project on fundamental analysis- haris

Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS

LIST OF TABLESTABLE No: TABLE NAME PAGE No:

TABLE NO .1 GROSS PROFIT RATIO 40

TABLE NO .2 NET PROFIT RATIO 42

TABLE NO .3 OPERATING RATIO 44

TABLE NO .4 RETURN ON TOTAL ASSETS 46

TABLE NO .5 RETURN ON CAPITAL EMPLOYED 48

TABLE NO .6 EARNINGS PER SHARE 50

TABLE NO .7 RETURN ON EQUITY 52

TABLE NO .8 DIVIDENT PAY-OUT RATIO 54

TABLE NO .9 RETURN ON INVESTMENT 55

TABLE NO .10 CURRENT RATIO 57

TABLE NO .11 QUICK RATIO 59

TABLE NO .12 DEBT- EQUITY RATIO 62

TABLE NO .13PROPRIETARY RATIO 63

TABLE NO .14WORKING CAPITAL TURNOVER RATIO 66

TABLE NO .15 FIXED CAPITAL TURNOVER RATIO 67

TABLE NO .16 INVENTORY TURNOVER RATIO 70

TABLE NO .17 DEBTORS TURNOVER RATIO 71

TABLE NO .18 TREND ANALYSIS OF INVENTORY 73

TABLE NO .19 TREND ANALYSIS OF DEBTORS 74

TABLE NO .20 TREND ANALYSIS OF CREDITORS 75

Magnus School Of Business


LIST OF FIGURESFIGURE No: FIGURE NAME PAGE No:

FIGURE NO .1 GROSS PROFIT RATIO 41

FIGURE NO .2 NET PROFIT RATIO 43

FIGURE NO .3 OPERATING RATIO 45

FIGURE NO .4 RETURN ON TOTAL ASSETS 47

FIGURE NO .5 RETURN ON CAPITAL EMPLOYED 49

FIGURE NO .6 EARNINGS PER SHARE 51

FIGURE NO .7 RETURN ON EQUITY 53

FIGURE NO .8 DIVIDENT PAY-OUT RATIO 54

FIGURE NO .9 RETURN ON INVESTMENT 56

FIGURE NO .10 CURRENT RATIO 58

FIGURE NO .11 QUICK RATIO 60

FIGURE NO .12 DEBT- EQUITY RATIO 62

FIGURE NO .13PROPRIETARY RATIO 64

FIGURE NO .14WORKING CAPITAL TURNOVER RATIO 66

FIGURE NO .15 FIXED CAPITAL TURNOVER RATIO 68

FIGURE NO .16 INVENTORY TURNOVER RATIO 70

FIGURE NO .17 DEBTORS TURNOVER RATIO 72

FIGURE NO .18 TREND ANALYSIS OF INVENTORY 73

FIGURE NO .19 TREND ANALYSIS OF DEBTORS 74

FIGURE NO .20 TREND ANALYSIS OF CREDITORS 75



EXECUTIVE SUMMARY

The study was conducted at Travancore Cochin Chemicals

Ltd (TCC) Udyogamandal. The Travancore Cochin Chemicals

Ltd (TCC) is a state public sector company undertaking owned by

the Government of Kerala an ISO 9001:2000 certified company.

The study was aimed is to analyze the financial performance with

reference to Travancore Cochin Chemicals Ltd. This was done

through exploratory research method using analysis of annual

reports of the company.

Through this study the researcher was able is to analyze the

financial performance in Travancore Cochin Chemicals Ltd. and

can able to suggest remedial measures to be taken by

management to improve the financial performance in TCC.



CHAPTER - 1

INTRODUCTION

Financial statements are prepared primarily for decision making. They

play a dominant role in setting the frame work of managerial decisions. But the

information provided in the financial statements is not an end in itself as no

meaningful conclusions can be drawn from these statements alone. However the

information provided in the financial statements is of immense use of making

decisions through analysis and interpretation of financial statements. Financial

analysis is “the process of identifying the financial strengths and weakness of the

firm by properly establishing relationship between the items of the balance sheet and

the profit and loss account. There are various methods or techniques used in

analyzing financial statements, such as comparative statements, trend analysis, and

common size statements, schedule of changes in working capital, fund flow and cash

flow analysis, cost-volume-profit analysis and ratio analysis.

The term financial analysis also known as analysis and interpretation of

financial statements, refers to the process of determining financial strengths and

weakness of the firm by establishing strategic relationship between the items of the

balance sheet, profit and loss account and other operative data. The purpose of

financial analysis is to diagnose the information contained in financial statements so

as to judge the profitability and financial soundness of the firm.



The analysis and interpretation of financial statements is essential to bring out

the mystery behind the figures in financial statements. Financial statements analysis

is an attempt to determine the significance and meaning of the financial statement

data so that forecast may be made of the future earnings, ability to pay interest and

debt maturities (both current and long-term) and profitability of a sound dividend

policy.

STATEMENT OF THE PROBLEM

The chemical industry occupies a very important in the country. This

industry has a vital role to play in the supply of essential commodity for the entre

population. It’s progress and development is of grate concern to every one. The

Travancore Cochin Chemicals Ltd is also one of the biggest firms in the chemical

producing industry. Hence an attempt of financial statement analysis of The

Travancore Cochin Chemicals Ltd has been undertaken in a view of that it may pave

way of prosperity.



1.2 OBJECTIVE OF THE STUDY:

1. PRIMARY OBJECTIVE:

The primary objective of the study is to analyze the financial performance

with reference to Travancore Cochin Chemicals Ltd.

2. SECONDARY OBJECTIVES:

To estimate the earning capacity of the firm

To analyze the financial statements of the company by using financial tools.

To evaluate the financial position of the company in terms of solvency,

profitability, activity, and earning ratios.

To analyze the working capital changes over a period of five years i.e., 2002-

03 to 2006-07

To determine the debt capacity of the firm

To know the progress of the firm

To measure the efficiency of operations.



1.3 RESEARCH METHODOLOGY

RESEARCH DESIGN

The research is exploratory in nature.

TYPES OF DATA

The methodology used in the study involves the collection of primary data as

well as secondary data. Majority of the data was collected with the help of the

annual reports provided by the company.

SOURCE OF DATA

Secondary data: Secondary data were obtained from the internal records of

the company i.e., from the published annual reports, website of the company,

journals and magazines and also other books related to the analysis of

financial performance.

PERIOD OF STUDY

A five year period from 2004 to 2008 has been taken for the study.

TIME OF STUDY

Two Months, from 25/04/2009 to 25/06/2009

TOOLS OF DATA ANALYSIS

Ratio analysis Trend analysis

REPRESENTATION:

Tables, figures and chart are used for the representation of the data.



1.4 LIMITATIONS OF THE STUDY:

Data availed were insufficient to make an in depth study

Due to security reasons all the enquires were not get answered

The study does not disclose reasons for changes.

The basic nature of financial statement is historic.

Due to time limitations, detailed study could not be conducted.

The reliability and accuracy of calculations and interpretation depends very

much on the information supplied in the form of annual reports and other

records,

Authorities were reluctant to reveal full information about the working of

the company.



CHAPTER - 2

INDUSTRY PROFILE

WORLD SCENARIO

Now the world is full of competition. The Chlor-alkali industries are growing

faster in the world. The chemical industries are also growing faster in the world. The

chemical industry plays a vital role in the production of many manufactured goods.

The industry provides a tremendous variety of materials to other manufacturers. It

also produces chemical products that benefits people directly. Major products of the

industry include detergents, drugs, fertilizers, food preservatives flavoring and paper

products etc.

Most major chemicals are basic chemicals used in many countries. It is

used to produce fertilizer and other chemical. Other basic chemicals include

chlorine, alkali like lime and sodium hydroxide and these chemicals are used in

plastics.

Production of chemicals has become increasingly concentrated in

Multinational Corporations, which have plants and offices in a number of countries.

To reduce costs, most of the multinational companies locate their factories in

countries where raw materials and cheap skilled labour are readily available. So

many basic chemicals are produced in developing countries by units of multinational

firms. But chemicals requiring advanced production methods are made in

industrialized countries.



Chlor-Alkali Industry in the world

During the 1970’s Caustic Soda used to be manufactured by utilizing the

mercury cell technology. It was produced by amalgam process. But this technology

consumes a lot of energy and power. There was also the problem of mercury

population.

The Mina Mata tragedy (resulting from mercury pollution), forced the

Japanese Government issued a direction to all caustic soda plants to change over to

other process under a time bound-programme. This paved the way for the

development of Ion Exchange Membrane Cell (IEMC) technology. This process

apart from totally avoiding mercury, consumed 30% less power compared to the

conventional process.

