CHAPTER 1:INTRODUCTION

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1.1 INTRODUCTION TO FINANCE:

 Finance is the science of funds management. The general areas of finance are business

finance, personal finance and public finance. Finance includes saving money and often

includes lending money. The field of finance deals with the concepts of time, money

and risk and how they are interrelated. It also deals with how money is spent and

budgeted.

Finance studies and addresses the ways in which individuals, businesses and

organizations raise, allocate and use monetary resources over time, taking into account

the risks entitles in their projects. The term finance may thus incorporate any of the

following:

The study of money and other assets

The management and control of those assets

Profiling and managing project risks

As a verb, ‘to finance’ is to provide funds for business

The activity of finance is the application of a set of techniques that individuals and

organizations (entities) use to manage their financial affairs, particularly the differences

between income and expenditure and the risk of their investment.

DEFINITIONS OF FINANCE:

The Oxford Dictionary defines finance as ‘the management of large amounts of money,

especially by governments or large companies.’

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

management, acquisition and investment. Simply, finance deals with matters related to

money and the markets.” - INVESTORSWORDS.COM

“A discipline concerned with determining value and making decisions. The finance

function allocates resources, including the acquiring, investing, and managing

resources.” – FORBES.COM

“The science that describes the management of money, banking, credit, investments,

and assets. Basically, finance looks at anything that has to do with money and the

market.” - INVESTOPEDIA.COM

FINANCIAL DECISIONS:

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There are three main financial decisions for every company:

a. Investment Decision: Where to invest the funds?

b. Financing Decisions: Where to acquire the required funds from?

c. Dividend Decisions : How much amount of profit should be distributed

among share holders

1.2 HISTORY OF TEA INDUSTRY:

The history of tea is really quite fascinating. There are many myths that surround the

creation of tea. One such popular myth is from a Chinese legend stating that tea was

discovered in 2737 BC when Chinese emperor Chen Nung accidentally dropped the

leaves of the camellia sinensis plant. Not wanting to throw the water out, he took a sip

and tea was born.

One would think that tea would grow on vines in the ground. However, tea is actually

grown from trees found in the hotter climates of the world.

From China, tea was brought to Japan who incorporated it into their special occasions

and into their holiday meals. When it reached England in sixteen sixty-two, tea was

fully introduced to the world. England adapted tea as their national beverage and it

remained so for hundreds of years.

Although China is where tea got its origins from, countries such as India and Sri Lanka

also have their own tea trees where they cultivate millions of pounds of tea leaves each

year to be sold all over the world.

Tea is the second largest beverage to be consumed in the world today. It comes in many

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different flavours and can be served hot or iced. Tea can keep you awake during the day

or help you to unwind at the end of a chaotic week. There are many other uses for tea

other than drinking it.

Many Chinese people use tea, especially green tea, to cure ailments such as indigestion,

constipation, upset stomachs and many other ailments. They also use tea to remove dark

circles from their eyes and to cure their acne. It is rubbed on the skin to make it smooth

and silky. The Chinese people believe that tea has many different medicinal properties

and use it as an herbal remedy to cure just about everything. They a have been doing

this for two thousand years.

Tea has natural caffeine in it, however it can be decaffeinated through the drying

process. When you go to a Chinese restaurant, the first thing that you are served is tea.

This is because the Chinese believe that tea aids in the digestion of food, and that you

will not get indigestion if you drink the tea before you eat.

There are various types of tea and they are mostly distinguished by the type of

processing that they undergo. The processing stages include adding in other herbs,

flowers and fruits and oxidation, drying and heating of the tea leaves.

There are four classic types of tea which are white tea, black tea, green tea and oolong

tea. You will most likely also hear of herbal teas this is from the infusion of fruits and

herbs and does not contain the leaves of the other teas Camellia Sinensis.

Studies have shown that tea is as good as drinking plenty of water but also has added

health benefits such as the protection against heart disease and some cancers.

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Different types of tea have different levels of benefits depending on the processing

involved as well as the region where it was grown.

1.3 HISTORY OF TEA INDUSTRY IN CHINA:

The history of tea in China is long and complex. The Chinese have enjoyed tea for

millennia. Scholars hailed the brew as a cure for a variety of ailments; the nobility

considered the consumption of good tea as a mark of their status, and the common

people simply enjoyed its flavour.

Tea was first discovered by the Chinese inventor Shennong in 2737 BC. It is said that

the emperor liked his drinking water boiled before he drank it so it would be clean, so

that is what his servants did. One day, on a trip to a distant region, he and his army

stopped to rest. A servant began boiling water for him to drink, and a dead leaf from the

wild tea bush fell into the water. It turned a brownish colour, but it was unnoticed and

presented to the emperor anyway. The emperor drank it and found it very refreshing,

and cha (tea) was born.

While historically the origin of tea as a medicinal herb useful for staying awake is

unclear, China is considered to have the earliest records of tea drinking, with recorded

tea use in its history dating back to the first millennium BC. The Han Dynasty used tea

as medicine. The use of tea as a beverage drunk for pleasure on social occasions dates

from the Tang Dynasty or earlier.

The Tang Dynasty writer Lu Yu's (729-804) Cha Jing is an early work on the subject.

(See also Tea Classics) According to Cha Jing writing, around AD 760, tea drinking

was widespread. The book describes how tea plants were grown, the leaves processed,

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and tea prepared as a beverage. It also describes how tea was evaluated. The book also

discusses where the best tea leaves were produced.

At this time in tea's history, the nature of the beverage and style of tea preparation were

quite different from the way we experience tea today. Tea leaves were processed into

compressed cakes form. The dried teacake, generally called brick tea was ground in a

stone mortar. Hot water was added to the powdered teacake, or the powdered teacake

was boiled in earthenware kettles then consumed as a hot beverage.

A form of compressed tea referred to as white tea was being produced as far back as the

Tang Dynasty (618-907 A.D.). This special white tea of Tang was picked in early

spring, when the tea bushes had abundant growths which resembled silver needles.

These "first flushes" were used as the raw material to make the compressed tea.

1.4 HISTORY OF TEA INDUSTRY IN INDIA:

The cultivation and brewing of tea in India has a long history of applications in

traditional systems of medicine and for consumption. The consumption of tea in India

was first clearly documented in the Ramayana (750-500 BC). Research shows that tea

is indigenous to eastern and northern India, and was cultivated and consumed there

for thousands of years. However, commercial production of tea in India did not begin

until the arrival of the British East India Company, at which point large tracts of land

were converted for mass tea production.

Today, India is one of the largest tea producers in the world, though over 70% of the tea

is consumed within India itself. A number of renowned teas, such as Darjeeling, also

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grow exclusively in India. The Indian tea industry has grown to own many global tea

brands, and has evolved to one of the most technologically equipped tea industries in

the world. Tea production, certification, exportation, and all other facets of the tea trade

in India is controlled by the Tea Board of India.

East India Company:

In the early 1820s, the British East India Company began large-scale production of tea

in Assam, India, of a tea variety traditionally brewed by the Singpho tribe. In 1826, the

British East India Company took over the region from the Ahom kings through the

Yandaboo Treaty. In 1837, the first English tea garden was established at Chabua in

Upper Assam; in 1840, the Assam Tea Company began the commercial production of

tea in the region, run by indentured servitude of the local inhabitants. Beginning in the

1850s, the tea industry rapidly expanded, consuming vast tracts of land for tea

plantations. By the turn of the century, Assam became the leading tea producing region

in the world.

Writing in The Cambridge World History of Food', Weisburger & Comer write: "The

tea cultivation begun there [India] in the nineteenth century by the British, however, has

accelerated to the point that today India is listed as the world's leading producer, its 715,

000 tons well ahead of China's 540,000 tons, and of course, the teas of Assam, Ceylon

(from the island nation known as Sri Lanka), and Darjeeling are world famous.

However, because Indians average half a cup daily on per capita basis, fully 70 percent

of India's immense crop is consumed locally."

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STATICAL FACTS ABOUT INDIAN TEA INDUSTRY:

Tea is indigenous to India and is an area where the country can take a lot of pride. This

is mainly because of its pre-eminence as a foreign exchange earner and its contributions

to the country's GNP.

In all aspects of tea production, consumption and export, India has emerged to be the

world leader, mainly because it accounts for 31% of global production. It is perhaps the

only industry where India has retained its leadership over the last 150 years. Tea

production in India has a very interesting history to it.

The range of tea offered by India - from the original Orthodox to CTC and

Green Tea, from the aroma and flavour of Darjeeling Tea to the strong Assam

and Nilgiri Tea- remains unparalleled in the world. 

