financial analysis of rico auto
TRANSCRIPT
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A
SUMMER TRAINING REPORT
ON
Financial Analysis of Rico Auto LTD
SUBMITTED IN THE PARTIAL FULFILMENT OF THE REQUIREMENT FOR
THE AWARD OF DEGREE OF
MASTER OF BUSINESS ADMINISTRATION (MBA)
From
Amity University Haryana
Manesar
Submitted by:
Ashish Negi
Roll No:-12
MBA 3 rd Sem.
AMITY BUSINESS SCHOOL
(2010 2012)
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DECLARATION
I, Ashish Negi , Roll No. 12 M.B.A. (3 rd Semester) of Amity University Haryana, Manesar,
Gurgaon hereby declare that the Project Report entitled, Financial Analysis Of Rico Auto
LTD is an original work and the same has not been submitted to any other institute for theaward of any other degree. The interim report was presented to the supervisor and the pre-
submission presentation was made on _______. The feasible suggestions have been duly
incorporated in consultation with supervisor .
Signature of the Supervisor Signature of Candidate
Countersigned
Director of the Institute
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ACKNOWLEDGEMENT
It is my privilege to acknowledge the contribution of all helping hands for their cooperation
and guidance that enabled me to dedicate time and effort in framing my analysis in
conceivable system.
I would like to thank Dr.Padmakali Banerji , Pro Vice Chancller, Amity University
Haryana for extending full help in my project . Her consistent support and cooperation
showed the way towards the successful completion of the project.
The success of this project has largely been due to the invaluable guidance of MR. P.K
Sharma, Faculty, Amity Business School, Manesar, my project guide . I am very thankful
to him, for his helpful suggestion and motivation throughout my work. I really appreciate the
patience with which he resolved my doubts amidst his busy schedule. I feel it is privilege to
have the opportunity to work under his prestigious supervision.
I am very grateful to my project guide Mr. Anand Gupat (Finance Manager, Rico Auto Ltd
,Gurgaon) for providing me constant support and inspiration during the summer training.
My overriding debts continue to be to the management and all employees of Rico Auto Ltd
for their co-operation and guidance, which made my summer training project possible.
Finally I would like to give special thanks to my family and my friends who make it all
happen and make it worthwhile.
Ashish Negi
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PREFACE
Practical training provides a golden opportunity to implement studied rules and regulation. In
the absence of Practical knowledge, theoretical knowledge is incomplete. This indented for
the experience gained by trainee during Summer Training in RICO AUTO Ltd .
While making this project report, trainee became Familiar with the Accounting terms (Cost
Related) that are usually used in a company and the different functions that a Finance
Manager has to perform. Trainee has learnt how to do a financial analysis through various
tools and techniques like making Profit & Loss A/C and hence how to calculate these costs
form judgment about the operating performance and of a business.
It is very challenging thats why I have undertaken this project. It is significant not only for
the calculation perspective but also helpful in the practical real life.
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TABLE OF CONTENTS
Declaration
Acknowledgement
Preface
Chapter 1
Introduction I Significance of the Study II Objectives of the Study III Research Methodology VI
Chapter 2
Industry Profileo Growth driverso Policy Initiativeso Road Aheado Competitors analysis
Company Profileo Management
o Profileo History & Milestoneso Products
Chapter 3 Literature Review
Chapter 4
Analysis & Interpretation
Chapter 5
Findings & Suggestion
Conclusion Bibliography
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Chapter - 1
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AN
INTRODUCTION
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Financial analysis is an important part of the process of developing a business plan, and then
for monitoring the success of that plan.
Typical elements of financial analysis include:
1. Budgeting - creating a budget setting out planned cash flows in and out of the business.
By monitoring a cash flow budget it is possible to identify any potential crisis points where
liquidity will be poor. Budgets can also be set out for income and expenditure by the business,
as well as a capital budget showing major capital spending e.g. on premises, equipment etc.
2. Profit and loss analysis - this involves the creation of a profit and loss budget setting out
expected future profits/losses for the business. This is important in assessing the return on the
business. Useful parts of profitability analysis are:
Gross profit margins - the gross profit of the business as a percentage of sales. Operating profit margins - operating profit as a percentage of sales.
3. Solvency analysis - involves calculating the net current assets of a business as shown in
the balance sheet (i.e. current assets - current liabilities).
4. Return on capital employed (ROCE) - this is a measure of the return made on all of the
capital employed in the business in a given period of time.
5. Where a business has shareholders it is useful to analyze returns to these shareholders in
terms of returns for each Rupee invested in share capital.
Financial analysis is very important in planning because ultimately business success is
measured in terms of money. Investors in a business need to feel that:
Their money is secure That their returns are comparable to what they can earn elsewhere That planner gets a good sense of the financial implications of their actions.
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SIGNIFICANCE OF THE STUDY
This study of financial analysis will show what importance a financial analysis holds
for the company and its investors, supp liers, buyers, as well as other subsidiary.
This study has helped in getting knowledge of Comparison of growth of the company
in last five years from FY07 to FY11.
It has given me the insight on how to do a financial analysis. It will help other researchers to do a study.
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Objective of the Study
Owners and managers require financial statements to make important business
decisions that affect its continued operations.
Employees also need these reports in making collective bargaining agreements(CBA) with the management.
Prospective investors make use of financial statements to assess the viability of
investing in a business.
Financial institutions (banks and other lending companies) use them to decide
whether to grant a company with fresh working capital or extend debt securities (such
as a long-term bank loan or debentures) to finance expansion and other significant
expenditures.
Government entities (tax authorities) need financial statements to ascertain the
propriety and accuracy of taxes and other duties declared and paid by a company.
Vendors who extend credit to a business require financial statements to assess the
creditworthiness of the business.
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Research Methodology
The system of collecting data for research projects is known as research methodology . The
data may be collected for either theoretical or practical research for example management
research may be strategically conceptualized along with operational planning methods and
change management.