Increased production of paper, aluminium, soap, and detergents at the

international level naturally led to increased requirement of caustic soda. But the

Green Peace movement is seeking the phasing out of chlorine usage, especially the

CFC compounds have resulted in closing down of some of the chlor-alkali industries

in Europe and restricted production in other European and North American Plants.

With the drop in international production, the international price of caustic

soda rose steadily.. The caustic soda which was selling for $50/tonne has grown up

to $300/tone now.

The international markets operates in the context of demand and supply conditions

prevailing from time to time, So price of caustic soda became highly volatile.

Predator pricing has become common and drop in import duty often led to steep

drop in price of the chemical.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALSThough demand for chlorine is growing fast the demand for caustic soda is not so

promising. Hence the units in the gulf and western countries are selling caustic soda

at a cheaper price.

Major Countries Producing Caustic Soda

1. U.S.A 5. France

2. China 6. Russia

3. Japan 7. Canada

4. Germany 8. India

INDIAN SCENARIO

The Indian chemical industry is an integral part of the Indian economy,

contributing around 6.7% to the Indian GDP. It touches our lives in many different

ways. Whether it is thermoplastic furniture we use, or a synthetic garment we wear,

or drug we consume. The industry is a vital part of the agricultural and industrial

development in India has key linkages with several other downstream industries

such as automotive, consumer durables, engineering, food processing, etc.

The chemical industry in India has the potential to grow around USD 100

billion by 2010 (according to KPMG’s analysis based on a survey of the industry).

This would imply an annual growth rate of 15.5%. For the industry to achieve this

size, specialty and knowledge chemical segments would need to grow 16.4 %

( current growth rate is 7.9%) and 27 %( current growth rate is 12.3%) respectively.

The basic chemicals segment would need to sustain its current growth rate of 7.7%

to match the profile of the chemical industry in global markets.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALSAt the industry level, the Indian Chemical industry is characterised by:

High domestic demand potential, as Indian markets develop and per capita

consumption level increase

High degree of fragmentation and small scale operations

Limited emphasis on exports due to domestic market focus and smaller

scale of operation.

Low competitiveness as compared to other countries due to higher cost of

power, import duties, taxes and cost of capital.

Low focus on R&D despite initiatives to innovate processes to synthesis

products cost effectively.

In spite of the disadvantages, a few proactive Indian companies have

created sizeable international operations to become significant players in the

global market place. The ability of chemical companies in India to perform better

than global companies has already been reflected by a comparatively better

performance of the Indian operations of some global companies. Operating profit

margins of these Indian subsidiaries range from 8 % to 13 % as compared to the

global operating margins range less than 1 % to 6%.

Several chemical industries in medium and small scale sectors have been

forced to suspend operations due to their inability to adhere to the environmental

standards in view of their technological and investment constraints. While the

country has lost production capacity and economic opportunity to some extent

due to such closures, it appears that the country, by and large has not regretted

about the closure of such units.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS The chemical industries have now realized and have made environmental

issues as an essential part of activity in project design and they provide as much

importance to environmental factors as they do to marketing and financial

aspects. It is necessary that the social activists should recognize this positive

mindset amongst the management of chemical industries and refrain from

launching negative and hate campaign.

Indian chemical industries have now have a great opportunity in the field of

research and development, in view of its large manpower of reasonably good

talent and R&D facilities already created and operating. With the WTO regime in

force, Indian industries should be able to protect their newly developed

technologies and emerge competitive in the global market.

Major South Indian Chlor-Alkali Units

Chempalst, Tamil Nadu

Chern Fab Alkalies Ltd., Pondicherry

Kothari Petrochemmicals Ltd., Chennai

Sree Rayalaseema Alkalies & Allied Chemicals Ltd, Andhra Pradesh

Andhra Sugars, Andhra Pradesh

Southern Petrochemical Industries Corporation Ltd., Chennai

The Travancore-Cochin Chemicals Limited, Eloor; Kerala.



STATE SCENARIO

Caustic Soda is one of the basic inorganic chemicals manufactured from

common salt. There are four processes used in the manufacturing of caustic soda,

chlorine and Hydrochloric acid which are the bye products obtained through these

processes.

In the state, only TCC is engaged in the production of caustic soda, chlorine

and hydrochloric acid. TCC has an installed capacity to produce 175 TPD caustic

soda and it is used in manufacturing of soaps, textiles, plastics etc. There are many

small scale industries in the state which consumes caustic soda for the production of

soaps, plastics, textiles.

Though the average demand, at an average rate of 4% the capacity has been

increased by nearly 7% in view of the high transportation cost and hazardous nature

of chemicals transported. Also because of the high transportation cost, it is not

possible to export caustic soda in large volume from the state.

The chlorine industrial units are working properly. Chlorine is a basic

material required for water purification and without chlorine; the government water

works will not be able to supply drinking water to the public.



CHAPTER - 3

COMPANY PROFILE

The Travancore Cochin Chemicals Ltd (TCC) is a state public sector

undertaking owned by the government of Kerala. It is situated at Udyogamandal in

Cochin Industrial area, about 10 kms from Aluva. Incorporated in 1951, TCC is now

one of the oldest chlor- alkali units in India. Today it has a production capacity of

about 57750 MT caustic soda per annum. The other products are chlorine,

Hydrochloric acid, Sodium Hypochlorite, and C.S flakes. The company supports a

large number of industrial units of strategic importance by supplying basic

chemicals with continuous effort for up gradation of technology and professional

management. A wide range of industries like mineral processing, paper, textiles,

petrochemicals, oil refining, pesticides, water treatment, etc uses the products. The

market is spread over southern and western India.

COMPANY PROFILE

The company was formed as a partnership between FACT (Fertilizers and

Chemicals Travancore Ltd) and MCIC (Mettur Chemicals and Industrial

Corporation). The partnership concern floated in the name and style as Travancore

Mettur Chemicals. When commissioned it was the first mercury cell plant for

manufacturing caustic soda in the country and it was the first producer of rayon

grade caustic soda. When the company faced financial difficulties, the Govt. of

Travancore Cochin stepped in with massive financial assistance and the company

was renamed as TCC in 1951.



. MISSION

The mission statement of the company is as follows:

TCC is committed to supply quality chemicals at competitive prices to

customers. Customer satisfaction, concern for environment and safety are our

priorities.

We intend to achieve:

1. Utmost level of conservation of all resources including energy.

2. Cost effectiveness in all our operation.

3. Regular up gradation of technologies used in processing.

4. Compliance with law and statutory regulations.

CORPORATE OBJECTIVE

The company states in its objective the following:

1. To produce and market chemicals such as Caustic Soda, Liquid Chlorine,

Hydrochloric acid and soda bleach economically and in an environmentally

sound manner.

2. To maintain optimum level of efficiency and productivity so as to secure

optimum returns on investment.

3. To maximize profits from projects taken up.

4. To continuously improve the plant and operational safety and to confirm

statutory pollution control standards.

5. To continuously upgrade the quality of human resources of the company and

to promote organizational development. .

6. To ensure corporate growth by expansion and diversification.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS7. Concerned about the protection of environment.

INITIAL INVESTMENT RECEIVED BY THE COMPANY:

Table No. 2.1

Investment Rs. In crores

Govt. of Kerala 24.80

FACT 2.53

KSIDC 1.5

Sanmar properties & investment 1.17

Total 30.00

QUALITY POLICY OF TCC:

“We are committed to enhance customer satisfaction by providing products

and related services complying with a continually improving quality improving

management system.”

TCC AT PRESENT:

TCC is the only chlorine- Alkali unit in Kerala. In India there are

approximately 38 chlor-alkali units as competitors. The company has helped in

attracting user industries to Kerala in the past, due to assurance in availability of raw

materials. Some of the industries which came up include Indian Rare Earth Ltd,

Hindustan Insecticides Ltd, Hindustan News print Ltd, Kerala Minerals and Metals

Ltd, Kerala chemicals and Proteins Ltd etc.



DIFFERENT PHASE OF DEVELOPMENT FROM INCEPTION TO

PRESENT:

1 1956- A Continuous Caustic Fusion plant with a capacity to upgrade 20

tonnes of caustic soda per day was added.

2 1958- A Chlorine Liquefaction Plant was added mainly to meet demand

from the new DDT plant of Hindustan Insecticides Ltd, Udyogamandal.

3 1963- The caustic soda capacity was raised to a new level of 40 tonnes per

day. The company established a new unit for the manufacture of Sodium

hydro sulphite with rated capacity of 3 tonnes per day.

4 1967- The third stage of expansion of capacity was raised to 60 tonnes

per day.

5 1970- A 60 tones per day caustic soda concentration plant was set up.

6 1975- 1980 - Exported commercial HCL to gulf countries.

7 1983- Installed an indigenously developed plant to recover mercury from

effluents.

8 1987- Installed Hydrogen firing system in Continuous Caustic Fusion

plant.