Here are some statistical facts about the Indian Tea Industry:

The total turnover of the tea industry is around Rs. 10,000 crores.

Since independence tea production has grown over 250%, while land

area has just grown by 40%.

There has been a considerable increase in export too in the past few

years. Total net foreign exchange earned per annum is around Rs.

1847 crores.

The labour intensive tea industry directly employs over 1.1 million

workers and generates income for another 10 million people

approximately. Women constitute 50% of the workforce.

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Tea trading in the domestic market is done in two ways- Auction and Private Selling.

Market Reports are received from the six major auction centres in India, namely,

Calcutta, Guwahati, Siliguri, Cochin, Coonoor, Coimbatore and N.I. teauction.com

Bulk trading is done through the auctions held in these centres.

TYPES OF TEA:

Black tea

The water for black teas should be added near boiling point 99 °C (210 °F). Many of the

active substances in black tea do not develop at temperatures lower than 90°C (195°F).

For some more delicate teas lower temperatures are recommended. The temperature

will have as large an effect on the final flavor as the type of tea used. The most common

fault when making black tea is to use water at too low a temperature. Since boiling

point drops with increasing altitude, it is difficult to brew black tea properly in

mountainous areas. It is also recommended that the teapot be warmed before preparing

tea, easily done by adding a small amount of boiling water to the pot, swirling briefly,

before discarding. Black teas are usually brewed for about 4 minutes and should not be

allowed to steep for less than 30 seconds or more than about five minutes (a process

known as brewing or mashing in Britain). It is commonly said that a steeping time

above five minutes makes the tea bitter (at this point it is referred to as being stewed in

Britain), but in reality the precise time depends on a number of factors, such as the type

of tea and the water quality, and bitterness can occur as early as three minutes, or not at

all even after prolonged steeping. When the tea has brewed long enough to suit the

tastes of the drinker, it should be strained while serving. The popular varieties of black

(red) tea include Assam tea, Nepal tea, Darjeeling tea, Nilgiri tea and Ceylon tea.

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Green tea

Water for green tea, according to most accounts, should be around 80 to 85 °C (176 to

185 °F); the higher the quality of the leaves, the lower the temperature. Hotter water

will burn green-tea leaves, producing a bitter taste. Preferably, the container in which

the tea is steeped, the mug, or teapot should also be warmed beforehand so that the tea

does not immediately cool down. High-quality green and white teas can have new water

added as many as five or more times, depending on variety, at increasingly high

temperatures.

Oolong tea

Oolong teas should be brewed around 90 to 100 °C (194 to 212 °F), and again the

brewing vessel should be warmed before pouring in the water. Yixing purple clay

teapots are the traditional brewing vessel for oolong tea. For best results use spring

water, as the minerals in spring water tend to bring out more flavour in the tea. High

quality oolong can be brewed multiple times from the same leaves, and unlike green tea

it improves with reuse. It is common to brew the same leaves three to five times, the

third steeping usually being the best.

White Tea

White tea is similar to green tea, in that it's undergone very little processing and no

fermentation. But there is a noticable difference in taste. Most green teas have a

distinctive 'grassy' taste to them, but white tea does not. The flavour is described as

light, and sweet. You should steep white tea in water that is below the boiling point.

There is also considerably less caffeine in white tea than the other varieties (15mg per

serving, compared to 40mg for black tea, and 20mg for green). Some studies have also

shown that white tea contains more active cancer-fighting antioxidants than green tea.

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As with all teas, there are many varieties of white tea, with poetic names such as: white

peony, golden moon, silver needle and white cloud. White teas are produced mostly in

China and Japan, but the Darjeeling region of India also produces some fine white teas.

Pu-erh Tea

Pu-erh teas come from the Yunnan province in China and have a strong earthy flavour.

Pu-erh has been praised for generations for it's flavor and health benefits. It's processed

according to an ancient technique (which used to be a state secret) that involves aging

the leaves. It is often formed into bricks and is one of the few teas those ages well.

Pu-erh tea is moderate in taste, not as strong as black tea. It can cut grease, help

digestion, warm stomach, help produce saliva and slake thirst, dispel the effects of

alcohol and refresh one’s mind. Pu-erh tea has functions of lowering the triglyceride,

cholesterol, hyperuricemia in the body.

Puer tea (also called pu-er or pu-erh) is an ancient and rare tea, much loved in China

and the only tea for some 'hardened' tea drinkers. The processes that go into making the

classic puers are closely guarded secrets. It is fermented, sometimes twice, and is often

pressed into cakes or bricks. This makes puer especially easy to store and keep for long

periods. Generally they are robust, earthy teas with a dark red or brown color and

distinctive, mysterious aroma. Puer is widely known in China to have major health

benefits, especially in reducing cholesterol and as an aid to digestion, which makes it

the ideal after dinner tea.

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king’s tea

King's Tea, a TenRen exclusive, is made of high quality oolong tea lended with a touch

of ginseng to create an incredible aftertaste. The tea has the rich smooth taste of oolong

with an aftertaste which is sweeter and longer lasting than the traditional oolong tea.

The bitter tartness associated with ginseng can not be tasted in this tea. King's Tea is

offered in two varieties, Green and Dark, each in several different grades. The Green

and Dark King's Teas are determined by how long the base oolong is baked, with Dark

ones baked longer than Green ones. The different grades depend on the quality of the

oolong leaves. Try this unique tea and taste why it is popular in southern Asia.

ORIGIN AND DEVELOPMENT OF TEA IN DOOARS:

In 1862 inspired planters tried out tea cultivation in the Terai region. James white set up

the first Terai plantation called Champta. Planting was then extended to the Dooars.

Gazeldubi was the first Dooars garden, and by 1876 the area boasted 13 plantations.

1877, the British to set up the Dooars Tea Planters' Association.

The economy of Dooars region is based on three T-s –Tea, Tourism and Timber. The

main industry of the Dooars region is tea industry. Thousands of people are engaged in

the tea estates and factories as labours and other posts. Several people are also engaged

in cultivation of Bettlenuts which also contribute to the economy. Cultivation of other

crops is done mainly for local consumption.

The area is dotted by several national parks and wildlife sanctuaries which attract a lot

of tourist from all over India and abroad making an important contributor to the

economy and also employs a lot of people in this sector.

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Blue Whistling Thrush at Jayanti in Buxa Tiger Reserve in Jalpaiguri district of West

Bengal, India.

Timber industry both legally and illegally flourish in this region. Number of saw mills,

plywood industries and other allied business also acts as an important contributor to the

economy.

1.5 FINANCIAL STATEMENTS:

Financial Statements are formal records of the financial activities of a business, person,

or other entity. Financial statements provide an overview of a business or person's

financial condition in both short and long term. All the relevant financial information of

a business enterprise, presented in a structured manner and in a form easy to understand

is called the Financial Statements. This includes an income statement and a balance

sheet, and often also includes a cash flow statement. Financial statements are usually

compiled on a quarterly and annual basis.

OBJECTIVES OF FINANCIAL STATEMENTS:

The objective of financial statements is to provide information about the financial

position, performance and changes in financial position of an enterprise that is useful to

a wide range of users in making economic decisions. Financial statements should be

understandable, relevant, reliable and comparable. Reported assets, liabilities and equity

are directly related to an organization's financial position.

Financial statements may be used by users for different purposes:

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1. Shareholders or Owners

The shareholders of a company are interested in the finance statements of the company

with the view to ascertaining the profitability and the financial strength of the company,

its prospects for future growth, and also the usefulness of the management to the

company.

2. Financial Institutions and Commercial banks

Financial institutions and commercial banks are interested in the financial statements of

the borrowing concern to ascertain its short-term as well as long-term solvency and also

its profitability.

3. Creditors

Creditors (i.e., the suppliers of goods on credit) are interested in the financial statements

of the purchasing concern to ascertain its short-term solvency or liquidity position (i.e.,

its ability to meet its current or short-term liabilities out of its current or short-term

assets)

4. Prospective Investors

Prospective Investors are interested in the financial statements of a concern to ascertain

its financial strength and future prospects.

5. Employees and Trade Unions

The employees of a concern and the trade unions are interested in the financial

statements of the concern to ascertain its profitability and ability to pay higher wages,

bonus, etc.

6. Government

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The government is interested in the financial statements of a concern for the purpose of

taxation and also for the purpose of regulating the activities of the concern.