Quantitative Research
In the social sciences, quantitative research refers to the systematic empirical investigation of
social phenomena via statistical, mathematical or computational techniques. The objective of
quantitative research is to develop and employ mathematical models, theories and/or
hypotheses pertaining to phenomena. The process of measurement is central to quantitative
research because it provides the fundamental connection between empirical observation and
mathematical expression of quantitative relationships.
Secondary Research
Secondary research occurs when a project requires a summary or collection of existing data.
As opposed to data collected directly from respondents or "research subjects" for the express
purposes of a project, (often called "empirical" or "primary research"), secondary sources
already exist.
These secondary sources could include previous research reports, newspaper, magazine and
journal content, and government statistics. Sometimes secondary research is required in the
preliminary stages of research to determine what is known already and what new data is
required, or to inform research design. At other times, it may make be the only research
technique used.
A key performance area in secondary research is the full citation of original sources, usually
in the form of a complete listing or annotated listing.
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Chapter 2
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Industry Analysis
India has the most competitive auto parts manufacturing industry in the world, with Indian
automotive components being widely preferred by major automobile manufacturing
companies. The auto component companies in India are contributing to the growth of this
sector by providing genuine, cheap and reasonably priced automotive parts.
The Indian automotive components industry has actively and quickly transformed from a
domestic market supplier, to one of the essential auto parts supplier in the world.
The Indian auto component sector has been growing at 20 per cent a year since 2000 and is
projected to maintain the high-growth phase of 15-20 per cent till 2015.
Growth Drivers
Rising demand for vehicles - Vehicle production grew to around 17.9 million in
2010-11 - Global Original Equipment Manufacturers (OEMs) are entering India to
establish their manufacturing base
Low-cost and high quality standards Low labour costs in India have resulted in a
significant cost reduction, with international quality standards being duly maintained.An average cost reduction of nearly 25-30 per cent has attracted several global
automobile manufacturers to set base since 1991
Availability of low cost skilled manpower India produces close to 0.4 million
engineering graduates every year, and the cost of entry-level engineers is as low as
US$ 8,000 a yea r.The country accounts for 26 per cent of the worlds Engineering
Service Outsourcing (ESO)
Policy initiatives - De-regulation and policy initiatives such as lower excise duties,
realisation of value added tax (VAT), etc., have been implemented. Foreign direct
investment (FDI) up to 100 per cent is permitted through the automatic route for
manufacturers of automobiles and components.
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Policy Initiatives
The Ministry of Heavy Industries and Public Enterprises has envisaged the Automotive
Mission Plan (AMP) 2006-2016 to promote growth in the sector. The plan targets to:
Increase turnover to US$ 122 billion US$ 159 billion by 2016 from US$ 34 billion in
2006
Increase export revenue to US$ 35 billion by 2016
Provide employment to additional 25 million people by 2016
Road Ahead
Going forward, the automotive component industry in India displays strong potential in
generating employment and promoting entrepreneurship in the country. The series of new
investment plans announced by global and domestic automobile manufacturers re instates the
emergence of India as a global hub for auto components.
The boost in demand, with the growth of the automobile industry, will see the emergence of
several new players in the industry. The huge market for auto components, and the diverse
products and technology involved ensures a place and role for many. Among the smallerplayers in the unorganised segment, the industry could witness a shift from being standalone
companies, to entering into either contract manufacturing or being ancillary units. The newly
defined rules of specialisation, development and delivery, hold the key to success in the auto
component industry.
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Competition analysis
TOP 3 Companies
BOSCH - Bosch innovations have shaped cars from the start and will keep doing so infuture. As the worlds biggest independent automotive supplier, Bosch focuses on
innovations to make driving safer, cleaner and economical. Automotive Technology is thelargest business segment of Bosch in India, supplying to the local automotive industry, andexporting components overseas.
Name Last Price Market Cap. SalesTurnover
Net Profit Total Assets
(Rs. cr.)Bosch 7,074.00 22,211.58 6,899.40 858.9 4,374.44
Motherson Sumi Systems Limited (MSSL) Is the flagship company of the Samvardhana
Motherson Group and was established in 1986. It is a joint venture between Samvardhana
Motherson Group and Sumitomo Wiring Systems (Japan). MSSL is a focused, dynamic and
progressive company providing customers with innovative and value-added products.
The company is one of the leading manufacturers of automotive wiring harnesses and mirrors
for passenger cars in India. It is also a leading supplier of plastic components and modules to
the automotive industry.
Name Last Price Market Cap. SalesTurnover Net Profit TotalAssets(Rs. cr.)
MothersonSumi
177.85 6,892.47 2,855.08 287.49 1,802.84
Amtek Auto is a diversified automotive component supplier in the global auto component
manufacturing and supply chain. Observing a powerful entrepreneurial culture, the forward
looking company manufactures automotive systems, assemblies, modules and components.
Tapping into its proven capabilities, over the past 25 years, Amtek has lived upto its
commitment to fulfill the rising indigenous demand and compete in the global forum. And
thus, today has a significant presence.
Name Last Price Market Cap. SalesTurnover
Net Profit Total Assets
(Rs. cr.)
Amtek Auto 141.3 3,294.75 1,792.64 85.3 6,576.10
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Company
Profile
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Management - Rico Auto
Name Designation
Chandra Mohan Chairman / Chair Person
Arvind Kapur VC & Mng.Director & CEO
Arun Kapur Joint Managing Director
Amarjit Chopra Director
Satish Sekhri Director
Vinod Kumar Bhalla Director
Kanwal Monga Director
Ashok Seth Director
Rakesh Kapur Director
Anup Singh Director
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PROFILE
Rico Auto Industries Limited (RICO) is a supplier of high precision aluminum and ferrous
components and assemblies to almost all major original equipment manufacturers (OEMs) in
India, including Hero moto corp, Maruti Udyog, Honda Siel Cars, Honda Motor Cycle and
Scooter, Tata Cummins and Delphi. The company is also a Tier-one supplier to auto OEMsin the International market. Its global customers include Ford, Land Rover, Jaguar, Cummins
Engine Company, and Matsusaka Engineering Company. The company incorporated in 1986
is promoted by Mr. Arvind Kapur and Mr. Arun Kapur. The company is a single source
supplier for Matsusaka Engg. Co. Limited, Japan for water pump kits and Eaton Limited, UK
for vehicle transmission components. The company has entered into a 50:50 JV with FCC,
Japan (largest manufacturer of clutches in that country). The company has also entered into a
JV with Daewoo Precision Industries Limited (DPI), Korea. The JV company will not onlybe the single source OE supplier for Daewoo operations in India, but will also progressively
emerge as the OE supplier to Daewoo in international markets. The JV is expected to
improve capacity utilization of Rico`s facilities and help in updating its technology to world
class standards. The trial production in the JV commenced from June 1997.