9 1988- Replacement of Graphite anodes by Titanium anode.



101990- Brine Dechlorination unit commissioned.

11 1992- A Research & Development section was set up.

12 1994- The Company in collaboration with Regional Research Laboratory

commissioned a pilot plant on synthetic retiles.

13 1997- The Company commissioned a 100 TPD caustic soda plant in

technical collaboration with ASAHI GLASS Company of Japan using

Membrane cell Technology. The advantage of this process is that the

mercury pollution can be avoided and power consumption can be reduced

by 30%.

14 2000 - The Company setup a Brine purification plant.

15 2001-2002- The Company commissioned a new continuous caustic fusion

plant (CCF).

16 2002-2003 - The Company increased its production capacity of membrane

cell plant to 125 tonnes per day.

17 2004-2005-125 MT per day capacity addition year of import

18 2005-A 25 TPD caustic soda plant employing membrane cell technology

from Uhde, Germany, was commissioned

19 2006- A 25 TPD caustic soda plant employing membrane cell technology

from Uhde, Germany, was commissioned



ACHIEVEMENTS

TCC always are the foremost to adopt and incorporate the latest technology

in the plants. Several innovative and modernization schemes were implemented to

achieve higher production and productivity, energy conservation, environmental

control, and economy in inputs.

The company has been dynamic to be pro-active to market and thus to come

out as a profitable public sector undertaking. TCC was bestowed with various

awards for excellent performance with regard to production, which is considered as

an award for commitment, rather than for efficiency.

a. 1981 - Best performance for safety in the state from directorate of

factories and boilers, Govt. of Kerala.

b. 1988-89 Best pollution award under group “Heavy Inorganic

Industries” in Kerala from Kerala state pollution control board.

c. 1987 - Award for best performance in safety in India under “chemical

industries” group from national safety council.

d. 1988-90 Prize for productivity from Kerala state productivity Council.

e. 1993 Best performance award for energy conservation in the state of

Kerala under group “Chemical and Fertilizers” above 3000KV A from

govt. of Kerala.



f. 1993-95 Best performance award for the productivity in the state of

Kerala under group “Large Industries” from Kerala state productivity

Council.

g. 1995-96 Best -performance award for the productivity in the state of

Kerala under group “Large Industries” from Kerala state productivity

Council.

h. 1997- Best performance award for energy conservation in the state of

Kerala under group “Major Industries” from energy management

center, Govt. of Kerala.

i. 1998 - Performance award for energy conservation under the group

“ChlorAlkali section” from the Minister of Power from Govt. of India.

J 2003 Kerala State Energy conservation award.

k 2005- National Energy Conservation Award "Chlor-alkali

Sector



PRODUCTS OF TCC

Caustic Soda:

Caustic soda is a basic alkali (NaOH) used in the manufacture of products like

soap, paper, textiles etc. It also serves the industries like fertilizers, drugs,

engineering and pharmaceuticals, petrochemicals etc. Caustic soda production

increased in the later half of 19th century with the development of electrolysis for

the manufacture of Caustic soda. Caustic soda lye obtained from Membrane cell is a

clear colorless odorless and soapy liquid.

Chlorine (Cl2):

Chlorine, a co-product obtained in the process of manufacture of caustic soda is

an equally important basic chemical, inevitable for the manufacture of paper textiles,

insectides, drugs and pharmaceuticals etc. It also serves the industries such as

mineral processing, sugar, fine chemicals, and rubber etc. It is also renowned water

purification chemical. It is a greenish yellow gas.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS Hydrochloric acid (HCl):

TCC also produces high purity HCl, used for ossein, fertilizers etc. HCl finds

its application in number of chemical industries such as mineral processing, gelatin,

Food industry, water treatment, etc. It also serves the industries like engineering,

starch, and plastics. It is a yellowish green color liquid.

Sodium Hypochlorite:

Another by product, Sodium hypochlorite finds its use in bleaching and

disinfectant applications and also for extraction of rare earth materials. It is a pale

yellowish green clear liquid.

PRODUCT AND PRODUCTION CAPACITIES


Products Quantity per annum in

M.T

1. Caustic soda 57750

2. Liquid chlorine 23760

3. Hydrochloric acid 127742

4. Sodium

hypochloride

15,000

5. C.S Flakes 30,000

Financial performance analysis THE TRAVANCORE COCHIN CHEMICALSINDUSTRIES SERVED BY TCC’S PRODUCT

Caustic Soda Soap, Paper, Textile, Fertilizers,

Drugs and Pharmaceuticals,

Vanaspathi, Petroleum,

Chemicals.

Chlorine Paper, Textile, Water Purification,

Drugs and Pharmaceuticals,

Mineral processing Sugar, Fine

Chemicals, Rubber etc.

Commercial HCI Acid Fertilizers, Engineering, Mineral

processing, Starch, Ossein,

Plastics etc.

FUTURE PLANS

TCC is in process of setting up a power project on its own. Electricity is one of the

raw materials for the company. It contributes to about 60% of the production cost.

The company would like to go for cheaper sources of power and insulate itself from

the future tariff hikes of the electric supply utility. A hydel power project is under

consideration at present. The problem faced by TCC with respect to this is the

shortage of funds. As expansion in the 1990s and subsequent adverse conditions

has caused TCC to drain its entire reserves and surpluses. It is also difficult to raise

debt funds under this situation. This has forced the company to think about newer

methods of project implementation like the BOT.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS In 1992, the R&D of the company started working on a project to

manufacture synthetic rutile. The company along with The Regional Research

Laboratories set up a pilot plant to manufacture synthetic rutile. It succeeded in

developing the technology. The process uses the products of the company in

manufacturing synthetic rutile. The technology is now ready for commercialization.

MAJOR COMPETITORS OF T.C.C.

T.C.C. is the only chloro - alkali unit in the public sector in India. Some of

Major competitors.

1. Atul Ltd., Ahmadabad

2. Bilt Chemicals Ltd., New Delhi

3. Century Rayon, New Delhi

4. Chern Fab Alkalies Ltd., Pondicherry

5. Champlast Sanmat Ltd:, Mumbai

6. D.C.W. Ltd., Mumbai

7. Grassim Industries Ltd., Nagda (M.P)

8. Gujarat Alkalies & Chemicals Ltd., Gujarat

9. Gujarat Heavy chemicals Ltd., Ahmadabad

10. Hukumchand Jute and Industries, Calcutta

11. Indian Petrochemicals Corporation Ltd., Gujarat

12. India Rayon and Industries Ltd., Mumbai

13. Jayashree Chemicals Ltd., Orissa

14. Kothari Petrochemmicals Ltd., Chennai

15. Saurashtra Chemicals ltd., Gujarat

16. Southern Petrochemical Industries Corporation Ltd., Chennai



FINANCE DEPARTMENT

Travancore Cochin chemicals Ltd has an efficient finance department headed

by a finance manager and he is assisted by the deputy manager, finance. Finance

manager is responsible for shaping the fortunes of the company, preparing budgets,

raising funds, keeping different accounts etc. TCC is having a management

information system to assist the finance department. The finance department is

dividing into different sections like general accounts, costing bills, establishment

and provident fund accounts section, each having its own functions.

DEPUTY FINANCE MANAGER

DFM controls the costing process. Various costs such as material costs and

production cost are assessed. Fixed capital and working capital are also planned by

this department. A comparative study on budgeting control is made. The various

areas coming under DFM are as follows;

AOGA: The main area coming under this section is finalization of accounts

and preparation of profit and loss account and balance sheet. Different vouchers,

journals and ledgers are also maintained under this area. Bank, cash, payroll etc also

come under this department. Based on the above data, ratio analysis is done.

AOEDP: This area mainly deals with hardware and software programs of the

computers. Any problems with computers are mainly analyzed by this department.

AO Bills: Under this area, first a quotation is collected from various

companies. If it is accepted, make purchase orders, contains the specifications, date,

place etc. Receiving repots are given. Income, Sales tax and VAT are verified in

this area.

Senior Accounts Officer: The SAO deals with sales accounting. He also

maintains the account of sundry debtors, sales tax, VAT, etc.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALSFinance Manager: The function of finance manager is to have an overall control of

the above departments.

The various sections coming under finance department are explained below;

GENARAL ACCOUNTS SECTION

In this section, a large number of general accounts are kept. These include;

general journal in which the transaction are entered first. Standard journal in which

all recurring items are entered (salary, wages, excise duty), Cash book in which all

cash receipts and payments are recorded, Sundry debtors and Sundry creditors

ledger, Bank book in which all bank payments and receipts are entered, Subsidiary

ledger, which include individual accounts maintained by each department. A trial

balance is prepared every 4 months. Balance sheet is prepared annually for the

financial year coming from April 1st extending to the period till March 31st.