7. Security or Investment Analysis

Security or Investment is interested in the financial statements of a company to advise

their clients whether to buy or sell the securities of that company.

VARIOUS FINANCIAL STATEMENTS:

The four basic financial statements are:

1. Balance Sheet

2. Income Statement

3. Statement of retained earnings

4. Statement of cash flow

a) balance sheet:

Balance Sheet is a financial statement that summarizes a company's assets, liabilities

and shareholders' equity at a specific point in time. Balance sheet gives investors an

idea as to what the company owns and owes, as well as the amount invested by the

shareholders. It's called a balance sheet because the two sides balance out. A company

has to pay for all the things it has (assets) by either borrowing money (liabilities) or

getting it from shareholders (shareholders' equity. 

b) income statements:

Income Statement is a financial statement that measures a company's financial

performance over a specific accounting period. Financial performance is assessed by

giving a summary of how the business incurs its revenues and expenses through both

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operating and non-operating activities. It also shows the net profit or loss incurred over

a specific accounting period, typically over a fiscal quarter or year. Income statements

are also referred to as Profit and Loss statement, Earnings Statement, Operating

Statement or statement of operations.

c) statement of reatained earnings :

The Statement of Retained Earnings (also known as Equity Statement, Statement of

Owner's Equity for a single proprietorship, Statement of Partner's Equity for

partnership, and Statement of Retained Earnings and Stockholders' Equity for

corporation) is one of the basic Financial Statements as per Generally Accepted

Accounting Principles (GAAP), and it explains the changes in a company's retained

earnings over the reporting period.

d) cash flow statement :

A cash flow statement, also known as Statement of Cash Flows, is a Financial

Statement that shows how changes in Balance Sheet accounts and income affect cash

and cash equivalents, and breaks the analysis down to operating, investing, and

financing activities.

1.6 FINANCIAL STATEMENT ANALYSIS:

Financial Statement Analysis is a systematic process of the critical examination of the

financial information contained in the financial statements in order to understand and

make decisions regarding operations of the firm. It is the assessment of the viability,

stability and profitability of a business, sub-business or project. Based on these reports,

management may.

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TOOLS FOR FINANCIAL STATEMENT ANALYSIS:

1) Comparative Financial Statement (or Analysis)

2) Common Measurement Statements (or Analysis)

3) Trend Percentages Analysis

4) Fund Flow Statement (or Analysis)

5) Cash Flow Statement (or Analysis)

6) Statement of Changes in Working Capital

7) Ratio Analysis

A. Comparative Financial Statements :

These statements are prepared in a way so as to provide time perspective to the

consideration of various elements of finance position embodied in such statements. This

is done to make the financial data more meaningful. The statements of two or more

years are prepared to show absolute data of two or more years increase or decrease in

absolute data in value and in terms of percentages.

B. Common Measurement Statements :

This statement indicates the relationship of various items with some common items

which are expressed as percentage of the common. In the income statement the sale

figure is taken as base, all other figures are expressed as percentages of sales. Similarly

in Balance Sheet the total of assets and liabilities is taken as base, all other figures are

expressed as a percentage of the total. The percentage so calculated can be easily

compared with the correspondent percentages in other periods and meaningful

conclusions can be made.

C. Trend Percentages Analysis :

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This analysis is an important tool of horizontal financial analysis. This method is

immensely helpful in making a comparative study of the financial statements of several

years. Under this method trend percentages are calculated for each item of the financial

statements taking the figure of base year as in the starting year is usually taken as the

base year. The trend percentages show the relationship of each item with its preceding

year’s percentages. These percentages can also be presented in the form of index.

D. Fund Flow Statement :

This statement is prepared in order to reveal clearly the various sources where from the

funds procure to finance the activities of a business concern during the accounting

period and also brings to highlight the uses to which these funds procure during the

given period. The statements are often used to determine whether companies efficiently

source and utilize funds available to them.

E. Changes in working capital:

This statement is prepared to know the net change in working capital of the business

between two specified dates. It is prepared from current assets and current liabilities of

the said dates to show the net increase or decrease in working capital.

F. Cash Flow Statement

In Financial Accounting, a Cash Flow Statement is a financial statement that shows

how changes Balance Sheet accounts and Income affect cash and cash equivalents, and

breaks the analysis down to operating, investing, and financing activities. Essentially,

the cash flow statement is concerned with the flow of cash in and cash out of the

business. The statement captures both the current operating results and the

accompanying changes in the Balance Sheet.

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G. Ratio analysis

It is essentially concerned with the calculation of relationships which after proper

identification and interpretation may provide information about the operations and state

of affairs of a business enterprise.

The analysis is used to provide indicators of past performance in terms of critical

success factors of a business. This assistance in decision-making reduces reliance on

guesswork and intuition and establishes a basis for sound judgement.

Financial ratios are calculated from one or more pieces of information from a

company’s financial statements. For example the “gross margin” is the gross profit

from operations divided by the total sales or revenues of a company, expressed in

percentage terms. In isolation, a financial ratio is a useless piece of information. In

context, however a financial ratio can give a financial analyst an excellent picture of a

company’s situation and the trends that are developing.

A ratio gains utility by comparison to other data and standards. Taking our example, a

gross profit margin or a company of 25% is meaningless by itself. If we know that this

company’s competitors have profit margins’ of 10% we know to so more profitable

than its industry peers which is quiet favourable. If we also know that the historical

trend is upwards, for example has been increasing steadily for the last few years, this

would also be a favourable sign that management is implementing effective business

policies and strategies.

STEPS INVOLVED IN RATIO ANALYSIS:

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Re-structuring, classification, grouping or re-arrangement of the data found in the

financial statement in a form suitable for analysis.

Calculation of the required ratios from the restructured or classified data.

Comparison of the computed ratios with the standard established.

Interpretation of the comparison, drawing of inference & report writing. Conclusions

are drawn after comparisons.

NATURE:

Ratio analysis is a technique of analysis and interpretation of financial statements. It is

only a means of better understanding of financial strengths and weaknesses of a firm .It

is the process of interpreting various ratios for helping in making certain decisions.

OBJECTIVES OF RATIO ANALYSIS:

To know the various source utilized by the firm

To know the amount of debt in the firm

To provide information to the investors in investment decision

To compare financial position of the firm in the current year with the previous

year’s financial position

To know the season effects in the firm that is cost position of the firm between

the profit making and loss period

To help the management in planning controlling and decision making.

To find out the solution to the unfavourable financial conditions and financial

performance

RATIONALE BEHIND RATIO ANALYSIS:

A firm has resources.

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It converts resources into profits through

o Production of goods & services

o Sales of goods & services.

Ratio

Measures relationship between resources & financial flows.

Show ways in which firms’ situation deviates from

o Its own past

o Other firms

o The industry

o All firms

IMPORTANCE OF RATIO ANALYSIS:

1) Helps in decision-making: Financial statements are prepared primarily for

decision making. But the information provided in financial statements is not an

end in itself and no meaningful conclusion can be drawn from these statements

alone.

2) Helps in financial forecasting and planning: Ratio is of much help in financial

forecasting and planning. Planning is looking ahead and the ratios calculated for

a number of years work as a guide for the future. Meaningful conclusion can be

drawn for futures form these ratios.

3) Helps in communicating: The financial strength and weakness of a firm are

communicated in a more easy and understandable manner by the use of ratios.

The information contained in the financial statements is conveyed in a

meaningful manner to the one whom it is meant.

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4) Helps in co-ordination: Ratios even help in co-ordination, which is of utmost

importance in effective business management. Better communication efficiency

and weakness of an enterprise result in better co-ordination in the enterprise.

5) helps in control: Ratio analysis even helps in making effective control of

business. Standard ratio can be used upon Performa financial statements

variations or deviations, if any, can be found by comparing the actual with the

standards so as to take the corrective action at the right time. The weakness or

otherwise, if any, come to the knowledge of management which helps in effective

control of business.

6) other uses: There are so many other uses of ratio analysis. Ratios are an essential

part of budgetary control and standard costing. Ratios are of immense importance

in the analysis and interpretation of financial statements as they bring the strength

or weakness of the firm.

USES & BENEFITS OF RATIO ANALYSIS:

Ratio analysis is useful in various ways. The main uses of ratio analysis are:-

Ratio analysis simplifies the understanding of financial statements.

Ratios are helpful in establishing standard costing system & budgetary control.

Ratio analysis is an invaluable aid to the management in the efficient discharge of

its basic functions of forecasting, planning, communication, control etc.

It facilitates inter-firm comparison.