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HISTORY & MILESTONES
1984-86
Rico Auto Incorporated (1984-85) and Commercial Production Started (1986)
Aluminum HPDC Plant set up in Dharuhera (40 Kms from Delhi, India)
TC with FCC Japan for manufacturing of Clutch Assembly
1990-92
Ferrous Casting & Machining Plant set up in Gurgaon (20 Kms from Delhi, India)
Entered International Market as OEM Supplier to MEC Japan.
1994-96
FCC RICO (50:50) JV formed
Started supplying globally to USA & UK (Eaton, Cummins, GM etc.)
1998-00
Second Aluminum HPDC & Machining Plant set up in Gurgaon
2000-02
Set up full service Engineering, Design & Development function. Added Customers: Ford, Jaguar, Land Rover
Certified TS 16949, ISO 140001, OHSAS 18001
2002-04
Enhanced Ferrous & Aluminum Capacity
Added Customers: Caterpillar, Honeywell, Detroit Diesel, Volvo
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2004-06
R&D Center started
Added Customers: Nissan, Tata, Perkins
2007
JV with CONTINENTAL Automotive Systems (Hydraulic Brakes)
JV with JINFEI CHINA (Aluminum Alloy Wheels - 2 Wheelers)
Acquired 25 acres land in Chennai.
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CURRENT GLOBAL CUSTOMER BASE
Two Wheelers
Passenger Cars
Commercial Vehicles
System Suppliers
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PRODUCTS
Oil Pump Assembly
Annual Volumes - 500,000
Fuel System Parts
Annual Volumes - Annual Volumes - 400,000
Lube Oil Filters Heads
Annual Volumes - 200,000
Exhaust Manifolds
Annual Volumes - 500,000
Turbine Housings
Center Housings
Back Plates
Crank Cases & Covers
Annual Volumes - 1 Million
Cylinder Head Covers
Annual Volumes - 100,000
Oil Pan
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Intake Manifold Covers
Annual Volumes - 150,000
Front Cover
Valve Cover
Annual Volumes - 60,000
Side Cover
Annual Volumes - 400,000
Balance Shafts Assembly
Annual Volumes - 120,000
Gear Housing
Annual Volumes - 1,20,000
Main Bearing Caps
Annual Volumes - 1 Million
Water, Air Connections and Pressure Plates
Flywheels
Annual Volumes - 250,000
Timing Cases
Annual Volumes - 400,000
Oil Filter Adaptor
Annual Volumes - 400,000
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Engine Brackets
Annual Volumes - 4.2 Million
Cylinder Block (Ferrous)
Cylinder Head (Aluminum)
Clutch Assembly
Annual Volumes - 3.5 Million
Automatic Transmission Bracket Assembly
Annual Volumes - 1 Million
Differential Case Housings
Annual Volumes - 600,000
Gear Shifts Forks
Wheel Hubs Assembly
Annual Volumes - 7 Million Sets
Brake Panel Assembly
Annual Volumes - 7 Million Sets
Brake Discs
Annual Volumes - 1.2 Million
Drums
Annual Volumes - 1.2 Million
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Steering Knuckles
Annual Volumes - 250,000
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Chapter - 3
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Conceptualization
Financial Statement
Financial statements (or financial reports) are formal records of a business' financialactivities.
Financial statements provide an overview of a business' financial condition in both short and
long term. There are four basic financial statements:
Balance sheet : also referred to as statement of financial position or condition, reports on a
company's assets, liabilities and net equity as of a given point in time.
Income statement : also referred to as Profit and Loss statement (or a "P&L"), reports on a
company's results of operations over a period of time.
Statement of retained earnings: explains the changes in a company's retained earnings over
the reporting period.
Statement of cash flows : reports on a company's cash flow activities, particularly its
operating, investing and financing activities.
Ratio Analysis: Ratio analysis enables the analyst to compare items on a single financial
statement or to examine the relationships between items on two financial statements.
Purpose of financial statements
The objective of financial statements is to provide information about the financial strength,
performance and changes in financial position of an enterprise that is useful to a wide rangeof 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. Reported income and expenses are directly related to an
organization's financial performance.
Financial statements are intended to be understandable by readers who have "a reasonable
knowledge of business and economic activities and accounting and who are willing to study
the information diligently."
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Owners and managers require financial statements to make important business decisions that
affect its continued operations. Financial analyses are then performed on these statements to
provide management with a more detailed understanding of the figures. These statements are
also used as part of management's report to its stockholders, as it form part of its Annual
Report.
Employees also need these reports in making collective bargaining agreements (CBA) with
the management, in the case of labor unions or for individuals in discussing their
compensation, promotion and rankings.
External Users : are potential investors, banks, government agencies and other parties who
are outside the business but need financial information about the business for a diversenumber of reasons.
Prospective investors make use of financial statements to assess the viability of investing in a
business. Financial analyses are often used by investors and is prepared by professionals
(financial analysts), thus providing them with the basis in making investment decisions.
Financial institutions (banks and other lending companies) use them to decide whether to
grant a company with fresh working capital or extend debt securities (such as a long-term
bank loan or debentures) to finance expansion and other significant expenditures.
Government entities (tax authorities) need financial statements to ascertain the propriety and
accuracy of taxes and other duties declared and paid by a company.
Media and the general public are also interested in financial statements for a variety of
reasons.