BILL SECTION

In this section, all payments for purchase are recorded. This includes bills

payable to suppliers and contractors. In case supplier demand advance, it is paid and

properly accounted. Sundry creditors ledger and supplier account are kept in this

section. At the end of the year, the accounts are ratified and send to the general

accounts section. In this section, separate cost records are kept and maintained, and

cost audit is conducted every year, both internally as well as by Government

nominees.

COSTING SECTION

Budgeting and budgetary control is the main function of the costing section

where both revenue and capital expenditure budget are prepared. Capital

expenditure is prepared based on the total asset incurred for all the items in all

debts. Revenue budget is prepared on the basis of estimates for production, sales

and expenditure. The balance sheet with total assets and liabilities is prepared and

total cash flow is found.



CHAPTER - 4

LITERATURE REVIEW

FINANCIAL PERFORMANCE ANALYSIS:

Financial performance analysis is the process of identifying the financial

strengths and weaknesses of the firm by properly establishing the relationship

between the items of balance sheet and profit and loss account. It also helps in short

term and long term forecasting and growth can be identified with the help of

financial performance analysis. The dictionary meaning of “analysis” is to resolve or

separate a thing into its elements or components parts for tracing their relation to the

things as a whole and to each other.

FINANCIAL STATEMENTS:

The financial statements provide rich information about the operational

results of a business unit and much can be learn from a careful examination of these

statements. Financial statements are prepared primarily for decision-making. The

statements are not an end in them, but are useful in decision-making. Financial

analysis is the process of determining the significant operating and financial

characteristic of a firm from accounting data. The Profit and Loss Account and

Balance Sheet are indicators of two significant factors – profitability and financial

soundness. Analysis of financial statement means such a treatment of the

information contained in the two statements as to afford a full diagnosis of the

profitability and financial position of the firm concerned.



DEFINITIONS:

Metcalf and Titard: “Analysis of financial statement is a process of evaluating

the relationship between component part of a financial statement to obtain a better

understanding of a firm’s operation and performance.”

Myers: Financial statement analysis is largely a study of relationship among the

various financial factors in a business as disclosed by a single set of statements, and

a study of the trend of these factors as shown in a series of statements.”

STATEMENTS FOR ANALYSIS:

The two main statements used in the analysis are

- Balance Sheet

- Profit and Loss account

Balance sheet:

The American Institute of Certified Public Accountants defines Balance sheet

as, “A tabular statement of summary of balances carried forward after an actual and

constructive closing of books of account and kept according to principles of

accounting.” The Balance sheet is one of the important financial statements

depicting the financial strength of the concern. It shows on the one hand the

properties that it utilizes and on the other hand the sources of these properties. The

Balance sheet shows all the assets owned by the concern and all the liabilities and

claims it owes to owners and outsiders. The Balance sheet is prepared as on a

particular date.



Profit and loss account:

Income statement is prepared to determine the operational position of the

concern. It is a statement of revenues earned and the expenses incurred for earning

that revenue. The difference is either profit or loss. The income statement is

prepared for a particular period.

OBJECTIVES OF FINANCIAL ANALYSIS:

The following are the main objectives of the analysis of financial statements:

1. To estimate the earning capacity of the firm

2. To gauge the financial position and financial performance of the firm

3. To determine the long-term liquidity of the funds

4. To judge the solvency of the firm

5. To determine the debt capacity of the firm

6. To decide about the future prospects of the firm

7. To know the progress of the firm

8. To measure the efficiency of operations.

PROCEDURE OF ANALYSIS:

1. The first step involves the re-organization of the entire financial data

contained in the financial statements. Therefore, the financial statements are

broke down into individual components and re-grouped into few principle

elements according to their resemblances and affinities. Thus, the balance



sheet and profit and loss account are completely re-casted and presented in the

condensed form entirely different from their original shape.

2. The second step is the establishment of significant relationships between the

individual components of balance sheet and profit and loss account. This is

done through the application tools of financial analysis like Ratio analysis,

Trend analysis, Fund flow analysis, Common size balance sheet and

Comparative Balance sheet.

3. Finally, the result obtained by means of application of financial tools is

evaluated.

TYPES OF FINANCIAL ANALYSIS:

Distinction between the different types of financial analysis can be made either on

the basis of material used for the same or according to the modus operandi of the

analysis or the object of the analysis

1. External Analysis:

Those who do not have access to the detailed accounting records of the company,

i.e., banks, creditors and public, make external analysis of financial statement. These

people depend almost entirely on published financial statements. The main objective

of such analysis varies from party to party.

2. Internal Analysis:

Such analysis is made by the finance and accounting department to help the top

management. These people have direct approach to the relevant financial records. So

they can peep behind the two basic financial statements and narrate the inside story.

Such analysis emphasis on the performance appraisal and assessing the profitability

of different activities.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS3. Horizontal Analysis:

When the financial statements for a number of years are reviewed and analyzed, the

analysis is called “horizontal analysis”. The preparation of comparative statements is

an example of horizontal analysis. As it is based on data from year to year, rather

than on one date or period or time as a whole, this is also known as “dynamic

analysis.”

4. Vertical Analysis:

It is also known as “static analysis”. When ratios are calculated from the balance

sheet of one year, it is called vertical analysis. It is not very useful for long term

planning, as it does not include the trend study for future.

5. Long-term analysis:

In the long term, the company must earn a minimum amount sufficient to maintain a

suitable rate of return on the investment to provide for the necessary growth and

development of the company and to meet the cost of capital. Thus, in the long run

analysis the stress is on the stability and earning potentiality of the concern. In the

long-term analysis the fixed assets, long-term debt structure and the ownership

interest is analyzed.

6. Short –term Analysis:

The short-term analysis of financial statement is mainly concerned with the working

capital analysis. In the short run, a company must have ample funds readily available

to meet its current needs and sufficient borrowing capacity to meet the

contingencies. Hence, in short –term analysis, the current assets and the current

liabilities are analyzed and cash position of the concern is determined. For short-

term analysis, the ratio analysis is very useful.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALSTOOLS OF FINANCIAL ANALYSIS:

The analysis of financial statements consists of a study of relationships and trends to

determine whether the financial position of the concern and its operating efficiency

have been satisfactory. In the process of this analysis, the financial analyst uses

various tools or methods. The analytical tools generally available to an analyst for

this purpose are as follows:

1. Comparative financial and operating statements

2. Common-size statements

3. Trend ratios

4. Statement of changes in working capital

5. Ratio analysis

1. Comparative Financial and Operating statements:

The preparation of comparative financial and operating statements is an important

device of horizontal financial analysis. Financial data become more meaningful

when compared with similar data for a previous period or a number of prior periods.

Statements prepared in a form that reflect financial data for two or more periods are

known as comparative statements. Annual data can be compared with similar data

for prior years. Such statements are very helpful in measuring the effects of the

conduct of a business during the period under consideration. Comparative statements

can be of two types: (i) Comparative balance sheet and (ii) comparative income

statement.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS(i)Comparative Balance sheet: The comparative balance sheet analysis is the study

of the trend of the same items, group of items and computed items in two or more

balance sheets of the same enterprise on different dates. The changes in periodic

balance sheet items reflect the conduct of the business. The changes can be observed

by comparison of the balance sheet at the beginning and at the end of the period and

these changes can help in forming an opinion about the progress of an enterprise.

The comparative balance sheet has to columns for the data for original balance sheet.

A third column is used to show increase in figures, the fourth column may be added

for giving percentage of increase or decreases.

(ii)Comparative income statement: The comparative income statement gives an

idea of the progress of a business over a period. The changes in absolute data in

money values and percentages can be determined to analyze the profitability of a

business. Like comparative balance sheet, income statement has four columns. First

two columns give figures of various items for two years. Third and fourth columns

are used to show increase or decrease in figures, in absolute amounts and

percentages respectively.

2. Common Size Statements:

Comparative statements that give only the vertical percentage ratio for financial data

without giving rupee values are known as common size statements. They are also

known as 100% statements. For example, if the balance sheet items are expressed as

the ratio of each asset to total assets and the ratio of each liability to total liabilities,

it will be called a common size balance sheet. Thus, a common size statement shows

the relation of each component to the whole. It is useful in vertical financial analysis

and comparison of two business enterprises at a certain date. Common size

statements include (i) common size balance sheet (ii) common size income

statement.



(i)Common size balance sheet: A statement in which balance sheet items are

expressed as percentage of each asset to total assets and percentage of each liability

to total liabilities is called common size balance sheet. This statement establishes the

relationship between each asset and total value of assets and each liability against

total of liabilities.

(ii)Common size income statement: A common size income statement is a

statement in which each item of expense is shown as a percentage of net sales. A

significant relationship can be established between items of income statement and

volume of sales.