UTILITY OF RATIO ANALYSIS:

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1) To shareholders: An investor in the company will always like to assess the

financial position of the concern where he is going to invest. His first interest will

be the security of his investment and then a return in the form of dividend or

interest. For the first purpose he will try to assess the value of fixed assets and the

loan rose against them. Profitability ratios, on the other hand, will be useful to

determine the profitability ratio. Ratio analysis will be useful to the investor in

making his mind whether present financial position of the concern warrants

further investment or not.

2) To Creditors: The creditors or suppliers extend short-term credit to the concern.

They are interested to know whether financial position of the company warrants

their payments at a specified time or not. The concern pays short-term creditors

pot of its current assets. If the current assets are quite sufficient to meet the

current liabilities then the creditor will not hesitate in extending credit facilities.

Current and acid test ratios will give an idea about current financial position of

the concern.

3) To Employees: The employees are also interested in the financial position of the

concern especially profitability. Their wages increases and amount of fringe

benefits are related to the volume of profits earned by the concern. The

employees make use of the information available in financial statement. Various

profitability ratios relating to gross profit, operating profit, net profit etc., enable

employees a foot forward their viewpoint for the increase of wages and other

benefits.

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4) To Government: Government is interested to know the overall strength of the

industry. Various financial statements published by the industrial units are used

to calculate ratios for determining short-term, long-term and overall financial

position of the concern. Profitability indexes can also be prepared with the help

of ratios. Governments may base its future policies on the basis of industrial

information available from various units. The ratios may be used as indicators of

overall financial strength of public as well as private sector. In the absence of the

reliable economic information, governmental plans and policies may not prove

successful.

LIMITATIONS:

Though ratios are simple to calculate and easy to understand, they suffer from some

serious limitations:

1. Limited use of a single ratio.

2. Lack of adequate standards.

3. Inherent limitations of accounting.

4. Change of accounting procedure.

5. Window dressing.

6. Personal bias.

TYPES OF RATIOS:

A: Liquidity Ratios

Liquidity refers to the ability of a firm to meet its short-term financial obligations

when and as they fall due.

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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.

Current Ratio

The Current Ratio expresses the relationship between the firm’s current assets

and its current liabilities.

Current asset normally includes 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).

The current assets of a firm, 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 provision

for bad and doubtful debts, bills receivables and pre-paid 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, banks

credit, provision for taxation, dividends payable and outstanding expenses.

Quick Ratio

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

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business to cover its short-term obligations from its “quick” assets only (i.e. it

ignores stock).

B: Asset Management/Activity Ratios

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.

Average Collection Period

The average collection period measures the quality of debtor’ssince 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.

Inventory Turnover

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

the cost of goods sold by the average inventory.

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Total Assets Turnover

Asset turnover is the relationship between sales and assets

The high stock turnover ratio would also tend to indicate that there was little

chance of the firm holding damaged or obsolete stock.

The firm should manage its assets efficiently to maximise sales.

The total asset turnover indicates the efficiency with which the firm uses all its

assets to generate sales.

Fixed Asset Turnover

The fixed assets turnover ratio measures the efficiency with which the firm has

been using its fixed assets to generate sales. Generally, high fixed assets

turnovers are preferred since they indicate a better efficiency in fixed assets

utilisation.

Creditors Turnover Ratio- It is a ratio between net credit purposes and the

average amount of creditors outstanding during the year. It is calculated as

follows

Creditor Turnover Ratio = Net credit purchase/Average creditors

Average Creditors = Average of creditors outstanding at the beginning and at the end of

the year.

C: 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 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 indicate a cushion

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(surplus) which shields creditors against possible losses from default in payment. 

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 considered here in exclusive of current liabilities. The shareholders

equity includes (i) equity and preference share capital (ii) past accumulated profits but

excludes fictitious assets like past accumulated losses, discount on issue of shares etc.

The shareholders equity so defined is known as "net worth". The D/F ratio computed on

this basis may also be called Debt-to-Net worth Ratio.

a) Debt to Total Capital Ratio:-The relationship between creditors funds and owners

capital can also be expressed in terms of another leverage ratio. This is the debt to total

capital ratio. Here, the outside liabilities are related to the total capitalization of the firm

and not merely the shareholders equity. It can be calculated in various ways. One

approach it to relate the long-term debt to the permanent capital of the firm. Included in

the permanent capital are shareholders equity as well as long term debt.

D: Profitability Ratios

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.

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Profits are essential, but it would be wrong to assume that every action initiated

by management of a company should be aimed at maximising profits,

irrespective of social consequences.

Expenses Ratio- Another profitability ratio related to sales is the expenses ratio. It is

computed by dividing expenses by sales. The term "expenses" includes (i) Cost of

goods sold (ii) Administration expenses, (iii) Selling and distribution expenses, but is

exclusive of financial expenses like interest, taxes, dividends and extra-ordinary losses

due to theft of goods, good, destroyed by fire and so on.

Return on Investment (ROI)

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.

Return on Equity (ROE)

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:

Earnings Per Share (EPS)

Whatever income remains in the business after all prior claims, other than owners

claims (i.e. ordinary dividends) have been paid, will belong to the ordinary shareholders

who can then make a decision as to how much of this income they wish to remove from

the business in the form of a dividend, and how much they wish to retain in the

business. The shareholders are particularly interested in knowing how much has been

earned during the financial year on each of the shares held by them.

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OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS:

Judging the earning capacity or profitability: On the basis of financial

statements the earning capacity of business may be computed. In addition to this, the

future earning capacity may also be forecasted.

Judging the managerial efficiency: The financial statement analysis helps

to pinpoint the areas wherein the managers have shown better efficiency and also the

areas of inefficiency.

Judging the short term and long term solvency of the company: On the

basis of financial statement analysis, the solvency of the concern may be judged.

Debenture holders and lenders judge the ability of the company to pay back the

principal and interest as most of the companies raise a portion of their

requirement through debt. Trade creditors are interested in knowing the short term

solvency of the business.

Inter firm comparison: Financial statements of different firms may be

analysed and compared. The inter-firm comparison helps in assessing own performance

as compared to others. This is better carried out if the analysis is based on ratios.

Making forecasts and preparing budgets: Past financial statement

analysis help a great deal inassessing developments in the future, specially the next

year.

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CHAPTER 2:RESEARCH DESIGN

2.1 INTRODUCTION

Finance and its function play a very major role in determining the profitability and stability of the business. Most of the studies in India on business finance have laid more stress in comparing financial results of public and private sector undertaking vis-à-vis profitability. The current study taken at HIMALAYAN TEA AND AGRO PRIVATE

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LIMITED is to find out and evaluate its financial performance. The purpose was also to closely examine the relationship between various financial elements, which may be compared to the prescribed standards and norms.

2.2 TITLE OF STATEMENT

“A STUDY ON FINANCIAL PERFORMANCE OF HIMALAYAN TEA AND AGRO PVT. LTD. ON THE BASIS OF RATIO ANALYSIS”

2.3 STATEMENT OF PROBLEM

The analysis of Financial Statements is a study of relationship among various financial facts and figures as set out in the financial statement i.e. Balance Sheet and Profit and Loss Account. The complex data given in these financial statements are divided into simple and valuable elements and significant relationships are established between the elements of the same statement or different financial statements. This process of division, establishing relationship and interpretation therefore to understand the working and financial position of a business is known as Analysis of Financial Statement.

It is in this view that the study is concerned with the analyzing the financial performance of Himalayan tea company Ltd. for 3 years. This study helps to know the 3 years financial position of the company.

2.4 OBJECTIVE OF THE STUDY

To determine the financial position of “HIMALAYAN TEA AND AGRO Pvt. Ltd.” using Ratio Analysis.

To analyse Short term and long term solvency position of the company.

To determine the profitability of the company.

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To analyze the efficiency of the company.

To determine the Liquidity position and ‘Utilization of Funds’ of the Company using Ratio Analysis.

To interpret the financial statements with the help of accounting ratios derived from financial statements.

2.5 SCOPE OF THE STUDY

The study is concerned with analyzing the financial performance of HIMALAYAN TEA COMPANY & AGRO PVT LTD. This study covers a period of 3years i.e. from 2007-08 to 2009-10.

2.6 METHODOLOGY

Research is an enquiry designed and carried out to provide information to solve a problem. It is a scientific investigation into the problem.

This research is directed to evaluate the performance of the company.

The information has been collected from relevant data of the organisation.

2.7 SAMPLING TECHNIQUE

The Research study is based on convenient sampling as it is limited to only a particular company.