Income Statement
An Income Statement, also called a Profit and Loss Statement (P&L), is a financial statement
for companies that indicates how Revenue (money received from the sale of products and
services before expenses are taken out, also known as the "top line") is transformed into net
income (the result after all revenues and expenses have been accounted for, also known as the
"bottom line"). The purpose of the income statement is to show managers and investors
whether the company made or lost money during the period being reported.
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Charitable organizations that are required to publish financial statements do not produce an
income statement. Instead, they produce a similar statement that reflects the fact that the
charity is not operating to make a profit.
Items on income statement
Operating section
Revenue - Cash inflows or other enhancements of assets of an entity during a period from
delivering or producing goods, rendering services, or other activities that constitute the
entity's ongoing major operations. Usually presented as sales minus sales discounts, returns,
and allowances.
Expenses - Cash outflows or other using-up of assets or incurrence of liabilities during a
period from delivering or producing goods, rendering services, or carrying out other activities
that constitute the entity's ongoing major operations.
General and administrative expenses (G & A) - represent expenses to manage the business
(officer salaries, legal and professional fees, utilities, insurance, depreciation of office
building and equipment, stationery, supplies)
Selling expenses - represent expenses needed to sell products (e.g., sales salaries and
commissions, advertising, freight, shipping, depreciation of sales equipment)
R & D expenses - represent expenses included in research and development
Depreciation - is the charge for a specific period (i.e. year, accounting period) with respect
to fixed assets that have been capitalised on the balance sheet.
Non-operating section
Other revenues or gains - revenues and gains from other than primary business activities
(e.g. rent, patents). It also includes unusual gains and losses that are either unusual or
infrequent, but not both (e.g. sale of securities or fixed assets).
Other expenses or losses - expenses or losses not related to primary business operations.
Irregular items
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They are reported separately because this way users can better predict future cash flows -
irregular items most likely won't happen next year. These are reported net of taxes.
Discontinued operations are the most common type of irregular items. Shifting business
location, stopping production temporarily, or changes due to technological improvement do
not qualify as discontinued operations.
Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected
nature disaster, expropriation, prohibitions under new regulations. Note: natural disaster
might not qualify depending on location (e.g. frost damage would not qualify in Canada but
would in the tropics).
Changes in accounting principle are, for example, deciding to depreciate an investment
property that has previously not been depreciated. However, changes in estimates (e.g.estimated useful life of a fixed asset) do not qualify.
Cash Flow
Cash flow is a term that refers to the amount of cash being received and spent by a business
during a defined period of time, sometimes tied to a specific project. Measurement of cash
flow can be used to evaluate the state or performance of a business or project.
To determine problems with liquidity. Being profitable does not necessarily mean beingliquid. A company can fail because of a shortage of cash, even while profitable.
To generate project rate of returns. The time of cash flows into and out of projects are used as
inputs to financial models such as internal rate of return, and net present value.
To examine income or growth of a business when it is believed that accrual accounting
concepts do not represent economic realities. Alternately, cash flow can be used to 'validate'
the net income generated by accrual accounting.
Cash flow as a generic term may be used differently depending on context, and certain cash
flow definitions may be adapted by analysts and users for their own uses. Common terms
(with relatively standardized definitions) include operating cash flow and free cash flow.
Classification
Cash flows can be classified into:
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1. Operational cash flows: Cash received or expended as a result of the company's core
business activities.
2. Investment cash flows: Cash received or expended through capital expenditure,
investments or acquisitions.
3. Financing cash flows: Cash received or expended as a result of financial activities,
such as receiving or paying loans, issuing or repurchasing stock, and paying
dividends.
All three together are necessary to reconcile the beginning cash balance to the ending cash
balance.
Benefits from using Cash flow
The cash flow statement is one of the four main financial statements of a company. The cashflow statement can be examined to determine the short-term sustainability of a company. If
cash is increasing (and operational cash flow is positive), then a company will often be
deemed to be healthy in the short-term. Increasing or stable cash balances suggest that a
company is able to meet its cash needs, and remain solvent. This information cannot always
be seen in the income statement or the balance sheet of a company. For instance, a company
may be generating profit, but still have difficulty in remaining solvent.
The cash flow statement breaks the sources of cash generation into three sections:
operational cash flows, investing, and financing . This breakdown allows the user of
financial statements to determine where the company is deriving its cash for operations. For
example, a company may be notionally profitable but generating little operational cash (as
may be the case for a company that barters its products rather than selling for cash). In such a
case, the company may be deriving additional operating cash by issuing shares, or raising
additional debt finance.
Companies that have announced significant write downs of assets, particularly goodwill, may
have substantially higher cash flows than the announced earnings would indicate. For
example, telecoms firms that paid substantial sums for 3G licenses or for acquisitions have
subsequently had to write-off goodwill, that is, indicate that these investments were now
worth much less. These write-downs have frequently resulted in large announced annual
losses, such as Vodafone's announcement in May 2006 that it had lost 21.9 billion due to a
writedown of its German acquisition, Mannesmann, one of the largest annual losses in
European history. Despite this large "loss", which represented a sunk cost, Vodafone's
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operating cash flows was solid: "Strong cash flow is one of the most attractive aspects of the
cell phone business, allowing operators like Vodafone to return money to shareholders even
as they rack up huge paper losses."
In certain cases, cash flow statements may allow careful analysts to detect problems that
would not be evident from the other financial statements alone. For example, WorldComcommitted an accounting fraud that was discovered in 2002; the fraud consisted primarily of
treating ongoing expenses as capital investments, thereby fraudulently boosting net income.
Use of one measure of cash flow (free cash flow) would potentially have detected that there
was no change in overall cash flow (including capital investments).
Balance Sheet
In financial accounting, a balance sheet or statement of financial position is a summary of thevalue of all assets, liabilities and Ownership equity for an organization or individual on a
specific date, such as the end of its financial year. A balance sheet is often described as a
"snapshot" of a company's financial condition on a given date. Of the four basic financial
statements, the balance sheet is the only statement which applies to a single point in time,
instead of a period of time.