3. Trend Ratios:

Trend ratios are also an important tool of horizontal financial analysis. Under this

technique of financial analysis, the ratios of different items for various periods are

calculated and then a comparison is made. An analysis of the ratios over the past few

years may well suggest the trend or direction in which the concern is going upward

or downward. The method of trend percentages is a useful analytical device for the

management since by substituting percentages for large amounts; the brevity and

readability are achieved.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS4. Statement of Changes in working Capital:

Statement of changes in working capital is also very useful to identify the increase or

decrease in working capital over a period. The main objective of this statement

preparation is to derive an accurate summary of the events that affected the amount

of working capital. The amount of net working capital is determined by deducting

the total of current liabilities from the total of current assets. Hence, it is a rough

statement, which may be prepared by using balance sheet data only. However, it

does not explain the detailed reasons for the changes in working capital and methods

of financing additional requirements of working capital. Hence, the preparation of

funds flow statements becomes necessary.

5. Ratio Analysis:

Ratio analysis is an important and widely used tool of analysis of financial

statements. It is essentially an attempt to develop meaningful relationship between

individual items or group of items in the balance sheet or profit and loss account.

The object and utility of ratio analysis as a technique of financial analysis is

confined not only to the internal parties but to the trade creditors, banks and lending

institutions also. It functions as a sort of health test. In the nutshell, ratio analysis

gives the answer to the problems such as: whether the enterprise’s financial position

is basically sound, whether the capital structure of the business is in proper order,

whether the profitability of the enterprise is satisfactory, whether the credit policy in

relation to sales and purchases is sound, Whether the company is credit-worthy.

Thus, ratio analysis highlights the liquidity, solvency, profitability, capital gearing,

etc.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALSLIMITATIONS OF FINANCIAL STATEMENT ANALYSIS:

The analysis of financial statement has certain limitations also. Hence, any person

using this technique must keep in mind those limitations. Main limitations are as

follows:

1. The analysis of financial statements is only a means to reach conclusions and

not conclusion in itself. Therefore, it cannot work as a substitute for sound

judgement. The judgement, ultimately, will depend upon the intelligence and

skill of the analyst.

2. The figures drawn from statement of just one year have limited use and value.

Therefore, it will be dangerous to depend upon them only.

3. The basic nature of financial statements is historic. Past can never be hundred

percent representative of the future. Hence, future course of business events

should be forecasted and interpreted in the context.

4. The results of the analysis of financial statements should not be taken as an

indication of good or bad management. The ratios or other figures explain

only probable state of events.

5. Any change in the method or procedure of accounting mars the utility of such

analysis. The figures of different financial statements lose the characteristic of

comparability.

6. An analyst should also be cautious from window dressing in the accounts.

7. The rapid changes in the value of money also reduce the validity of such

analysis and no useful conclusions can be drawn from a comparative study of

the financial statements of different years.

8. It does not disclose reasons for changes.



CHAPTER - 5

ANALYSIS AND INTERPRETATION

RATIO ANALYSIS

Profitability ratio

1. Gross profit ratio 2. Net profit ratio

2 Operating ratio 4. Return on total asset

5 Return on capital employed 6. Earnings per share

Liquidity ratios

1. Current ratio

2. Quick ratio

Activity ratios

1. Fixed asset turn over ratio

2. Inventory turn over ratio

3. Debtors turn over ratio

Leverage ratios

1. Debt equity ratios

2. Proprietary ratio

RATIO ANALYSIS



Ratio analysis is an important and age-old technique. It is a powerful tool of

financial analysis. It is defined as “the indicated quotient of two mathematical

expression” and as “the relationship between two or more things”. Systematic use of

ratio is to interpret the financial statement so that the strength and weakness of a

firm as well as its historical performance and current financial condition can be

determined.

A ratio is only comparison of the numerator with the denominator. The term

ratio refers to the numerical or quantitative relationship between two figures. Thus,

ratio is the relationship between two figures, and obtained by dividing the former by

the latter. Ratios are designed show how one number is related to another.

The data given in the financial statements are in absolute form, are dump, and are

unable to communicate anything. Ratios are relative form of financial data and very

useful technique to check upon the efficiency of a firm. Some ratios indicate the

trend, progress, or downfall of the firm.

In the view of the requirements of the various users of ratio, it has divided into the

following important categories:

A. Profitability Ratio

B. Liquidity Ratio

C. Activity Ratio

D. Leverage Ratio



I. PROFITABILITY RATIOS:

A business firm is a profit earning organization. The income statement of

the firm shows the profit earned by the firm during the account period. Profitability

is an indication of the efficiency with which the operations of business are carried

on. Poor operational performance may indicate poor sales and hence poor profits.

The profit figure has , however, different meanings to different parties interested in

financial analysis. The following are the important profitability ratios.

1. GROSS PROFIT RATIO:

The gross profit ratio plays an important role in two management areas. In

the area of financial management, the ratio serves as a valuable indicator of the firms

ability to utilize effectively outside sources of fund. Secondly, this ratio also serves

as important tool in shaping the pricing policy of the firm. This ratio expresses the

relationship between gross profit and sales. This ratio is calculated by dividing gross

profit by net sales.

Gross profit ratio = Gross profit x 100

Net sales

Table showing the Gross profit ratio of TCC:

Table No: 1 (Rs in lakhs)YEAR GROSS PROFIT

(Rs in lakhs)SALES (Rs in lakhs)

G/P RATIO

2004 90.16 9123.33 0.9882362005 -829.24 8868.57 -9.350322006 581.08 10877.3 5.3421352007 61.87 12313.8 0.5024442008 43.69 9384.56 0.465552

Source: Annual Reports of TCC


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS Graph showing the Gross profit ratio of TCC:

Graph No: 1

Interpretation:

Gross profit ratio indicates the degree to which selling price per unit may decline

without resulting in losses from operations to the firm. An increase in the gross

profit ratio may be due to an increase in the selling price without a corresponding

increase in the cost of goods sold or due to a decrease in the cost of goods sold

without a corresponding decrease in the selling price of goods. Similarly, a decrease

in the gross profit ratio may be due to a decrease in the selling price without a

corresponding decrease in cost of goods sold or due to an increase in the cost of

goods without a corresponding increase in the selling price of the goods sold.

Here in the case of TCC the gross profit ratio shows an increasing trend from the

year 2002-2004, but during the year 2005-2007 it shows a decreasing trend.

Therefore, it means that company’s performance in terms of trade is not satisfactory.



2. NET PROFIT RATIO:

This ratio is also called as the net profit to sales or net profit margin ratio. It is

determined by dividing the net income after tax to the net sales for the period and

measures the profit per rupee of sales.

Net profit ratio = Net profit x 100

Sales

This ratio is used to measure the overall profitability and hence it is very useful

to proprietors. It is an index of efficiency and profitability of the business. Higher

the ratio better is the operational efficiency of the concern.

Table showing the Net profit ratio of TCC:

Table No: 2 (Rs in lakhs)YEAR NET PROFIT (Rs

in lakhs)SALES (Rs in lakhs) N/P RATIO

2004 83.23 9123.33 0.912277

2005 -829.24 8868.57 -9.35032

2006 523.01 10877.3 4.80827

2007 48.52 12313.8 0.394029

2008 27.67 9384.56 0.294846




Graph No: 2

Graph showing the Net profit ratio of TCC:

Interpretation:

Net profit ratio is used to measure the overall profitability of the organization. It is

an index of efficiency and profitability of the business. Here the company is running

at a loss except 2003-2004, 2005-2006 and 2006-2007. In the year, 2004-2005 the

company is incurred a loss of Rs.829.24 lakh. This is reported mainly due to the

unabsorbed depreciation of Rs.472.86 lakh, written of advance amounting to Rs.

237.91 lakh. The cost of raw material is increasing day by day and the company

could not increase the selling price corresponding with the increase in cost. As

compared to the loss in 1999-2000, the company is in a better position now.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS3. OPERATING RATIO:

Operating ratio is an indicative of the proportion that the cost of sales bears

to sales. Cost of sales includes direct cost of goods sold as well as other operating

expenses. An important ratio is used to discuss the general profitability of the

concern. It is calculated by dividing the total operating cost by sales. Total operating

expenses include all costs like administration, selling and distribution expenses, etc.

but do not include financing cost and income tax.

Operating Ratio = (Cost of goods sold + Operating expenses) 100

Net sales

Lower the ratio; the more profitable are the operations indicating an efficient control

over costs and an appropriate selling price. Reverse is the position when the ratio is

higher. It is one of the most important efficiency ratios.

Table showing the Operating ratio of TCC:

Table no: 3 (Rs in lakhs)

YEAR COST OF

GOODS

SOLD

ADMINISTRATIVE

AND SELLING EXP.

