
2006 2007 2008
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Operating Profit Ratio
Net Profit Ratio:
This ratio establishes a relationship between net profit and sales and indicates
management’s efficiency in manufacturing and selling the products. It is the overall
measure of a firm’s ability to turn each rupee of sales into net profit. This ratio also
indicates the firm’s capacity to withstand in adverse economic conditions. The
following table shows the net profit margin ratio of PTL.
Net Profit Ratio= Net profit after tax * 100
Net Sales in crores
Particulars 2006 2007 2008Net Profit 129.3 78.0 65.2
Sales 958.55 958.85 969.59N. P. Ratio 13.49% 8.13% 6.72%
2006 2007 2008
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
N.P.Ratio
Cash Profit Ratio:
This ratio measures the relationship between cash generated from operations and the
net sales.
Cash Profit Ratio= Cash Profit * 100
Net Sales in crores
Particular 2006 2007 2008Cash profit
119.7 109.7 111.6
Net Sales 958.55 958.85 969.59C. P.Ratio 12.5% 11.4% 11.5%
2006 2007 2008
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
C.P. Ratio
C.P ratio
ANALYSIS OF PROFITABILITY OF PTL
PTL has been able to maintain a soundly profitable stance through its focus on
continuous improvement and capital efficiency. In profit there are little fluctuations
from the FY 2004 to 2008. However unprecedented stretch of poor monsoons resulted
into broad spectrum of depressed market environment of the whole tractor industry.
Clearly profitability of PTL’s has shown continuous and steadiest growth. It is the
result of notable improvement in both volume and model mix in tractors underpinned
by its traditional cost efficiencies.
Cost Break Down of PTL:
The raw material constitutes the major portion of the total expenditure in PTL. It
revolves around 79% of total expenditure as is given from the table given below:
Cost Breakdown of PTL (%age of Total Expenditure)
Particulars 2006 2007 2008Material Consumption 82.33 79.54 78.97Finance Charges 0.75 0.11 (1.66)Depreciation 1.78 1.79 1.93Operating & Adm. Exp. 15.14 18.56 20.76
PROFITABILITY IN RELATION TO INVESTMENTS
The profitability of the firm is also measured in relation to its investment. The term
investment may refer to capital employed in the business or the owner’s equity.
Accordingly, return on capital employed (ROCE) and return on Shareholders equity
(ROSE) are calculated to give a broad idea about the overall return on the funds
invested in the business.
Return on capital employed (ROCE) is the best tool which is used by the owners to
know how well the management has used the funds supplied by them and other
parties. A higher ratio will satisfy the owners that their funds earn a handsome return.
To get a true idea about the operating efficiency of a firm ROCE is calculated for a
number of years and the firm’s ratio should be compared with industry average. In
other words both intra-firm and inter-firm comparisons should be made. This ratio
helps management in the formulation of the proper debt policy by comparing the cost
of raising debt with the rate of return on capital employed. ROCE is calculated by
dividing net profit after tax and interest by total capital employed i.e.
ROCE = Net Profit after Tax and Interest
Capital Employed
(Here capital employed = Fixed Assets + Trade Investments + Current Assets –
Current liabilities)
ROCE of PTL (Rs. In Lacs)
Particulars 2006 2007 2008
Net Profit 17045.40 7798.23 6516.87
Net Capital Employed
61061.61 68372.17 68394.68
ROCE 27.91% 11.41% 9.53%
2006 2007 2008
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
ROCE
On seeing the return on capital employed of PTL, it will be found that up to the year
2007 it shows a decreasing trend in its ROCE. This is due to severe demand down-
turn arousing from weakening farm fundamentals across major markets. But in the FY
2007-08 recorded the lower ROCE as 09.53% in comparisons of last three years.
Return on Equity Analysis:
ROE is the relationship between net profits (after interest and taxes) and the
proprietors’ funds. As the primary objective of business is to maximize its earnings,
this ratio indicates the extent to which this primary objective of business is being
achieved. This ratio is of great importance to the present and prospective shareholders
as well as the management of the company. As this ratio reveals how well the
resources of the firm are being used, higher the ratio, better the results.