A company balance sheet has three parts: assets, liabilities and shareholders' equity. The
main categories of assets are usually listed first and are followed by the liabilities. The
difference between the assets and the liabilities is known as the net assets or the net worth of
the company. According to the accounting equation, net worth must equal assets minus
liabilities.
Records of the values of each account or line in the balance sheet are usually maintained
using a system of accounting known as the double-entry bookkeeping system.
A simple business operating entirely in cash could measure its profits by simply withdrawingthe entire bank balance at the end of the period, plus any cash in hand. However, real
businesses are not paid immediately; they build up inventories of goods to sell and they
acquire buildings and equipment. In other words: businesses have assets and so they could
not, even if they wanted to, immediately turn these into cash at the end of each period. Real
businesses also owe money to suppliers and to tax authorities, and the proprietors do not
withdraw all their original capital and profits at the end of each period. In other words
businesses also have liabilities.
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Types of balance sheets
A balance sheet summarizes an organization or individual's asset, equity and liabilities at aspecific point in time. Individuals and small businesses tend to have simple balance sheets.
Larger businesses tend to have more complex balance sheets, and these are presented in the
organization's annual report. Large businesses also may prepare balance sheets for segments
of their businesses. A balance sheet is often presented alongside one for a different point in
time (typically the previous year) for comparison.
Personal balance sheet
A personal balance sheet lists current assets such as cash in checking accounts and savings
accounts, long-term assets such as common stock and real estate, current liabilities such as
loan debt and mortgage debt due or overdue, and long-term liabilities such as mortgage and
other loan debt. Securities and real estate values are listed at market value rather than at
historical cost or cost basis. Personal net worth is the difference between an individual's total
assets and total liabilities.
Small business balance sheet
A small business balance sheet lists current assets such as cash, accounts receivable, and
inventory, fixed assets such as land, buildings, and equipment, intangible assets such as
patents, and liabilities such as accounts payable, accrued expenses, and long-term debt.
Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The
small business's equity is the difference between total assets and total liabilities.
Corporate balance sheet structure
Guidelines for corporate balance sheets are given by the International Accounting Standards
Committee and numerous country-specific organizations.
Balance sheet account names and usage depend on the organization's country and the type of
organization. Government organizations do not generally follow standards established for
individuals or businesses.
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If applicable to the business, summary values for the following items should be included on
the balance sheet:
1. Assets
2. Current assets
3. Inventories4. Accounts receivable
5. Cash and cash equivalents
6. Long-term assets
7. Property, plant and equipment
8. Investment property, such as real estate held for investment purposes
9. Intangible assets
10. Financial assets (excluding investments accounted for using the equity method,accounts receivables, and cash and cash equivalents)
11. Investments accounted for using the equity method.
12. Biological assets, which are living plants or animals. Bearer biological assets are
plants or animals which bear agricultural produce for harvest, such as apple trees
grown to produce apples and sheep raised to produce wool.
Liabilities
1. Accounts payable
2. Provisions for warranties or court decisions
3. Financial liabilities (excluding provisions and accounts payable), such as promissory
notes and corporate bonds
4. Liabilities and assets for current tax5. Deferred tax liabilities and deferred tax assets
6. Minority interest in equity
7. Issued capital and reserves attributable to equity holders of the parent company
Equity
The net assets shown by the balance sheet equals the third part of the balance sheet, which is
known as the shareholders' equity. Formally, shareholders' equity is part of the company'sliabilities: they are funds "owing" to shareholders (after payment of all other liabilities);
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usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding
shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is
not a coincidence. Records of the values of each account in the balance sheet are maintained
using a system of accounting known as double-entry bookkeeping. In this sense,
shareholders' equity by construction must equal assets minus liabilities, and are a residual.
Numbers of shares authorized, issued and fully paid, and issued but not fully paid, par value
of shares, reconciliation of shares, outstanding at the beginning and the end of the period.
Description of rights, preferences, and restrictions of shares Treasury shares, including shares
held by subsidiaries and associates. Shares reserved for issuance under options and contracts.
A description of the nature and purpose of each reserve within owners' equity.
Financial Statement Analysis
Financial statement analysis is the process of examining relationships among financial
statement elements and making comparisons with relevant information. It is a valuable tool
used by investors and creditors, financial analysts, and others in their decision-making
processes related to stocks, bonds, and other financial instruments. The goal in analyzing
financial statements is to assess past performance and current financial position and to make
predictions about the future performance of a company. Investors who buy stock are
primarily interested in a company's profitability and their prospects for earning a return on
their investment by receiving dividends and/or increasing the market value of their stock
holdings. Creditors and investors who buy debt securities, such as bonds, are more interested
in liquidity and solvency: the company's short-and long-run ability to pay its debts. Financial
analysts, who frequently specialize in following certain industries, routinely assess the
profitability, liquidity, and solvency of companies in order to make recommendations about
the purchase or sale of securities, such as stocks and bonds.
Analysts can obtain useful information by comparing a company's most recent financial
statements with its results in previous years and with the results of other companies in the
same industry. Three primary types of financial statement analysis are commonly known as
horizontal analysis, vertical analysis, and ratio analysis.
Horizontal Analysis
When an analyst compares financial information for two or more years for a single company,
the process is referred to as horizontal analysis , since the analyst is reading across the page to
compare any single line item, such as sales revenues. In addition to comparing dollar
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amounts, the analyst computes percentage changes from year to year for all financial
statement balances, such as cash and inventory. Alternatively, in comparing financial
statements for a number of years, the analyst may prefer to use a variation of horizontal
analysis called trend analysis . Trend analysis involves calculating each year's financial
statement balances as percentages of the first year, also known as the base year. When
expressed as percentages, the base year figures are always 100 percent, and percentage
changes from the base year can be determined.
Vertical Analysis
When using vertical analysis, the analyst calculates each item on a single financial statement
as a percentage of a total. The term vertical analysis applies because each year's figures are
listed vertically on a financial statement. The total used by the analyst on the income
statement is net sales revenue, while on the balance sheet it is total assets. This approach to
financial statement analysis, also known as component percentages , produces common-size
financial statements . Common-size balance sheets and income statements can be more easily
compared, whether across the years for a single company or across different companies.