SALES RATIO

2004 6443.99 58.04 9123.33 0.712682

2005 5776.66 58.6 8868.57 0.657971

2006 7256.2 74.95 10877.3 0.673986

2007 8150.57 77.48 12313.8 0.668197

2008 6932.29 70.92 9384.56 0.746248

Source: Annual Reports of TCCGraph no: 3



Graph showing he Operating ratio of TCC:

Interpretation: Operating ratio is an indicative of the proportion that the cost of sales bears to

sales. It is also used to measure the general profitability of the concern. Here in the

case of TCC almost all the ratios are near or above 100. The situation is satisfactory

in 2003-2004 periods, because during that period the company earned a profit of Rs.

83.23 lakhs. For the last five years, company’s position in cost of sales to sales is

better as compared with the beginning period, because during the beginning periods

the cost of sales to sales was far above the sales.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS4. RETURN ON TOTAL ASSETS:

Profitability can be measured in terms of relationship between net profit and

total asset. This ratio is also known as return on gross capital employed. It measures

the profitability of investment. The overall profitability can be known by applying

this ratio.

Return on total assets = Net profit x 100

Total assets

The term “net profit” stands for “net profit before interest, tax and dividend.”

Table showing the Return on total assets of TCC:

Table: 4(Rs in lakhs)

YEAR COST OF GOODS

SOLD

AVERAGE T.A. RATIO

2004 6443.99 11149.78 0.57794773

2005 5776.66 10158.38 0.56865957

2006 7256.2 10281.11 0.70577982

2007 8150.57 12349.02 0.66001756

2008 6932.29 12569.55 0.55151457


Graph showing the Return on total assets of TCC:



Graph: 4

Interpretation:

Return on total assets is an important ratio to measure the profitability of

investment. It is a useful measure of financial resources invested in firm’s assets.

The most efficiently the asset used, more profitable would be the business. Here the

highest ratio for return on total assets was during the year 2005-2006 and the lowest

was in 2004-2005 periods. Therefore the company should try to utilize the total

assets more efficiently as a result company can earn better profit.

5. RETURN ON CAPITAL EMPLOYED:


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS This ratio is also known as return on investment. The primary objective of

making investment in any business is to obtain satisfactory return on capital

invested. It indicates the return on capital employed in the business and it can be

used to show the efficiency of the business as a whole. The higher the ratio, the more

efficient use of capital employed.

Return on capital employed = (Net profit before interest, tax and dividend)

x100

Net capital employed

The term net capital employed refers to long-term funds supplied by the creditors

and owners of the firm. Alternately, it is equivalent to net working capital plus fixed

assets.

Table showing Return on capital employed of TCC:Table no: 5(Rs in lakhs)

YEAR NET PROFIT CAPITAL EMPLOYED RCE

2004 83.23 11328.81 0.73467557

2005 -829.24 8987.94 -9.2261408

2006 523.01 11574.27 4.51872991

2007 48.52 13123.76 0.36971112

2008 27.67 12015.33 0.23028914


Graph showing the Return on capital employed of TCC:



Graph: no 5

Interpretation:

Return on net capital employed indicates the return on capital employed in

the business and it can be used to show the efficiency of the business as a whole.

The higher the ratio, the more efficient use of the capital employed.

Here in the case of TCC, it reveals that the ratio does not have a constant nature. In

the financial year 2004-2005, there is no return. In the financial year 2005-2006, the

financial data shows a higher profitability position. This backdrop was happened

because of decline in the operating profit.

6. EARNINGS PER SHARE:


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS This ratio helps in the assessment of the profitability of a firm from the

standpoint of equity shareholders. This measures the profit available to the equity

shareholders per share. It is calculated by dividing the profit available to the equity

shareholders by the number of shares issued. The profits available to the equity

shareholders are represented by the net profits after interest, tax and preference

dividend.

Earnings per share (EPS) = Net profit available to the equity shareholders

Number of equity shares issued

The earnings per share help in determining the market price of the equity shares

of the company. A comparison of E.P.S. of the company with another will also help

in deciding whether the equity share capital is being effectively used or not. It also

helps in estimating the company’s capacity to pay dividend on its equity

shareholders.

Table showing the Earnings per share of TCC:

Table: 6(Rs in lakhs)

YEAR EPS

2004 0.39

2005 -3.89

2006 2.45

2007 0.23

2008 0.13


Graph showing the Earnings per share of TCC:



Graph: 6

Interpretation:

It helps in determining the market price of the equity shares of the company. Here

TCC’s earning per share is not satisfactory. The earning per share in 2002-2003 and

2004-2005 is negative. The highest earning per share is Rs.2.45 in 2005-2006 and

the lowest earning per share is -3.89 in 2004-2005. It means company is running at a

loss and the shareholders will not get any dividend. However, in the year 2005-2006

the company’s earning per share were increases to Rs.2.45 and during the year 2006-

2007 the earnings per share declines to Rs.0.23.

7. RETURN ON EQUITY SHAREHOLDERS FUNDS



The profit considered from computing the ratio is taken after payment of

preference dividend.

Return on equity shareholder funds= Net profit after interest, tax,&

Pref. dividend

………......................................

Equity shareholders fund

Equity Shareholder funds= Share capital + Reserves + profits -

Accumulated losses

Table no: 7

(Rs in lakhs)

YEAR NET PROFIT EQUITY SHARE

CAPITAL

ROE

2004 83.23 2131.19 3.90532989

2005 -829.24 2131.19 -38.909717

2006 523.01 2131.19 24.5407495

2007 48.52 2131.19 2.27666233

2008 27.67 2131.19 1.29833567




Graph no: 7

Interpretation:

Return on shareholders’ fund reveals the overall efficiency of the business. It shows

the relationship between residual profit and shareholders’ funds. Here in the case of

TCC, the Return on shareholders’ fund founds to be fluctuating. The highest ratio

was 41.19 during the year 2005-2006 and the lowest ratio was -46.3 in 2002-2003.

8. DIVIDEND PAYOUT RATIO


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS It indicates the proportion of earning available to equity shareholders. This

ratio is also indirectly throws light on the financial policy of the management in

plugging back.

Table no: 8(Rs in lakhs)

Year Dividend per

equity shares

Earning per

equity share

Payout ratio

2004 8.21 0.39 21.03

2005 8.21 -3.89 -2.11

2006 8.21 2.45 3.35

2007 8.21 0.23 36.07

2008 8.21 0.23 36.07


Graph no: 8

9. RETURN ON INVESTMENT



The overall profitability is measured by the return on investment, which is the

product of net profit ratio and investment turnover. it is a central measure of the

earning power or operating efficiency of a company.

Return on Investment = EAT sales EAT

………* ……. (Or) ……….

Sales Total assets Total Assests

Table No: 9(Rs in lakhs)YEAR NET PRO(Rs in

lakhs)FIT SHAREHOLDER'S FUNDS

(Rs in lakhs)PERCENTAGE

2004 83.23 2131.19 3.90533

2005 -829.24 2131.19 -38.9097

2006 523.01 2131.19 24.54075

2007 48.52 2131.19 2.276662

2008 27.67 2131.19 1.298336


Graph No: 9



INTERPRETATION AND INFERENCE:

Return on investments is one of the most important ratio used for measuring

the overall efficiency of the firm. It reveals, how well the resources of a firm are

being used, higher the ratio, better are the results. In 2004-2005, company shows

negative (-38%) return of investment. Butter later company recovers, the very next

year company shows higher ratio (24.54%) in 2005-2006. But later it shows a

declining trend. In last year, company has 1.30% return on investment.

II. LIQUIDITY RATIOS:



Liquidity is the ability of the firm to meet its current liabilities as they fall due.

Since liquidity is basic to continuous operations of the firm, it is necessary to

determine the degree of liquidity of the firm. Important liquidity ratios analysed are

as follows:

10. CURRENT RATIO:

Current Ratio is the most common ratio for measuring liquidity. It represents

the ratio of current assets to current liabilities. It is also called working capital ratio.

In a sound business, a current ratio of 2:1 is considered as an ideal one. The current

ratio of a firm measures its short –term solvency, i.e., its ability to meet short-term

obligations. It is calculated by dividing current assets by current liabilities.

Current Ratio = Current Assets

Current liabilities

Current assets are those, the amount of which can be realized within a period

of one year. It includes cash in hand, cash at bank, bill receivable, sundry debtors,

stock, prepaid expenses, short-term investments, etc.Current liabilities are those

amounts which are payable within a period of one year. Current liabilities are

creditors, bills payable, bank overdraft, outstanding expense, income tax payable,

proposed dividend, etc.