5 Yearly Trends of ROE of PTL (Rs. In Lacs)
Particulars 2006 2007 2008
Shareholders Funds
56901.65
64699.88 66483.51
Net Profit after tax
12933.66
7798.23 6516.87
ROE 22.72% 12.05% 9.80%
.
2006 2007 20080.0%
5.0%
10.0%
15.0%
20.0%
25.0%
ROE
As the table depicts, PTL s’ ROE (Net Worth) in FY 2005-06 is highest amongst the
other financial years which is 22.72% in 2006. Thus PTL is very attractive company
for the purpose of investment with lesser risk of dilution of equity as well as lesser
risk due to less debt equity ratio. But it further decreases in the FY 2007-08 due to
input costs inflation.
WORKING CAPITAL MANAGEMENT
Working capital refers to the excess of current assets over current liabilities.
Management of working capital is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities and the interrelationship
that exists between them. In other words, it refers to all aspects of administration of
both current assets and current liabilities. The basic goal of working capital
management is to manage the current assets and current liabilities of a firm in such a
way that a satisfactory level of working capital is maintained, i.e. it is neither
inadequate nor excessive. This is so because both inadequate as well as excessive
working capital implies idle funds which earns no profit for the business and
inadequacy of working capital may lead the firm to insolvency. Working capital
management policies of a firm have great effect on its profitability, liquidity and
structural health. A sound working capital management policy is one which ensures
lowest cost, adequate liquidity and sound structural health of the organization.
PRINCIPLES OF WORKING CAPITAL
MANAGEMENT
The following are the main principles of a sound working capital management
policy:
1. Principal of Risk Variation
Risk in this context, refers to inability of a firm to meet its obligations as and
when they become due for payment. Larger investment in current assets with less
dependence on short-term borrowing increases liquidity reduces risk and thereby
decreases the opportunity for a loss. To the contrary, less investment in current assets
with greater dependence on short-term borrowings increases risk, reduces liquidity as
well as profitability. Thus there is a definite and inverse relationship between the
degree of risk and profitability. A conservative management prefers to minimize the
risk maintaining a higher level of current assets or working capital while a liberal
management assumes greater risk by reducing working capital. However the goal of
management should be to establish a suitable tradeoff between profitability and risk.
2. Principle of Cost of Capital.
Cost of raising capital is different for different sources of raising working
capital finance. It is generally dependent on the degree of risk involved in raising
capital from a particular source. Higher the risk, higher is the cost and lower the risk,
lower is the cost. A sound working capital management should always try to achieve a
proper balance between these two.
3. Principle of Equity Position.
This states that the amount of working capital invested in each component
should be adequately justified by a firm’s equity position. Every rupee invested in the
current asset should contribute to the net worth of the firm. Thus this principle is
concerned with planning the total investment in current assets. The level of current
assets may be measure with the help of two ratios.
i. Current assets as a percentage of total assets.
ii. Current assets as a percentage of total sales.
While deciding about the composition of the current assets, the financial manager
may consider the relevant industrial average.
4. Principle of Maturity of Payment.
This principle states that a firm should make every effort to relate maturities of
payment to its flow of internally generated funds. It is concerned with planning the
sources of finance for working capital. Maturity pattern of various current obligations
is an important factor in risk assumptions and risk assessments. Generally, shorter the
maturity schedule of current liabilities in relation to expected cash inflows the greater
is the inability to meet its obligations in time.
Nature of Working Capital Requirements
The working capital requirements of a concern can be classified as:
1. Permanent or fixed or regular working capital requirements.
2. Temporary or variable working capital requirements.
Permanent working capital is that minimum amount which should always be
deployed to carry the business operations without interruption. This part of working
capital should generally be financed from the fixed capital sources. Temporary
working capital is that amount which is required for the seasonal demands and some
special exigencies such as rise in prices, strikes, extensive advertisement to capture
more markets, etc. It should be financed from short term sources of capital.
Both kinds of working capital - permanent and temporary are necessary to
facilitate production and sale through the operating cycle.
FINANCING OF WORKING CAPITAL
Permanent working capital should be financed in such a manner that the
enterprise may have its uninterrupted use for a sufficiently long period. Important
sources are:
1. Shares: Issue of shares is the most important source for raising the long term
capital. Raising of permanent capital through the issue of shares has certain
advantages like there is no fixed burden on the resources of the company and,
moreover, no charge is created on the assets of the company.