Ratio Analysis
Ratio analysis enables the analyst to compare items on a single financial statement or to
examine the relationships between items on two financial statements. After calculating ratios
for each year's financial data, the analyst can then examine trends for the company across
years. Since ratios adjust for size, using this analytical tool facilitates intercompany as well as
intracompany comparisons. Ratios are often classified using the following terms: profitability
ratios (also known as operating ratios), liquidity ratios , and solvency ratios . Profitability
ratios are gauges of the company's operating success for a given period of time. Liquidity
ratios are measures of the short-term ability of the company to pay its debts when they come
due and to meet unexpected needs for cash. Solvency ratios indicate the ability of thecompany to meet its long-term obligations on a continuing basis and thus to survive over a
long period of time. In judging how well on a company is doing, analysts typically compare a
company's ratios to industry statistics as well as to its own past performance.
Classification of ratios
1) Liquidity ratios
2)
Solvency ratios3) Activity or turnover ratios
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4) Profitability or turnover ratios
1) Liquidity ratios it is the ability of the firm to meet its current liabilities. They are
therefore called short term solvency ratios. Liquidity ratios include
a) Current ratios or working capital ratio this ratio is used to assess the firms ability to
meet its short term liabilities on time. According to accounting principles, a current
ratio of 2 : 1 is supposed to be an ideal ratio.
b) Quick ratio or acid test ratio an ideal quick ratio is 1 : 1. If it is more, it is
considered to be better. The idea is that for every rupee of current liabilities, there
should at least be one rupee of liquid assets.
2) Solvency ratios these ratios are calculated to assess the ability of the firm to meet its
long term liability as and when they become due.
a) Debt equity ratio this ratio expresses the relationship between long-term debts &
shareholders funds. This ratio is calculated to ascertain the soundness of long term
financial policies of the firm. Debt equity of 2 : 1 is considered safe.
b) Total asset to debt ratio this ratio is usually expressed as a pure ratio i.e. 1 : 1 or 2 :
1. This ratio expresses the relationship between total assets and long term loans are
covered by assets which indicates the margin of safety available to providers of long
term loans
c) Proprietary ratio this ratio indicate the proportion of total assets funded by owners
or shareholders. A higher proprietary ratio is generally indicated as an indicator of
sound financial position from long term point of view, because it means that a large
proportion of total assets is provided by equity and hence the firm is less dependent
on external source of finance.
3) Activity ratios these ratios are calculated on the basis of cost of sales therefore these
ratios are called turnover ratios. Higher turnover ratios indicate the better use of capital or
resource & in turn lead to higher profitability.
a) Inventory turnover ratio or stock turnover ratio this ratio indicates the relationship
between the cost of goods sold during the year & average stock kept during that year.A low stock turnover ratio indicates that stock does not sell quickly and remains lying
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in the godown for quite a long time. This results in increased storage cost, blocking of
funds and losses on account of goods becoming obsolete or unsalable.
b) Debtors turnover ratio this ratio is the relationship between credit sales and average
debtors during the year. This ratio indicates the speed at which money is collected
from debtors. The higher the ratio, the better it is, since it indicates that amount from
debtors is collected more quickly.
c) Creditors turnover ratio or payables turnover ratio this ratio indicates the
relationship between credit purchase & average creditors plus average bills payable.
This ratio indicates the speed at which the amount of creditors is being paid by the
company.
d) Working capital turnover this ratio is the relationship between the net sales &
working capital (current assets current liability). This ratio is particular important in
non manufacturing concerns where current assets play a major role in generating
sales.
e) Fixed assets turnover ratio this ratio is of particular importance in manufacturing
concerns where the investment in fixed assets is quite high. The ratio reveals how
efficiently the fixed assets are being utilized. If there is an increase in the ratio it
means that the fixed assets are being utilized efficiently.
4) Profitability ratios or income ratios the efficiency & the success of the business can
be measured with the help of profitability ratios.
a) Gross profit ratio the ratio shows the relationship between gross profit and sales.
The higher the gross profit ratio the better it is. No ideal standard is fixed for this
ratio, but the gross profit should be adequate enough not only to cover the operating
expenses but also to provide for depreciation, interest on loans, dividends & creation
of reserves.
b) Operating ratio this ratio measures the proportion of enterprises cost of sales &operating expenses in comparison to its sales
c) Net profit ratio this ratio tells the relationship between the net profit & sales.
d) Return on investment or rate of return this ratio shows the overall profitability of the
business. It is calculated by comparing the profit earned before interest tax &
dividends and the capital employed to earn it.
e) Earnings per share (E.P.S) this ratio is helpful in determining of market price of the
equity share of the company. This ratio is also helpful in the determination of themarket price of the equity share of the company.
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f) Dividend per share profits remaining after payment of tax & preference dividend are
available to equity shareholders. D.P.S is the dividend distributed to equity
shareholders divided by the number of equity shares.
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Chapter - 4
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Analysis & Interpretation
Profit & loss A/CProfit & Loss - Rico AutoIndustries Ltd.