Table showing Current Ratio for the last five years:

Table No: 10(Rs in lakhs)YEAR CA (Rs in

lakhs)CL (Rs in

lakhs)CURRENT

RATIO2004 4267.84 4889.1 0.872005 2588.75 5063.93 0.512006 3576.06 5859.42 0.612007 3717.33 5583.33 0.672008 3457.23 5473.83 0.63

Graph No: 10



Interpretation:

The current ratio of firm measures its short-term solvency, i.e, its ability to

meet short-term obligations. In a sound business, a current ratio of 2:1 is considered

as an ideal one. It provides a margin of safety to the creditors. It is an index of the

firm’s financial stability. The current ratio must not only be equal to current

liabilities but should leave a comfortable margin of working capital after paying of

the current liabilities. A high ratio indicates sound solvency position and a low ratio

indicates inadequate working capital.

Standard current ratio of a sound business is two and TCC’s current ratio is

below one for the last five years. The highest ratio was 0.87 in 2003-2004, and the

lowest was in 2004-2005 i.e, 0.51. Therefore, we can interpret that the company is

suffering from inadequate working capital. That is they cannot meet their short-term

obligations in time. The main reason for the decrease in current ratio is that, in all

the five years the current liabilities of the company are more than the current assets.

The company should try to increase their current asset, so that they can easily meet

their short -term obligations.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS11. QUICK RATIO:

This ratio is some times known as “Acid Test Ratio” or “Liquidity ratio”. It is the

relation between quick assets to current liabilities. It is determined by dividing

“quick assets” by current liabilities.

Quick Ratio = Quick or Liquid Assets

Current Liabilities

The term ‘quick assets’ refers to current assets which can be converted into cash

immediately. It comprises all current assets except stock and prepaid expenses.1:1 is

considered as an ideal Acid Test Ratio. Quick ratio is the true test of business

solvency. A highest ratio indicates sound financial position and vice-versa.

Table showing Quick Ratio for the last five years:

Table No: 11(Rs in lakhs)YEAR QA (Rs in

lakhs)CL (Rs in

lakhs)QUICK RATIO

2004 2887.77 4889.1 0.59

2005 1921.74 5063.93 0.38

2006 2568.69 5859.42 0.44

2007 2644.85 5583.33 0.47

2008 2414.75 5473.83 0.44


Graph showing Quick Ratio of TCC for the last five years:



Graph No: 11

Interpretation:

An Acid Test Ratio of 1:1 is considered satisfactory as a firm can easily meet all

its current liabilities. If the ratio is less than 1:1, then the financial position of the

concern shall be deemed unsound. On the other hand, if the ratio is more than 1:1,

then the financial position of the concern is sound and good. Quick ratio is the true

test of business solvency. A higher ratio indicates sound financial position and vice-

versa.

Here in the case of TCC the Acid Test Ratio for the five years are below one

therefore the financial position of TCC shall be deemed unsound. In most cases, the

quick ratio of TCC could not achieve the standard quick ratio of 1:1. The highest

Quick Ratio was 0.59 in 2003-2004 and the lowest is -0.015 in 2006-2007.The

greater amount of current liability is the main reason for the low Quick Ratio of the

company.

III. LEVERAGE RATIOS:



Many financial analysts are interested in the relative use of debt and equity in

the firm. These ratios measure the long- term solvency position of the firm.

Following are the important leverage ratios:

12. DEBT-EQUITY RATIO

The relationship between borrowed funds and owners’ capital is a popular

measure of the long-term financial solvency of a firm. This relationship is shown by

the debt-equity ratio. This ratio indicates the relative proportion of debt and equity in

financing the assets

of a firm. An acceptable norm for this ratio is considered 2:1. This ratio is computed

by

dividing the total debt of the firm by its net worth.

Debt-equity ratio = Debt

Equity

Or

Debt-equity ratio = Outsiders’ fund

Shareholders’ fund

The term ‘debt’ refers to the total outside liabilities. It includes all current

liabilities and other outside liabilities like loan, debentures, etc. The term equity

refers to net worth or shareholders’ fund.

Equity or shareholders’ fund = Share capital + Reserves and surplus – Fictitious

assets




year debt equity ratio

2004 7020.50 2131.19 3.29

2005 7224.00 2131.19 3.39

2006 7518.66 2131.19 3.53

2007 8356.89 2131.19 3.92

2008 7339.7 2131.19 3.44

Graph no: 12 Source: Annual Reports of TCC

Interpretation:

An acceptable norm for this ratio is considered 2:1. A high ratio shows that

the claims of creditors are greater than those of owners. A very high ratio is

unfavorable from the point of view of the firm. A high debt company is able to

borrow funds on very restrictive term and conditions. A low debt-equity ratio

implies a greater claim of owners than creditors. From the point of view of creditors,

it represents a satisfactory capital structure of the business. In debt-equity ratio; also,

the company is not coming to the satisfactory level. The entire debt-equity ratio is

higher than the standard level of 2. There by we can interpret that the claim of

creditors of TCC are much above than of owners. The highest debt-equity ratio was

13.6 in2 004-2005 and the lowest was 6.20 in 2003-2004.

13. PROPRIETARY RATIO:



Proprietary Ratio relates to the shareholders fund to total assets. This ratio shows the

long-term solvency of the business. It is calculated by dividing shareholders’ funds

by the total assets.

Proprietary Ratio = Shareholders funds

Total assets

Shareholders fund = Equity share capital + Preference share capital +

Reserves and surplus – Fictitious assets

Total assets include all assets including goodwill (excluding fictitious assets). The

acceptable norm of the ratio is 1:3(i.e., 0.33)

Table showing the Proprietary Ratio of TCC:


YEAR DEBT EQUITY RATIO

2004 7020.50 2131.19 3.29

2005 7224.00 2131.19 3.39

2006 7518.66 2131.19 3.53

2007 8356.89 2131.19 3.92

2008 7339.7 2131.19 3.44


Graph showing the Proprietary Ratio of TCC:



Graph no: 13

Interpretation:

Proprietary ratio shows the financial strength of the company. It helps the

creditors to find out the proportion of shareholders fund in the total assets. Higher

ratio indicates a secured position to creditors and a low ratio indicates greater risk to

creditors. It indicates the long-term solvency of the firm.

Here the proprietary ratio of TCC never touches the acceptable ratio of 0.33;

therefore, we can assume that the creditors are in great risk. The highest proprietary

ratio was 0.13 in 2002-2003 and 2003-2004. Moreover, the lowest ratio was 0.068 in

2004-2005. The main reason for the unsatisfactory level of proprietary ratio is the

high value of total assets of the company and the low value of shareholders fund.



IV. ACTIVITY RATIOS:

The published accounts of a firm also provide a useful data for the

measurement of the company’s level of activities. These ratios are also called as

“Turnover ratios.” This ratio highlights upon the activity and operational efficiency

of the business concern. Activity ratios measure how efficiently the firm employs

the assets. These ratios indicate the speed with which assets are being converted into

sales. These ratios are also called as efficiency ratios. Some of the important activity

ratios are as follows:

14. WORKING CAPITAL TURNOVER RATIO:

This ratio reflects the turnover of the firm’s net working capital in the course

of the year. It is a good measure of over-trading and under-trading. The ratio is

calculated as follows:

Working capital turnover ratio = Net sales

Net working capital

Net working capital refers to the difference between current assets and current

liabilities. Current liabilities are those claims of outsiders, which are expected to

mature for payment within an accounting year and include creditors, bills payable

and outstanding expenses. Current assets are those, the amount of which can be

realized within a period of one year. It includes cash in hand, cash at bank, bill

receivable, sundry debtors, stock, prepaid expenses, short-term investments, etc.

Net working capital can be positive or negative. A positive net working capital will

arise when current assets exceed current liabilities. A negative net working capital

occurs when current liabilities are in excess of current assets.



Table No: 14(Rs in lakhs)

YEAR SALES (Rs in lakhs)

NET WORKING CAPITAL

RATIO

2004 9123.33 -621.26 -14.6852

2005 8868.57 -2475.18 -3.583

2006 10877.3 -2283.36 -4.76373

2007 12313.8 -1866 -6.59904

2008 9384.56 -2016.6 -4.65365


Graph No: 14

Graph showing the working capital turnover ratio of TCC:

Interpretation:

Here all the working capital turnover ratio of TCC is found to be negative,

because of the negative working capital. In all years the current liabilities exceeds

the current assets. If we ignore the negatives all ratios are found satisfactory. From

this, we can understand that the working capital turn over ratio is fluctuating. That is

in the beginning period it shows an increasing trend then declines and again

increases and then shows a decreasing trend.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS15. FIXED ASSETS TURNOVER RATIO:

This ratio indicates the extent to which the investments in fixed assets

contribute towards sales. If compared with a previous year, it indicates whether the

investment in fixed assets has been judicious or not. The ratio is calculated as

follows:

Fixed assets turnover ratio = Net sales

Fixed assets

Table showing fixed assets turnover ratio of TCC:


YEAR COST OF GOODS

SOLD

AVERAGE F.A. RATIO

2004 6443.99 7353.57 0.8763077

2005 5776.66 6730.08 0.85833452

2006 7256.2 7198.7 1.00798755

2007 8150.57 8702.32 0.93659737

2008 6932.29 8982.27 0.77177484



Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS Graph showing fixed assets turnover ratio of TCC:

Graph: 15

Interpretation:

Here all fixed assets to turnover ratio are near and above one. That means sales

are almost equal to the fixed assets. The highest ratio was 1.38 in the year 2004-

2005 and the lowest was 0.97 in 2002-2003.there was an increasing trend for the

past years because of increase in sales and decrease in fixed assets. We can see that

increase or decrease in fixed assets does not results to increase or decrease in the

sales.