2.8 DATA COLLECTION TOOLS:

PRIMARY DATA:

It is first hand Information which has been collected from the company’s annual statements and through personal interaction with the employees of the company.

SECONDARY DATA:

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The second hand data has been collected from various sources including published Text Books, Web Sites, and the Annual Reports of the company

2.9 PLAN OF ANALYSIS

Every effort has been compiled, analyzed, and tabulation in various forms. The tabulated financial data has been further interpreted.

These interpretations have been further used to form conclusion and suggest recommendation. Using various financial tools like Ratios and Percentages the analysis was done.

This interpretation has also been represented in the pictorial form using Bar Diagrams.

2.10 REFRENCE PERIOD

This study has been conducted on the tea company for the period of 3 months

2.11 LIMITATIONS OF THE STUDY

Every effort has been made to mark the study complete. However, the study is not free from certain limitations. They are as follows:

The study is confined only HIMALAYAN TEA AND AGRO PVT LTD. and the performances of other Tea Companies have not been compared with it.

The study is limited to the data provided in the financial reports. So if there is any window dressing the findings could be misleading.

Due to time limit, it is not possible to carry out extensive research study.

Project report is prepared with student point of view and through auditor’s angle.

Some information cannot be collected as it is confidential and it is only a theoretical study.

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2.12 CHAPTER SCHEME

Chapter 1: INTRODUCTION

This Chapter gives a detailed general introduction about the industry and theoretical background of the study.

Chapter 2: RESEARCH DESIGN

This Chapter reveal the methodology in the approach of the study. From the framing of the objectives to fieldwork & analysis, this chapter gives a detailed description of all aspects of research design.

Chapter 3: COMPANY PROFILE

The profile of the company with detailed description is presented here.

Chapter 4: ANALYSIS AND INTERPRETATION

This Chapter is concerned with getting results from the analysis & thereby drawing inferences.

Chapter 5: SUMMARY OF FINDINGS, CONCLUSION AND SUGGESTIONS

This Chapter deals with the findings & making suggestions and recommendation in order to help the company in framing its further policies.

At the end of this research project, the bibliography and all the required annexure are attached.

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Chapter 3: COMPANY PROFILE

3.1 HISTORY OF THE COMPANY:

HIMALAYAN Tea and Agro Pvt. Ltd is a tea manufacturing unit in the Darjeeling

district of west Bengal. It is exactly based in Bidhan Nagar region which comes under

western dooars. It was established on 1st April in the year 2000. Its head office is

located in Siliguri and Kolkata. HIMALAYAN Tea and Agro Pvt. Ltd. is a quality CTC

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tea manufacturing unit. A major part of its production is being auctioned in Siliguri

auction tea committee, which is the main auction centre in that region. The company

owns a tea estate under the name of Atiabari tea estate which is much known for its

high quality leaves. This company proves to be a very important factor for price fixation

of the leaves.

The Company mainly focuses on its employees and strives to achieve them a healthy

working condition. It has implemented safe ways of disposing industrial waste. The

area of the manufacturing unit is 2,800sq.ft. It annually produces 2, 00,000Kgs of tea

and the raw material is green leaf of tea which is acquired through various leaf brokers

around that region. The yearly requirement of green leaf is 92, 00,000Kgs on an

average. Its production percentage is 22% on 100kgs of green leaf.

The cost of production per kg is 65-70 Rs. The numbers of managerial staffs are two

and daily rated workers are 32 in number. The unit works for 282 days on an average

yearly which includes both morning and night shifts. The company has shaped very

well over the last few years and is showing very good sign of a well established and a

growing company. Through the years it has played a very good role of a good corporate

citizen.

The company is also into exporting its little percentage of production to various

countries like Russia, Kazakhstan and Afghanistan. The main objective of the company

is to produce good tea and satisfy its customers all over rural India. The main states

where the company has its distribution channel are Rajasthan, Punjab, Haryana, Uttar

Pradesh, Madhya Pradesh and Maharashtra. The Tea brokers form a very important part

of this distribution channel.

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The company has been able to maintain a healthy relationship with its employees, its

Debtors and Creditors, which is an excellent sign of a good organization. Through a

survey we came to know that our staff and labours are very happy. And the way they

are treated and taken care of by the top level organisation and every staff has been given

quarters to live inside the campus with their family. The company has maintained very

congenial and healthy environment to maintain good coordination among the top,

middle level and subordinates. The company mainly focuses on eliminating wastage of

raw material and cost cutting and most importantly quality.

The company is now mapping up scales in terms of organic growth and is looking

beyond its present operations.

3.2 ORGANISATION STRUCTURE OF THE COMPANY

The company adopts functional structure of department. The organization is structured

on the basis of functions like Finance, Production, Marketing and Human Resource. All

the departments are headed by general managers who manage the department and are

accountable to the Board of Directors.

3.2 CHART ON ORGANISTAION STRUCTURE:

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GENERAL MANAGER

(MR. Basant kumar Berlia)

3.3 FUNCTIONAL DEPARTMENTS OF THE ORGANISATION:

FINANCE DEPARTMENT:-

This department takes care of the finances of the company. It looks after the

working capital, and other investments. The payment to the suppliers and receipts from

the customers, payment to labors etc. maintenance of various accounting books are

done by the finance department and other financial aspect of the company

HUMAN RESOURCE DEPARTMENT:-

This department takes care of the human resource of the company. It maintains various

records relating to human resources like profiles of employees, employment

agreements, etc. It also takes care of the training and development of the employees and

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AGM

(MR. SANDEEP Gupta)

DGM

(MR. Rajiv Gogoi)

OFFICERS, ACCOUNTANTS

MANAGER

(MR. R.K. AGARWAL, MR. P. AGARWAL)

the laborers. This department also takes care of industrial relation of the company with

the laborers and unions as whole and other statutory departments.

MARKETING DEPARTMENT:-

Tea being a consumer product, marketing department plays a very important role in this

industry. Selling products to right customer at right price is looked after by this

department.

PRODUCTION DEPARTMENT:-

Himalayan tea Co. being a tea manufacturing company, its production department is the

most important and the largest department of the company. The tea leaves are converted

to various grades of tea by a long process. It produces CTC tea. The main activities of

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MANAGER

(MR. Narendra Berlia)

OFFICERS, ASSISTANTS

GENERAL MANAGER

(Mr. Arun Berlia)

ASSISTANT MANAGER

OFFICERS

the production department are to procure the tea leaves, process it into final product and

check the quality of the tea produced.

3.4 MAJOR PRODUCT:

CTC Teas

Tea grown in the plains of North East India along the mighty river Brahmaputra

manufactured using the CTC method (CTC is an acronym for crush, tear and curl)

require the green tea leaves to be machine chopped into uniform and very small pieces.

Thereafter the leaves are next spread out to oxidize as this process enables the tea leaves

to develop their flavour, aroma strength and depth of

body. At just the right time the leaves are then fired

with hot air.

Himalayan tea Co’s CTC teas are fine and granular;

and they're ideal for blending, especially for tea bags.

It manufactures and markets all grades of CTC Tea as

Bulk Tea, which are supplied in standard packaging as

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GENERAL MANAGER

(Mrs. Meera Devi Agarwal)

MANAGER

(Mr. Khaund)

EXECUTIVES

well as per customer requirements which may be

Polylined Jute Bags, Multiwall Paper Sacks, etc.

BROKEN TEA:

Broken grades mainly consist of granular

black tea in various sizes. The various grades of

broken manufactures by the company are:

BPS - Broken Pekoe Souchong

BOP- Broken Orange Pekoe

BOP(S) - Broken Orange Pekoe (Small)

BP- Broken Pekoe

FANNINGS:

Fannings are particles of leaf sifted out of bulk teas and are smaller than Broken’s. The

company manufactures only one grade of fanning that is OF, which forms a major part

of company’s total production.

OF- Orange Fanning

DUST:

Dust are the smallest particles and mainly in

powder form. This is a kind of waste generated in the production of tea. This dust is

also traded in market. Dusts are also in many grades. The grades manufactured by the

company are:

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PD- Pekoe Dust

CD- Churamoni Dust

The company’s main products is BOP (S) and OF grades. It produces highest

quantity of these two grades of tea

3.5 COMPETITORS OF THE COMPANY The following are the competitors of Himalayan Tea & Agro pvt Ltd

Shakuntala Tea Exports Pvt Ltd. Kamdhenu Tea Jtc Tea Industries Pvt Ltd. Rajhuns Tea Pvt Ltd. Vardhaman Tea

3.6 FUTURE PROSPECTS OF THE COMPANYThe company is currently Exports to some countries so its future prospects is to

make its presence all over the globe and improves its technology with the changing trend with the market.