2. Debentures: A debenture is an instrument issued by the company
acknowledging its debt to its holder. Debentures carry a fixed rate of interest which is
a legal charge against revenue of the company. The debentures are generally given
floating charge on the assets of the company.
The firm issuing debentures also enjoy a number of benefits such as trading on equity,
retention of control, tax benefit, etc.
3. Public deposits: Public deposits are the fixed deposits accepted by a business
enterprise directly from the public. This source of raising finance became popular
because of the imperfect development of banking system in the country. This mode of
financing has a large number of advantages such as very simple and convenient
source of finance, taxation benefits, trading on equity, and inexpensive source of
finance.
4. Retained Earnings: It refers to reinvestment by a concern of its surplus
earnings in its business. It is an internal source of finance and it often referred to as
self financing or ploughing back of profits. It is most suitable for an established firm
for its expansion, modernization, replacement, etc. But excessive resort to ploughing
back of profits may lead to monopolies, misuse of funds, over capitalization,
manipulation in the value of the shares, etc.
5. Loans from Financial institutions: Financial institutions such as
Commercial Banks, Life Insurance Corporation, State Financial Corporation of India,
Industrial Development Bank of India, etc. also provide short term, medium term and
long term loans.
Temporary/Variable working capital is financed through;
1. Commercial Banks. Commercial banks are the most important source of short
term capital. They provide a wide variety of loans tailored to meet the specific
requirements of a concern.
2. Trade Credit. The trade credit arrangement of a concern with its suppliers is an
important source of short term finances. The use of trade credit depends upon the
buyer’s need for it and the willingness of the sources of supply to extend it.
3. Advances. A company can meet its short term working capital requirements by
getting advances from their customers and agents against orders. This source of
finance is especially suitable for those industries which have long production cycles.
4. Commercial Papers: Commercial papers are unsecured promissory notes sold
by the issuers to investors through agents like Merchant bankers and security houses.
Commercial papers provide an avenue for short term borrowings to highly rated
corporate borrowings at cheaper rates of interest as compared to bank borrowings.
The rating of the company by any rating agency is a pre-requisite for issuing
commercial papers.
In a nutshell, working capital is the life blood and controlling nerve centre of
the business. No business can be successfully run without an adequate amount of
working capital. Whether a particular business is managing its working capital
properly or not can be judged by analyzing the liquidity position of that unit and the
concerned information (like debtors analysis, creditors analysis etc).
To comment upon the working capital management in PTL,
the technique of ratio analysis is adopted.
The following ratios have been calculated for the said purpose.
1. Current ratio.
2. Comparative debtors’ analysis.
3. Working capital turnover ratio.
4. Inventory Turnover analysis.
5. Creditor’s turnover.
Current Ratio:
The current ratio is an indicator of a firm’s short term solvency. A firm, to survive on
a continuing basis, should maintain sufficient liquidity. As a rule of thumb, 2:1 is
considered to be an ideal current ratio. The idea of having double the current assets as
to current liabilities is to provide a cushion against possible losses and to ensure a
smooth day to day functioning of the firm. There is, however, nothing very sacrosanct
about the 2:1 ratio. What is more important is the quality of current assets, how fast
and to what extent can they be converted into cash.
5 Yearly Trend of Current Ratio of PTL
Years Current Assets Current
Liabilities
Ratio
2006 66579.18 16565.46 4.02:1times
2007 72458.42 13940.70 5.19:1times
2008 62323.63 18433.35 3.38:1times
A relatively high current ratio is an indication that the firm is liquid and has the ability
to pay its current obligations in time and when they become due. On the other hand, a
low current ratio represents that the liquidity position of the firm is not good and the
firm shall not be able to pay its current liabilities in time. The above table indicates
that there are also fluctuations in the current ratio of PTL. In FY 2004 it was 3.39:1
and then increases to 5.20:1 in FY 2007 and in FY 2008 it further decreases to 3.38:1.
The reason of increment in the current ratio because decrease in current liabilities and
increase in current assets in the FY 2007. In all the years it is above than the standard
2:1.