16. INVENTORY TURNOVER RATIO:

This ratio indicates whether investment in inventory is efficiently used or not.

It, therefore, explains whether investments in inventories are within proper limits or

not. It also measures the effectiveness of the firm’s sales efforts. The ratio is

calculated as follows:

Inventory Turnover Ratio = cost of goods sold

Average stock

Where, Cost of goods sold = Sales – Gross profit or

Cost of goods sold = (opening stock +purchases + direct expenses) - closing

stock

Average stock = opening stock + closing stock

2

The inventory turnover ratio signifies the liquidity of the inventory. A high

inventory turnover ratio indicates brisk sales. The ratio is a measure to discover the

possible trouble in the form of over stocking. A low inventory turnover ratio results

in blocking of funds in inventory. There is no standard ratio for the inventory

turnover.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALSTable showing the inventory turnover ratio of TCC:

Table No.16(Rs in lakhs)YEAR NET SALES (Rs in

lakhs)AVERAGE INVENTORY (Rs in lakhs)

RATIO

2004 9123.33 1336.39 6.826847

2005 8868.57 644.19 13.76701

2006 10877.3 967 11.2485

2007 12313.8 1044.91 11.78456

2008 9384.56 1018.27 9.21618

Source: Annual Reports Of TCC

Graph No: 16

Interpretation:

From this chart we can understood that the highest inventory turnover ratio is

11.73 in the period 2006-2007 and the lowest was 6.75 in 2003-2004. In the last year

the inventory turnover ratio is increased, it is a good sign of improvement in sales. If

sales increase, the inventory cost can be reduced.



17.DEBTORS TURNOVER RATIO:

The purpose of this ratio is to discuss the credit collection power and policy

of the firm. For this ratio, a relationship is established between accounts receivables

and net credit sales of the period. The debtors turnover ratio is calculated as follows:

Debtors turnover ratio = Net credit sales

Average accounts receivable

The term “accounts receivable” includes trade debtors and bill receivables. This ratio

indicates the efficiency of the staff entrusted with collection of book debts. The

higher the ratio, the better it is, since it would indicate that debts are being collected

promptly.

Table showing the Debtors turnover ratio of TCC:

Table No: 17(Rs in lakhs)

YEAR SALES (Rs in lakhs)

DEBTORS(Rs in lakhs)

RATIO

2004 9123.33 1175.4 7.761894

2005 8868.57 954.67 9.289671

2006 10877.3 1098.56 9.901416

2007 12313.8 1424.95 8.641566

2008 9384.56 1229.14 7.635062




Graph showing the Debtors turnover ratio of TCC:

Graph No: 17

Interpretation:

Debtors turnover ratio indicates the efficiency of the staff entrusted with collection

of book debts. The higher the ratio the better it is. Since it would indicate that debts

are being collected promptly. The ratio is highest during 2005-2006, lowest during

2002-2003. For the last three years the debtors turnover ratio are found to be

increasing but during the year 2006-2007, it declines to 8.64. Therefore we can

interpret that company should improve their debt collection program so that the

company gets more money for use.



TREND ANALYSIS

1. TREND ANALYSIS OF INVENTORY

Table No: 18(Rs in lakhs)YEAR INVENTORY (Rs

in lakhs)TREND INCREASE OR

DECREASE

2004 1336.39 100 0

2005 644.19 48.20374 -51.7963

2006 967 72.35912 -27.6409

2007 1044.91 78.189 -21.811

2008 1018.27 76.19557 -23.8044Source: Annual Reports of TCC

Graph No: 18

INTERPRETATION AND INFERENCE: The above table and graph shows the trend of inventory in the

study period, it also shows a fluctuating trend. In2004-2005 it shows a

high decline, later it recovers. But compared to 2003-2004, now company

shows a decreasing trend. TCC has high amount of inventory in 2003-

2004.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS2. TREND ANALYSIS OF DEBTORS

Table No: 19(Rs in lakhs)YEAR DEBTORS (Rs in

lakhs)TREND INCREASE OR

DECREASE

2004 1175.4 100 0

2005 954.67 81.22086 -18.7791

2006 1098.56 93.46265 -6.53735

2007 1424.95 121.2311 21.23107

2008 1229.14 104.5721 4.572061


Graph No: 19


Trend of debtors of TCC Company shows fluctuating trend. Compared to

2003-2004, company has better debtor position in 2006-07 and 2007-08. But in last

year it shows a decreasing trend from previous year.


Financial performance analysis THE TRAVANCORE COCHIN CHEMICALS3. TREND ANALYSIS OF CREDITORS

Table No: 20(Rs in lakhs)YEAR CREDITORS (Rs

in lakhs)TREND INCREASE OR

DECREASE

2004 4054.14 100 0

2005 4184.11 103.2059 3.205859

2006 4519.02 111.4668 11.4668

2007 3950.05 97.4325 -2.5675

2008 3577.14 88.23425 -11.7658Source: Annual Reports of TCC

Graph No: 20


Here we analyze that company’s creditors shows a fluctuating trend. In 2004-

05 and 2005-06 company’s creditors have increasing trend but later it shows a

decreasing trend. In 2007-08 company’s creditors have least amount compared to

other years in study period. It is good sign for the company.



CHAPTER – 6

FINDINGS In the study period current ratio is not satisfactory. It shows high in

2004. It is not satisfy the standard norm of the ratio.

Proprietary ratio showed as decreasing trend which indicates that the long

term solvency position was liquidating against the interest of creditors.

Debt equity ratio showed slightly fluctuating trend and it satisfy the stand

norm 1:1 in all the years.

Fixed asset to share holders fund ratio of the company was satisfactory.

Gross profit ratio of the concern is satisfactory in the study period. A high

profit margin in ratio is a sign of good and efficient management.

The net profit ratio showed the decrease trend.

Operating ratio is an indicator of the growth the business revealed a

fluctuating trend.

Return on total asset ratio accounts are not satisfactory position in the study

period.

Return on capital employed indicates satisfactory position in the study period

even though the negative trend shows.

Earnings per share ratio attains negative trend in the study period. It shows the

share position of the concern is not satisfied in the study period.

Dividend per share ratio shows the good position of the company.

The pay out ratio shows a good position even though it shows negative.

Trend of debtors and trend of creditors of TCC Company shows fluctuating

trend.

The trend of inventory in the study period, it also shows a fluctuating trend.

In2004-2005 it shows a high decline, later it recovers.



CHAPTER - 7

SUGGESTIONS

The following are the suggestions which have been made to improve the company:

1. The average liquid ratio shows a declining trend when compared with the

standard norm1:1 the company should pay more attention to improve its

liquidity position.

2. Investment in slow moving inventory should be cut down this fund should be

directed towards marketable securities so as to improve the liquidity position

of the company.

3. Proper techniques should be adopted for planning and control of cash order to

regularize and optimize the use of cash balances

4. The negative growth of profitability ratio should be improved by increasing

by owner’s equity.

5. Particular expenses should be controlled to improve the earnings of the

company.



CHAPTER - 8

CONCLUSION

The present business world is becoming more complex because of it’s

dynamic nature. The chemical industry provides an assured market for manufacture

of pulp, textiles, soaps, and detergents, pesticides, aluminum, petrochemicals,

drugs& pharmaceuticals, oil refining, etc.

The industry had to be rejuvenated and diversified to produce chemicals viz.

caustic soda lye and flakes, liquid chlorine, hydrochloric acid and sodium

hypochlorite. It is unfortunate that there has been no measure spelt by the

government to save the industry.

To conclude the management of the ‘the Travancore-cochin chemicals

should strive to improve the liquidity position by reducing the investment. The

company should adopt necessary and relevant steps for curtailing the cost to improve

the profitability.



BIBLIOGRAPHY

Kevin .S, securities and portfolio management, First

edition (2008), Prentice hall India Pvt Limited.

Shashi K. Gupta, Sharma R.K, Management

Accounting, 10th edition (2005), Kalyani Publishers.

Khan M.Y, Jain P.K, Financial Management,

4th edition (2004), Tata McGraw Publishing Company

Limited.

www.tcckerala.com

www.moneycontrol.com


http://www.moneycontrol.com/

http://www.tcckerala.com/

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