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Chapter 4: ANALYSIS ANDINTERPRETATION

4.1 Current Ratio Or Working Capital Ratio:

The current ratio measures the short term of solvency of the firm. It indicates

the availability of current assets in rupees for every rupee of current liability.

The ideal ratio for current ratio is 2: 1. If the ratio is less, than this means that

the concern does not enjoy sufficient liquidity, if the ratio is more than the

standard the concern will enjoy a good liquidity position.

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CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITIES

Table no. 4.1

TABLE SHOWING CURRENT RATIO (in Rs.)

YEAR 2008 2009 2010

Total Current Assets

56172698.36 126077510.67 96055834.17

Total Current Liabilities

38646632.43 93889502.62 124488310.37

Ratio 1.453

1.342 0.772

Interpretation Of Current Ratio:

The company ideal ratio has to be 2:1. For the first year the ratio is 1.453 but in

second year it’s come down to 1.342 and in third year further reduced to.0.772

which indicates the company is not in a position of liquidity.

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GRAPH No. 4.1:

GRAPH SHOWING CURRENT RATIO

4.2QUICK RATIO OR LIQUID RATION OR ACID TEST RATIO:

Quick assets mean nothing but current assets minus closing stock and pre-paid

expenses. It studies a firms capacity of paying current liabilities through quick

assets like cash, bank balance, sundry debtor’s and marketable securities.

Generally quick ratio of 1:1 considered ideal ratio, which means 1 Re. of Quick

assets for every 1 Re of current liability.

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QUICK RATIO = QUICK ASSETS

CURRENT LIABILITIES

Table no. 4.2

TABLE SHOWING QUICK RATIO

(in Rs.)

Year 2008 2009 2010

Quick Assets 54091451.36 62131643.08 94997282.67

Current Liabilities

38646632.43 93889502.62 124488310.37

Ratio 1.39 0.66 0.76

Interpretation:

As from above table, the company is having sufficient assets to match its liabilities, for

the first year (i.e. 1.39). But in 2009, it came down to 0.66, and in 2010 it increased

marginally to 0.76 this shows that the company is not stable in maintaining its liquidity

position

GRAPH No. 4.2:

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GRAPH SHOWING QUICK RATIO

4.3ABSOLUTE LIQUID RATIO OR CASH RATIO:

Although receivables and debtor’s are generally more liquid than inventories, yet

there may be doubts regarding their realization into cash immediately or in time.

Hence absolute liquid ratio should be calculated so as to find out the absolute

liquid position of the firm. Absolute liquid ratio defines the relationship between

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absolute liquid assets, which include cash at bank and short term securities and

the current liabilities.

Absolute Liquid ratio = Cash + Bank + Short term Marketable securities

Current liabilities

Table no. 4.3

TABLE SHOWING ABSOLUTE LIQUID RATIO

(in Rs.)

Year 2008 2009 2010

Cash + Bank +Short term Marketable securities

3290983.69 2735535.35 3629197.85

Total Current Liabilities

38646632.43 93889502.62 124488310.37

Ratio 0.085 0.029 0.029

Interpretation:

The Absolute liquidity ratio is low as the ratios show that the company is not in a very good liquidity position as the ratios are 0.085 in 2008 which further falls down to 0.029 in 2009 and remain stable in 2010.

GRAPH No. 4.3:

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GRAPH SHOWING ABSOLUTE RATIO

4.4 DEBTOR’S TURNOVER RATIO:

Debtor’s velocity indicates the number of times the debtor’s are turned

over during a year. Generally the higher the value of debtor’s turnover

the more efficient is the management of debtor’s and indicates the

liquidity of debtors.

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DEBTORS’ TURNOVER RATIO = NET CREDIT SALES

AVERAGE TRADE DEBTORS

Table no. 4.4

TABLE SHOWING DEBTORS TURNOVER RATIO

(in Rs.)

Year 200 2009 2010

Net credit Sales

89127593.52 106245050.06 134585002.62

Average trade debtor

10740528.29 12252360.95 71990168.36

Ratio 8.298 8.671 8.869

Interpretation:

From the above table it is clear that the debtors turnover ratio shows an increasing trend i.e. 8.298 in 2008 to 8.671 In 2009 and finally 8.869 in 2010 which signifies that the velocity has increase over 2 years.

GRAPH No. 4.4:

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GRAPH SHOWING DEBTORS TURNOVER RATIO

4.5 AVERAGE. COLLECTION PERIOD:

It represents the average number of days for which a firm has to wait

before its receivables are converted into cash.

Average Collection Period = No. of Days in a year

Debtor’s Turnover Ratio

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Table no. 4.5

TABLE SHOWING AVERAGE COLLECTION PERIOD

(in Rs.)

Year 2008 2009 2010

No. of days in a Year

365 365 365

Debtor’s Turnover

Ratio

8.298 8.671 8.869

Ratio 43.986 42.09 41.154

Interpretation:

The shorter the collection period the better quality of the company in terms of

collecting their debts from debtors. The collection period in the year 2008 is

43.986days is much higher than the ratio in the year 2009(42.09) and in

2010(41.154).this clearly indicates that the firm’s debt collection management

has been improved

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GRAPH No. 4.5:

GRAPH SHOWING AVERAGE COLLECTION PERIOD

4.6 CREDITORS TURNOVER RATIO:

Creditor’s turnover ratio indicates the number of times the creditors are

turned over a year. A high creditor’s turnover ratio shows that the creditors are paid

promptly. This situation enhances the credit worthiness of the company. However a

very favourable ratio to this effect also shows that the business is not taking the full

advantage of credit facilities allowed by the creditors.

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CREDITORS TURNOVER RATIO = NET CREDIT PURCHASE

AVERAGE TRADE CREDITORS

Table no. 4.6

TABLE SHOWING CREDITORS TURNOVER RATIO

(in Rs.)

Year 2008 2009 2010

Net credit purchases

50760748 104850859 105932692

Average trade debtor

9669939 13298030 11502027

Ratio 5.25 7.88 9.21

Interpretation:

From the above table it is clear that the creditor turnover ratio shows an increasing trend i.e. 5.25 in 2008 to 7.88 in 2009 and finally 9.21 in 2010 which signifies that the creditors are paid promptly.

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GRAPH No. 4.6:

GRAPH SHOWING CREDITORS TURNOVER RATIO

4.7 AVERAGE PAYMENT PERIOD:

The average payment period represents the average number of days taken by the firm to pay its creditors. Generally lower the ratio better is the liquidity position of the company, and higher the ratio, less liquid is the position of the firm. A higher payment period implies greater credit period enjoyed by the firm and consequently larger the benefits reaped from the credit suppliers.

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AVERAGE PAYMENT PERIOD = TRADE CREDITOR

AVERAGE DAILY CREDIT PURCHASE

Table no. 4.7

TABLE SHOWING AVERAGE PAYMENT PERIOD

(in Rs.)

Year 2008 2009 2010

Trade creditor

50760748 104850859 105932692

Average daily credit purchase

282 282 282

Ratio 107.44 71.53 61.24

Interpretation:

From the above table it is clear that the debtors’ turnover ratio shows an decreasing trend i.e.107 days in 2008 which reduced to 72days in 2009 and finally 61days in 2010 which signifies that the creditors are paid within a short period of time.

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GRAPH No. 4.7:

GRAPH SHOWING AVERAGE PAYMENT PERIOD:

4.8: 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. A stock turnover of 8 times a year is ideal.

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Inventory Turnover ratio = Cost of Goods Sold

Average Stock

Table no. 4.8

TABLE SHOWING INVENTORY TURNOVER RATIO

(in Rs.)

Year 2008 2009 2010

COGS 71828809.20 88746140.93 89844090.56

Average Stock

22999463.57 42359907.29 71990168.36

Ratio 3.123 2.095 1.248

Interpretation:

from the above table it is shown that the inventory of the company in the year 2008 has been turned over 3.123 times while in the year 2009 it has been turned over 2.095 and in the year 2010 1.248 this shows that the firm has increasing sales growth.

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GRAPH No. 4.8:

GRAPH SHOWING INVENTORY TURNOVER RATIO

4.9 INVENTORY CONVERSION PERIOD:This ratio indicates the number of days in which the firm can convert the funds tied up in stock into liquid funds

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INVENTORY CONVERSION PERIOD = NO. OF DAYS IN A YEAR

STOCK TURNOVER RATIO

Table no. 4.9

TABLE SHOWING INVENTORY CONVERSION PERIOD

(in Rs.)