Mar'11 Mar'10 Mar'09 Mar'08 Mar'0712 Months 12 Months 12 Months 12 Months 12 Months
INCOME:Sales Turnover 1,055.95 812.27 806.65 800.57 876.18
Excise Duty 79.21 52.21 78.74 91.86 105.78NET SALES 976.74 760.06 727.91 708.71 770.4Other Income 0 0 0 0 0
TOTAL INCOME 1,016.98 784.2 755.25 735.28 781.92
EXPENDITURE:Manufacturing Expenses 79.62 69.22 66.73 59.88 54.98Material Consumed 635.59 492.66 481.17 453.04 521.34Personal Expenses 129.71 94.53 83.95 78.34 67.96
Selling Expenses 0 0.46 0.36 0.86 4.9Administrative Expenses 45.41 39.59 33.65 41.38 37.69
Expenses Capitalized 0 0 0 0 0
Provisions Made 0 0 0 0 0TOTAL EXPENDITURE 890.33 696.46 665.86 633.5 686.87Financial Charges 43.65 41 45.47 25.89 15.16
Gross Profit 83 83.74 53.92 75.89 79.89
Operating Profit 86.41 63.6 62.05 75.21 83.53EBITDA 126.65 87.74 89.39 101.78 95.05
Depreciation 53.94 47.62 50.02 47.32 42.54Other Write-offs 0 0 0 0.52 0.52EBIT 72.71 40.12 39.37 53.94 51.99
EBT 29.06 -0.8 -6.1 28.05 36.83
Taxes 2.55 -1.09 -1.88 5.77 11.16
Net Profit 26.51 0.21 -4.22 22.28 25.67Non Recurring Items 0 5.93 10.42 0.2 0.22
Other Non CashAdjustments
0 0 -1.45 -0.2 0
Other Adjustments 0 0 0 0.02 0REPORTED PAT 26.51 6.07 4.75 22.27 25.84
The statement of profit and loss follows a general form as seen in this example. It begins
with an entry for revenue and subtracts from revenue the costs of running the
business, including cost of goods sold, operating expenses, tax expense and interest expense.
The bottom line (literally and figuratively) is net income (profit).
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BALANCE SHEET
The balance sheet, income statement and statement of cash flows are the most important
financial statements produced by a company. While each is important in its own right, theyare meant to be analyzed together.
Balance sheet - Rico Auto Industries Ltd.
Particulars Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
Liabilities 12 Months 12 Months 12 Months 12 Months 12 Months
Share Capital 13.53 15.72 12.56 12.56 12.56
Reserves & Surplus 306.12 272.15 260.13 256.85 243.4Net Worth 319.65 287.87 272.69 269.41 255.96
Secured Loans 453.53 341.16 262.24 229.61 189.42
Unsecured Loans 0 78.39 108.09 143.01 48.39
TOTAL LIABILITIES 773.18 707.42 643.02 642.03 493.77
Assets
Fixed Assets 833.37 803.74 720.59 657.37 584.45
(-) Acc. Depreciation 357.82 306.8 264.46 216.05 170.15
Net Fixed Assets 475.55 496.94 456.13 441.32 414.3Capital Work in Progress. 59.77 28.96 29.58 26.89 15.31
Investments. 98.6 63.95 26.83 20.31 4.24
Inventories 102.2 90.04 77.18 71.58 60.89
Sundry Debtors 142.32 119.72 106.17 133.21 90.61
Cash And Bank 14.03 7.08 3.11 27.59 6.39
Loans And Advances 146.52 116.45 95.85 59.98 42.01
Current Assets 405.07 333.29 282.31 292.36 199.9
Current Liabilities 262.64 213.45 146.62 131.09 141.52
Provisions 3.17 2.27 5.21 8.8 0.02Total Current Liabilities 265.81 215.72 151.83 139.89 141.54
NET CURRENT ASSETS 139.26 117.57 130.48 152.47 58.36
Misc. Expenses 0 0 0 1.04 1.56
TOTAL ASSETS 773.18 707.42 643.02 642.03 493.77
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Financial ratios
Key Financial Ratios In %
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
Liquidity Ratios
Current ratio 1.52 1.54 1.85 2.08 1.41
Liquid ratio 0.58 0.58 0.71 1.14 0.68
Solvency Ratios In %
Debt Equity ratio 1.41 1.45 1.35 1.38 0.92
Total assets to debt ratio 1.70 1.68 1.73 1.72 2.07
Proprietary ratios 2.41 2.45 2.35 2.38 1.92
Turnover Ratios In
times
Working capital turnover ratio 7 6.4 5.5 4.6 13.2
Fixed Assets Turnover Ratio 2.05 1.53 1.59 1.60 1.85
Profitability Ratios In %
Gross profit ratios 8.49 11.07 7.4 10.70 10.36
Net profit ratio 2.71 0.027 -0.57 3.14 3.33
ROI 7.45 4.34 4.59 6.58 8.08
EPS 1.96 0.47 0.38 1.77 2.06
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Interpretation
Current ratio this ratio is used to assess the firms ability to meet its short term liabilities
on time. According to accounting principles a current ratio of 2:1 is supposed to be an ideal
ratio. It means that the current assets of a business should, at least be twice of its current
liabilities. The current ratio of RICO has been dynamic it was at its ideal position in fy08 but
then the ratio has shown consistent drop. It sho ws that the companys current liabilities are
coming at equilibrium with current assets.
0
0.5
1
1.5
2
2.5
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
1.52 1.54
1.852.08
1.41
Current Ratio
Current Ratio
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Liquid Ratio the ideal ratio is 1:1. It shows the short term financial condition of thecompany. It has also dropped after the fyo8. It shows the inadequacy of assets which are
easily converted into cash. In march 08 the ratio was at ideal level but in march 11 it
decreased to o.58.
0
0.2
0.4
0.6
0.8
1
1.2
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
0.58 0.580.71
1.14
0.68
Liquid ratio
Liquid ratio
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Debt Equity Ratio the ideal ratio is 2:1. It shows the firms ability to meet its long termliabilities. As seen in the above analysis the ratio is steadily improving from fy07 to fy10 but
in fy11 the ratio slightly declined and over all the companys ability to fund its long term
liability is insufficient.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
1.41 1.45 1.35 1.38
0.92
Debt Equity ratio
Debt Equity ratio
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Total Asset to Debt Ratio the ideal ratio 1:1 or 2:1. This ratio expresses the relationshipbetween the total assets & long term loans. In the fy07 the company had 2.07 ratio but during
the year it steadily decreased but still it has been at the ideal position of 1:1. This means that
the margin of safety for long term loan providers is at an ideal position and if the company
asks for loan from banks then seeing this ratio they will approve them.
0
0.5
1
1.5
2
2.5
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
1.7 1.68 1.73 1.72
2.07
Total assets to debt ratio
Total assets to debt ratio
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Proprietary ratios a higher proprietary ratio is generally treated as an indicator of soundfinancial positions from long term view point, because it means that large proportion of total
assets is provided by equity & hence the firm is less dependent upon external sources of
finance.