2006 2007 20080
10000
20000
30000
40000
50000
60000
70000
80000
Current Assets
Current Liabilities
Debtors/Receivables Turnover Ratio:
Debtor’s turnover ratio indicates the velocity of debt collection of firm. In simple
words, it indicates the number of times the average debtors are turned over during a
year.
Debtors Turnover Ratio = Total sales
Debtors
Avg. collection period = No. of Months
D.T.R
5 Yearly Trend of Debtor Turnover Ratio of PTL
Years Sales Debtors D.T.R Collection
Period (months)
2006 95855 52776 1.82 6.61
2007 95885 50364 1.90 6.32
2008 96959 28135 3.45 3.48
Since 1989, the company’s main product i.e. tractor which accounted for nearly 95%
of its turnover is being sold against cash only. In fact sales of tractors are executed
against advances from the dealers. Since liquidity position of a company depends
upon the quality of its debtors to a great extent, two ratios i.e. Debtors Turnover Ratio
and Average Collection Period are calculated to judge the quality and liquidity of
debtors of the company and comment on efficiency.
A close analysis of this ratio of five years from 2004 to 2008 as given in chart
shows PTL has a very low turnover ratio of about 1.15 times in 2004 but it increasing
Y-O-Y and it is highest in the current year i.e. 3.45. The reason is, during the year,
PTL has made special efforts to reduce dealer outstanding by focusing attention on
increasing retail sales and reducing dealer stocks and thereby increase in collection
from dealers.
Current Assets & Current Liabilities of PTL in Period 2007-08
Current Assets Total %age
Inventories 11379.38 18.26
Sundry Debtors 28135.08 45.14
Cash & Bank 19883.14 31.90
Loans & Advances 2581.83 4.14
Other C. A. 344.20 0.56
TOTAL 62323.63 100
Current Liabilities Total %age
Sundry Creditors 8342.12 72.36
Acceptances 1331.06 11.55
Dividend Payable & other
109.91 0.95
Interest Accrued 54.04 0.47
Other Liabilities 1690.89 14.67
TOTAL 11528.02 100
Net Working Capital (C.A. - C.L.)
50795.61
Working Capital Turnover Analysis:
The amount of working capital is sometimes used as a measure of a firm’s liquidity. It
is considered that between the two firms, the one having the larger amount of working
capital has the greater ability to meet its current obligations. Working capital turnover
analysis is, therefore, used to measure the efficiency with which the firms are using
their working capital. For this purpose, working capital turnover ratio, which indicates
the velocity of the utilization of net working capital, is worked out. A higher ratio
indicates efficient utilization of working capital. In the following lines a comparative
statement of working capital turnover ratio of PTL is produced.
Net Working Capital of PTL (Rs. In Lacs)
Year Current Assets Current Liabilities Net Working Capital
2006 66579.18 11054.69 55524.49
2007 72458.42 13940.70 58517.72
2008 62323.63 18433.35 43890.28
2006 2007 2008
0
10000
20000
30000
40000
50000
60000
70000
Net Working Capital
Working Capital Turnover Ratio of PTL
Years Sales Net W. C. W.C. Turnover Ratio
2006 95855 55524.49 1.73:1
2007 95885 58517.72 1.64:1
2008 96958 43890.28 2.21:1
An analysis of this table shows there is slight variation of the ratio from 2004 to 2007.
But it is quite high in 2008 in respect to other years. This no doubt indicates the
maximum use of working capital or quick turnover of current assets due to handsome
sales of its main products (tractors). To ensure maximum profitability, working
capital has to be managed skillfully to avoid situation of both, under and over trading.
2006 2007 20080
0.5
1
1.5
2
2.5
W.C. Turnover Ratio
Inventory Turnover Analysis:
Every firm has to maintain a certain level of inventory of finished products so as to be
able to meet the requirements of the business and ensure an uninterrupted production.
This analysis is done by calculating inventory turnover ratio. Inventory turnover ratio
which is calculated by dividing sales by average inventory indicates the number of
times the stock has been turned over during the year. It also evaluates the efficiency
with which a firm is able to manage its inventory. A lower inventory turnover is an
indicator of higher efficiency in managing the inventory.