Year 2008 2009 2010

No. of Days in a Year

365 365 365

Stock Turnover

Ratio

3.123 2.095 1.248

Ratio 116.87 174.22 292.47

Interpretation:

The Stock Conversion Period of the company is good, it may be seen that there is a increasing trend which says that the company is quick enough to sell its stock in the market.

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GRAPH No. 4.9:

GRAPH SHOWING STOCK CONVERSION RATIO

4.10 CASH TURNOVER RATIO:

It is a ratio between cash and sales. Turnover means total annual sales.

It indicates the extent to which cash resources are efficiently utilized by the

enterprise. It is also helpful in determining the liquidity of a concern.

The ideal Cash Turnover Ratio is 10:1.

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Cash Turnover ratio = Net Annual Sales

Cash

Table no. 4.10

TABLE SHOWING CASH TURNOVER RATIO

(in Rs.)

YearYear

2008 2009 2010

Net Annual Sales 89127593.52

106245050.06

134565002.62

Cash 3290983.69 126077510.67

3629197.85

Ratio 27.08 0.84 37.08

Interpretation:

The Cash Turnover Ratio is well above the ideal standard in 2008(27.08) and 2010(37.08), while in 2009(0.84) it had fallen drastically this indicates that cash resources of the enterprise are efficiently utilized 2008 and 2010.

Page | 64

GRAPH No. 4.10:

GRAPH SHOWING CASH TURNOVER RATIO

4.11 GROSS-PROFIT RATIO

It shows the relationship between the gross profit to net sales and its generally

expressed in percentage.

Page | 65

It helps to determine the selling price so that there is adequate margin to cover the

manufacturing expenses and to provide for other operating expenses the ideal gross

profit ratio is 20 to 25%.

Gross Profit ratio = Gross Profit × 100

Net Sales

Table no. 4.11

TABLE SHOWING GROSS PROFIT RATIO

(in Rs.)

Year 2008 2009 2010

Gross Profit 17298784.38 17498909.13 24740736.87

Net Sales 89127593.52 106245000.06 134585002.62

Ratio 19.409 % 16.47 % 18.38%

Interpretation:

From the table it is clear that The Company had a higher gross profit ratio of 19.409% in 2008 which reduced in 2009 to 16.47% indicating an increase in expenses. The ratio

Page | 66

has further improved in the year 2010 to 18.38% showing an improvement in the firms sales.

GRAPH No. 4.11:

GRAPH SHOWING GROSS PROFIT RATIO

4.12 NET PROFIT RATIO:

Page | 67

It shows the relationship between the net profit to net sales and its generally expressed

in percentage.

It helps to determine the selling price so that there is adequate margin to cover the

administrative and marketing expenses and to provide for dividends and transfers to

reserve.

Net Profit ratio = Net Profit × 100

Net Sales

Table no. 4.12

TABLE SHOWING NET PROFIT RATIO

(in Rs.)

Year 2008 2009 2010

Net Profit 1379176.58 6393361.61 5051473.85

Net Sales 89127593.52 106245050.06 134585002.62

Ratio 1.547% 6.01 % 3.80%

Interpretation:

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The net profit ratio of the firm is lower in 2008(1.547) which shows that the company will find it difficult to withstand adverse conditions, but the company net profit ratio of the company increased drastically in 2009(6.01) but decreases in 2010(3.80) which shows that the firm has a fluctuating profitability position.

GRAPH No. 4.12:

GRAPH SHOWING NET PROFIT RATIO

4.13 DEBT EQUITY RATIO:

Page | 69

The debt-equity ratio is a leverage ratio that compares a company's total liabilities to its

total shareholders' equity. This is a measurement of how much suppliers, lenders,

creditors and obligors have committed to the company versus what the shareholders

have committed

Debt Equity ratio = Long term Debts

Shareholders fund

Table no. 4.13

TABLE SHOWING DEBT EQUITY RATIO

(in Rs.)

Year 2008 2009 2010

Long term Debts

25218249.48 33558454.44 35347652.37

Shareholders Fund

18098545.95 23399546.56 27330714.41

Ratio 1.393 1.434 1.293

Interpretation:

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From the above table it shows that the debt equity ratio has been 1.393 in 2008 showing an increasing trend of 1.434 in 2009 and 1.293 in 2010. This shows that the firm has not depended much on long term borrowings for its finances.

GRAPH No. 4.13:

GRAPH SHOWING DEBT EQUITY RATIO

4.14 PROPRIETARY RATIO:

Page | 71

This ratio establishes the relationship between shareholders’ fund to the total

assets of the firm. It is an important ratio for determining long-term solvency of a

firm.

.The higher the proprietary ratio, the greater the long stability of the company and

consequently greater protection to creditors and vice versa

Generally a ratio of 0.33:1 is considered ideal.

Proprietary ratio = Shareholders Fund

Total Assets

Table no. 4.14

TABLE SHOWING PROPRIETARY RATIO

(in Rs.)

Year 2008 2009 2010

Shareholders Fund

18098545.95 23399546.56 27330714.41

Total Assets 8407076.86 152199184.62 187167838.10

Ratio 0.215 0.153 0.146

Interpretation:

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From the above table the company has a higher ratio in 2008(0.215), it decreased in 2009(0.153) further decreasing in 2010(0.146) which was not a good sign but again fell down which indicates company has to make more efforts to remain stable in long term.

GRAPH No. 4.14:

GRAPH SHOWING PROPRIETARY RATIO

4.15 FIXED ASSETS TO NET WORTH RATIO:

Page | 73

The ratio establishes the relationship between fixed asset and shareholders’ fund.

This ratio indicates the extents to which shareholders’ fund are sunk into the

fixed assets. The standard or ideal fixed assets to net worth ratio for an

undertaking are 2/3 or 67%.

Fixed Asset to Net Worth ratio = Net Fixed Assets

Shareholders Fund

Table no. 4.15

TABLE SHOWING FIXED ASSET TO NET WORTH RATIO

(in Rs.)

Year 2008 2009 2010

Net Fixed Assets

23618535.50 18836309.95 83035439.91

Shareholders Fund

18098545.95 23399546.56 27330714.41

Ratio 1.304 0.804 3.038

Interpretation:

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The above table shows that the fixed assets are 1.304 in the year 2008 which decreases in the year 2009 (0.804) and then shows a increase in 2010(3.038) indicating that the shareholders funds are secured in the fixed assets

GRAPH No. 4.13:

GRAPH SHOWING FIXED ASSET TO NET WORTH RATIO

4.16 CURRENT ASSETS TO NET WORTH RATIO:

Page | 75

It is the ratio between current assets and shareholders fund.

It indicates the proportion of current assets financed by the owner’s.

Current Asset to Net Worth ratio = Current assets

Shareholders Fund

Table no. 4.16

TABLE SHOWING CURRENT ASSET TO NET WORTH RATIO

(in Rs.)

Year 2008 2009 2010

Current Assets

56172698.36 126077510.67 96055834.17

Shareholders Fund

18098545.95 23399546.56 27330714.41

Ratio 3.103 5.388 3.515

Interpretation:

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From the above that In the year 2008 the ratio was 3.103 then in the year 2009

the ratio increased to 5.388 and decreased to 3.515 in 2010 which shows a

fluctuation in current assets to net worth ratio.

GRAPH No. 4.16:

GRAPH SHOWING CURRENT ASSET TO NET WORTH RATIO

4.17 TOTAL ASSET TURNOVER RATIO:

Page | 77

This ratio studies the relationship between total assets & net sales of the firm.

This ratio indicates the efficiency in the use of total resources or assets of a

concern. The standard ratio is that the sales should be at least 2 times the value

of the assets. A total assets turnover ratio of 2 times or more indicates that the

assets of a concern have been utilized properly.

Total Asset turnover ratio = Net sales

Total Asset

Table no. 4.17

TABLE SHOWING TOTAL ASSET TURNOVER RATIO

(in Rs.)

Year 2008 2009 2010

Net Profit 1379176.58 6393361.61 5051473.85

Total Assets 84070076.86 152199184.62 195628656.80

Ratio 0.016 0.042 0.027

Interpretation:

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The Total asset turnover ratio is increasing in 2009(0.042) which indicates that there is improvement in the utilisation of total assets but decreases in 2010(0.027) that indicates the assets remained idle.