0
0.5
1
1.5
2
2.5
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
2.41 2.45 2.35 2.38
1.92
Proprietary ratios
Proprietary ratios
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Working Capital Turnover Ratio - It indicates the velocity of the utilization of net workingcapital. This ratio represents the number of times the working capital is turned over in the
course of year. A high working capital turnover ratio indicates efficient use of working
capital & quick t urnover of current assets like stock & debtors. Companys turnover ratio was
at 13.2 times but fell in fy08 to 4.6, but after it has been steadily increasing to 7 times in fy07.
0
2
4
6
8
10
12
14
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
76.4
5.54.6
13.2
Working capital turnover ratio
Working capital turnoverratio
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Fixed Assets turnover Ratio this ratio is particularly important in manufacturing concernswhere the investment in fixed assets is quite high. This ratio indicates that how efficiently
fixed assets are being utilized. Since fy07 the ratio has been decreasing but at the stage of
fy11 the ratio jumped to 2.05 that indicate that fixed assets of the company are being utilized
to their highest as compared to previous year.
0
0.5
1
1.5
2
2.5
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
2.05
1.53 1.59 1.61.85
Fixed Assets Turnover Ratio
Fixed Assets TurnoverRatio
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Gross Profit Ratio the ratio measures the margin of profit available on sales. The higherthe gross profit ratio the better it is. No ideal standard is fixed for this ratio, but the gross
profit should be adequate enough to cover all the operating expenses & also to provide
depreciation, interest on loans, dividends & creation of reserve. In rico ltd the % has shown a
decline so we can assume that
1. Price of materials purchased have gone up but the selling price might not have gone
up or vice versa
2. There may be misappropriation, theft or pilfered of stocks during the year.
3. There is fall in sale of more profitable varieties of goods
4. There is fall in price of unsold goods, thereby reducing the value of closing stock.
0
2
4
6
8
10
12
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
8.49
11.07
7.4
10.7 10.36
Gross Profit Ratio
Gross Profit Ratio
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Net Profit ratio this ratio measures the rate of net profit earned on sales. It helps in
determining the overall efficiency of business operations. The ratio is very useful as if the net
profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its
investment.
This ratio also indicates the firm's capacity to face adverse economic conditions such as price
competition, low demand, etc. Obviously, higher the ratio the better is the profitability. But
while interpreting the ratio it should be kept in mind that the performance of profits also be
seen in relation to investments or capital of the firm and not only in relation to sales.
As seen in the company s graph the NPR was satisfactory in 07 & 08 but went negative in 09
this shows that the company did not earned sufficient profits as well as in 10. But in fy11 it
rose to a satisfactory level of 2.71.
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
2.71
0.027
-0.57
3.143.33
Net Profit Ratio
Net Profit Ratio
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Return on Investment this ratio reflects the overall profitability of the business. It
measures how efficiently the capital employed in the business is being used. The companys
ratio for fy07 was 8.08% but fell down at 6.58 in fy08 7 consecutively fell to 4.50 & 4.34, but
regained it in fy11 with 7.45%.it also reflects that company should make its borrowing policy
under 7.45% in future.
0
1
2
3
4
56
7
8
9
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
7.45
4.34 4.59
6.58
8.08
ROI
ROI
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EPS this ratio is helpful in determination of the market price of the share of the company.This ratio also shows the companys ability to declare dividends on equity shares. The
companys EPS was 2.06 per share but declined to 1.77 to 0.38 lowest in 09, b ut regained to
1.96 in fy 11.
0
0.5
1
1.5
2
2.5
Mar'11 Mar'10 Mar'09 Mar'08 Mar'07
1.96
0.47 0.38
1.77
2.06
EPS
EPS
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Chapter - 5
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Findings & Suggestion
Findings1. In FY 07 the companys financial position was very good as we see in analysis of
each ratio, except the Current ratio.
2. In FY 08 the company has down performed as compared to FY 07.
3. In FY 09 some of the ratios remained to the same position as in FY08, but some ratios
saw negative turn like the Net Profit Ratio.
4. In FY 10 the Solvency, Turnover & Profitability ratio rose but Liquidity ratio slided
downwards.
5. In FY 11 profitability & turnover Ratio rose to a safe level, but Liquidity & Solvency
remained same as FY10.
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Suggestion1. The company should improve its current ratio which is 1:52 as compared to ideal
ratio which is 2:1
2. The company should also improve its liquid ratio as the ideal is 1:1
3. The company should also improve working capital turnover ratio as compared to 13.2
in FY07, which is 7 in FY 11
4. The company should also improve its gross profit ratio which is 8.49% in Fy11 as
compared to 11.07 in FY10
5. My suggestion would be that the company should concentrate on quality factors
especially improving the TQM philosophy which would give them a competency
factor against all other competitors and improve the companys stature.
6. As the year 2011 introduced expansion plans like the Haridwar & Sanand in Gujrat
the company the company is giving full loyalty to its customers Hero Moto Corp &
Tata motors Ltd. This will prove to be a beneficial project for future growth.
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ConclusionAs seen through keen analysis of key ratios like Liquidity Ratio, Solvency Ratio & Activity
Ratio my conclusion of the study is that the company suffered mostly in fy08 & fy09 but
after that period the company is steadily growing at a slow rate. On could depict the reason
for this condition, it is the Financial crisis of 2008 & EU crisis which are causing slowdown
in the world economy. But still as we see the analysis the company is growing in FY11.
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Bibliography1. Pandey, I.M. 1999, Financial Management, 9 th Ed., Vikas Publishing House
2. D.K.Goel, Rajesh Goel & Shelly Goel, Aryan (2009), Analysis of financial statementPublications, Seventh edition
3. Rustagi, R.P. 1999, Financial Management: Theory, Concepts and Problems, Galgotia
Publishing Company.4. www.moneycontrol.com 5. www.economictimes.com 6. www.investopedia.com
http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.economictimes.com/http://www.economictimes.com/http://www.investopedia.com/http://www.investopedia.com/http://www.investopedia.com/http://www.economictimes.com/http://www.moneycontrol.com/ -
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