Inventory Turnover of PTL in 5 Years
Particulars 2006 2007 2008
Sales 95855 95885 96958
Inventory 8816.04 13426.61 11379.38
I. Turnover Ratio
10.87 7.14 8.52
The above table shows PTL has the moderate inventory ratio during this period. This
indicates that the company has a good inventory management. In FY 2004 there is
lowest inventory turnover. This is due to excessive inventory level than required by its
production and sales activities. The inventory turnover ratio should be moderate
because we can’t blindly accept very high inventory turnover ratio as indicative of
efficient inventory management as it may be due to very low levels of inventory
which generally results into frequent stock outs. And frequent stock outs may hamper
production activities and may ultimately affect profits.
Creditors Turnover Analysis:
The analysis of creditor’s turnover is basically the same as of debtor’s turnover ratio
except that in place of trade debtors, the trades creditors are taken as one of the
components of the ratio and in place of average daily sales, average daily purchases
are taken as the other component of the ratio. It can be calculated as:
Creditors Turnover Ratio = Net Credit Annual Purchases
Average Trade Creditors
Average Payment Period Ratio = Average Trade Creditors
Average Daily Purchases
Creditors Turnover Analysis of PTL in 5 Years
Year Purchases Sundry Creditors
Creditors Turnover
Payment Period (months)
2006 67384 9443 7.14 1.68
2007 72573 10272 7.06 1.70
2008 66368 8342 7.95 1.51
The average payment period ratio represents the avg. number of days taken by
the firm to pay its creditors. Generally lower the ratio better is the liquidity position of
the firm and higher the ratio less liquid is the position of the firm. From the analysis,
the payment period has been reduced from 3.93 in FY 2004 to 1.51 in FY 2008 hence
we can say PTL has better liquidity position.
CAPITAL STRUCTURE ANALYSIS
In order to ensure an economic use of its funds, a company has to plan its
capital structure. Capital structure of a company, is also known as its financial plan,
refers to the composition of long term sources of funds in its total capital. It gives an
idea about the proportion of debt and equity in the financial structure of the business.
A properly planned capital structure is most important to maximize the use of various
funds and to be able to adapt more easily to the changing conditions. The analysis of
capital structure shows the debt or equity raising capacity of various companies and
the amount of risk they bear.
Debt equity position of PTL:
This ratio indicates the relationship between the external equities or the outsider’s
funds and the internal equities or the shareholders funds. Thus,
Debt Equity Ratio = Outsiders funds
Shareholders funds
This ratio is calculated to measure the extent to which debt financing has been used in
the business. The ratio indicates the proportionate claims of owners and the outsiders
against the firm’s assets. The purpose is to get an idea of the cushion available to
outsiders on the liquidation of the firm. As a general rule, there should be an
approximate mix of owners’ funds and outsiders’ funds in financing the firm’s assets.
A low debt equity ratio is considered as favorable from the long term creditors’ point
of view because a high proportion of owner’s funds provide a larger margin of safety
to them. A high debt equity ratio which indicates that the claims of outsiders are
greater than those of owners, may not be considered by creditors because it gives a
lesser margin of safety for them at the time of liquidation of the firm.
Debt Equity Position of PTL (Rs. In Lacs)
Year Net Worth Loans Debt Equity Ratio
2006 56902 1298 0.02:1
2007 64700 1074 0.02:1
2008 66483 404 0.006:1
Here net worth includes share capital and reserve and surplus. Loans include both
secured and unsecured.
PTL is the very low debt company with a debt equity ratio 0.006:1 in the FY 2008 on
account of repayment of loan and reducing interest costs. The reserve and surplus also
increased from Rs. 58624 lacs in FY 2007 to Rs. 60408 lacs in FY 2008. In fact,
bolstered by the notable improvement in both volume and model mix of tractors
underpinned by PTL’s traditional Cost efficiencies and operations have generated this
sizably enhanced surplus.
The lowest debt equity ratio as recorded by PTL maintains the fact that company
does not rely on the outside sources for its routine operations rather it depends on its
internal sources. This fact helps the company to win confidence of its creditors, who,
in turn can/will extend liberal credit.
PTL is a cash rich company and strong internal cash generation is expected
over the next few years and this will completely cover planned capital expenditure,
and thus reducing the fear of dilution.
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