GRAPH No. 4.17:

GRAPH SHOWING TOTAL ASSET TURNOVER RATIO

Page | 79

Chapter 5: SUMMARY OF FINDINGS AND SUGGESTIONS

5.1Summary of the findings

Page | 80

The Current Ratio is less than 1:1 it indicates that company is having a relatively bad short term financial position and policy. The company is not able to meet its short term liabilities.

The Quick Ratio of the company has constantly decreasing from 1.39 in 2008 to 0.06 in 2009 and slightly increases to 0.76 in 2010.

It can be observed that the Absolute Liquid Ratio was 0.085 in 2008 which decrease drastically to 0.029 in 2009 and remained constant in 2010.

The Debtor Turnover Ratio of the company has increase slightly from 8.298 in 2008 to 8.69 in 2010.

The Inventory Turnover ratio of the company has reduced from 3.123 in 2008 to1.248 in 2010

The Cash Turnover Ratio has shown sudden fall in the year 2009 to 0.84 and has increase drastically in 2010 at 37.08

The Gross Profit Ratio shows a fluctuation over the period 2008 to 2010. It was 19.409 in 2008 which is reduced to 18.38 in 2010

The Net Profit of the company has increased in 2009 to 6.01 and reduced to 3.8 in 2010.

The Debt Equity Ratio has been constant throughout the year i.e. from in 2008 to 1.4343 in 2009 to 1.293 in 2010.

The Proprietary Ratio of the company has decreased from 0.215 in 2008 to 0.146 in 2010.

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The Total Asset Turnover Debtor is fluctuating of the company i.e. from 0.16 in 2008 to 0.042 in 2009 to 0.027 in 2010.

The Average Collection Period of the company shows a diminishing trend i.e.43.986 in 2008 to 42.09 in 2009 and further decrease to 41.154 in 2010.

The Inventory Conversion Period of the company has drastically increased from 116.87 in 2008 to 174.22 in 2009 to 292.47 in 2010.

The Current Asset to Net worth Ratio of the company is fluctuating i.e.3.103 in 2008 to 3.515 in 2010.

The Fixed Asset to Net worth Ratio of the company increased from 1.304 in 2008 to 3.038 in 2010.

The creditor turnover ratio of the company shows a increasing trend i.e.5.25 in 2008 to 7.88 in 2009 and finally drastically increased to 9.21 in 2010.

The average payment period of the company decreases from 107days in 2008 to 61days in 2010.

Page | 82

5.2 SUGGESTIONS

By analysing and interpreting the performance of HIMALAYAN TEA AND AGRO

PVT. LTD., the following suggestions have been made:

1. The company must maintain a balance between the margins of current assets

and current liabilities, as working capital is needed for day to day operations.

2. The company should try and make sure that creditors claim should not

increase to much extent.

3. The company has to concentrate on improving its liquid assets.

4. The cash balance with the company should be increased to meet emergency

situations.

5. The firm could avail a better a credit period from the creditors to ensure that

they have a sufficient liquidity position at all times.

6. The company should ensure that it has sufficient proprietary ratio so that the

shareholders funds can be protected.

7. The trend shows that there are fluctuations in stock turnover. The company

should take care that there would not be any shortage of stock at any times.

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8. The current assets of the firm should be financed by its working capital and

not by the long term sources of funds. if the firm depends on the long term

sources of funds for current asset it may end up being in a shortage of funds

for meeting its fixed assets requirements.

9. The company could try to control its direct cost in the manufacturing of tea

which will enable it to improve its manufacturing profits

10.The firms profitability position is on a decreasing trend. The firm should

concentrate on controlling its operating and non operating expenses to

improve the overall profit of the firm

Page | 84

5.3 CONCLUSION

By analysing and interpreting the performance of HIMALAYAN TEA AND AGRO

PVT. LTD. it can be observed that the financial stability of the company should be

improved. The overall view of the company is seen to have a positive side. The

company should look forward in boosting its profits more and more as the company has

potential to grow and it may not find it difficult to survive in the face of rising cost of

production and falling selling prices. It should also look into yielding more returns to its

share holders. The company should use its retained earnings for expansion, which will

help expand operation and sales leading to greater returns on investments in the long

run. The company is quite has good financial strength.

Page | 85

BIBLIOGRAPHY

Page | 86

1. BOOKS REFFERED:

Cost and Financial Analysis by S. P. Jain and K. L. Narang (2009),

Kalyani Publishers.

Management Accounting by Shashi K. Gupta and R.K.Sharma (2009),

Kalyani Publishers.

Cost and Financial Analysis by Jawahar Lal (2010), Himalaya Publishing

House.

Management Accounting by M. N. Arora (2009), Himalaya Publishing

House.

2. WEBSITES VISITED:

www.google.com

www.answers.com

www.wikipedia.com

3. OTHER SECONDARY DATA:

Annual Report of HIMALAYAN TEA and AGRO Pvt. Ltd. for the

financial year 2007-2008.

Annual Report of. HIMALAYAN TEA and AGRO Pvt. Ltd. for the

financial year 2008-2009.

Annual Report of HIMALAYAN TEA and AGRO Pvt. Ltd. for the

financial year 2009-2010.

Page | 87

ANNEXURE

BALANCE SHEET 2007-08

Page | 88

L I A B I L I T I E SCURRENT

YR. A S S E T SCURRENT YR.

        SHARE CAPITAL: FIXED ASSETS:  

(As per Schedule - A) 1,00,00,000.00 (As per Schedule - G)

2,37,80,842.50

        RESERVES & SURPLUS:   INVESTMENT  

(As per Schedule - B) 80,98,545.95 (As per Schedule - H)

40,87,764.00

       

SECURED LOANS:  

CURRENT ASSETS, LOANS & ADVANCES:  

(As per Schedule - C) 89,70,765.48 (As per Schedule - I)

5,61,72,698.36

       

UNSECURED LOANS:   MISCELLANEOUS EXPENDITURE:  

(As per Schedule - D) 1,62,47,484.00 (As per Schedule - J)

28,772.00

        DEFERRED TAX LIABILITY :      

(As per Schedule - E) 21,06,649.00    

        CURRENT LIABILITIES & PROVISIONS:      

(As per Schedule - F) 3,86,46,632.43    

       

TOTAL Rs. 8,40,70,076.86 TOTAL Rs.

8,40,70,076.86

BALANCE SHEET 2008-09

Page | 89

L I A B I L I T I E S CURRENT YR. A S S E T S CURRENT YR.

        SHARE CAPITAL:   FIXED ASSETS:  

(As per Schedule - A) 1,00,00,000.00 (As per Schedule - G)

1,88,36,309.95

        RESERVES & SURPLUS:   INVESTMENT  

(As per Schedule - B) 1,33,99,546.56 (As per Schedule - H)

72,85,364.00

       

SECURED LOANS:  

CURRENT ASSETS, LOANS & ADVANCES:  

(As per Schedule - C) 2,31,98,821.44 (As per Schedule - I)

12,60,77,510.67

       

UNSECURED LOANS:   MISCELLANEOUS EXPENDITURE:

-

(As per Schedule - D) 1,03,59,633.00    

        DEFERRED TAX LIABILITY :      

(As per Schedule - E) 13,51,681.00    

        CURRENT LIABILITIES & PROVISIONS:      

(As per Schedule - F) 9,38,89,502.62    

       

TOTAL Rs. 15,21,99,184.62 TOTAL Rs.

15,21,99,184.62

BALANCE SHEET 2009-10

Page | 90

L I A B I L I T I E S CURRENT YR. A S S E T S CURRENT YR.

        SHARE CAPITAL: FIXED ASSETS:   (As per Schedule - A) 1,00,00,000.00 (As per Schedule - G) 8,30,35,439.91

    INVESTMENT  80,76,564.00

RESERVES & SURPLUS:   (As per Schedule - H)  

(As per Schedule - B) 1,73,30,715.41

CURRENT ASSETS, LOANS & ADVANCES: 9,60,55,834.17

    (As per Schedule - I)

 

SECURED LOANS:   MISCELLANEOUS EXPENDITURE:  

(As per Schedule - C) 2,53,80,739.37 (As per Schedule - I)         UNSECURED LOANS:       (As per Schedule - D) 99,66,913.00            DEFERRED TAX LIABILITY :       (As per Schedule - E) 1160.00            CURRENT LIABILITIES & PROVISIONS:      

(As per Schedule - F) 12,44,88,310.37    

       

TOTAL Rs. 18,71,67,838.10 TOTAL Rs.

18,71,67,838.10

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