STUDY AND ANALYSIS OF FINANCIAL STATEMENT OF MECON LIMITED

A REPORT SUBMITTED TO MECON LIMITED FOR WINTER TRAINING

PROGRAMME OF MBA

UNDER THE GUIDANCE OF

Mr. R.K.DASGUPTA
Sr. MANAGER (FINANCE)
MECON LIMITED
(A Government of India undertaking)
(An ISO:9001:2001 company)

SUBMITTED BY:

GAURAV SHEKHAR
Roll No. 2008MB0009
Institute- ISMU,
Dhanbad
 

DECLARATION

I, GAURAV SHEKHAR, do hereby declare that this project entitled “STUDY AND
ANALYSIS OF FINANCIAL STATEMENT OF MECON LIMITED ’’ is an original work of mine,
done towards the practical fulfillment of my winter training programme of MBA.
 GAURAV
SHEKHAR
ROLL NO. -
2008MB0009
INTITUTE-
ISMU, DHANBAD

ACKNOWLEGEMENT

This project has been a collaborative effort. I take this opportunity to

acknowledge those who have helped me in the preparation and successful completion
of this project work.

First I would like to thanks MECON Ltd., Ranchi for providing me with an
opportunity to work in this organization.

I wish to acknowledge the support and encouragement given to my effort by my

project.

I would also like to take this opportunity to thanks the entire employee’s of the
cash section, MECON LIMITED for making my stay most homely and measurably.

 
 MECON LIMITED
“Thinking beyond steel”
(A GOVERNMENT OF INDIA ENTERPRISE)

MECON LTD. AT FIRST SITE:

Year of establishment: 31st March 1973

Type of company: Consultancy

(PSU, ISO
9001 Certified)
Total branches: 2 regional offices
and 16 site
offices

Head Office: Ranchi

Work force: 2505(with 1192

engineers)

Major area of functioning: Metal, Infrastructure, Oil

& Gas,
Power and
many more.

INTRODUCTION OF THE COMPANY:

History:

MECON LIMITED was formerly known as METALLURGICAL & ENGINEERING CONSULTANTS

(INDIA) LIMITED.
In past Mecon was the consultant company under Sail but later it was exploited and
became independent organization on 31st march 1973.

Present:

Mecon ltd. is a Govt. of India Public Sector Undertaking under Ministry of Steel.
MECON has all technical disciplines including civil, structural, architecture,
mechanical, chemical, ceramics, electrical, electronics and control system,
instrumentation, environmental engineering, ocean engineering, power, computer
etc. MECON is committed to become world class engineering and contracting company
to contribute in realisation of energy, oil & gas, infrastructure and
metallurgical projects by its professional and capable employees delivering
quality service. MECON continues to aspire and excel for being in the forefront
for projects using newer clean technologies with its ability to develop
technologies, address issues of environmental concern, assimilate technologies
developed by world leaders, adopt the same in specific project situations and by
retaining competent, professional and motivated staff.

MECON, during its existence of past 45 years, besides executing varied type
engineering/ consulting assignments, has been a pioneer in acquiring and
assimilating newer technologies for various sectors of the Indian Industry.

MECON LIMITED is a multi-disciplinary designing, planning, engineering,

consultancy and contracting organization an established engineering & contracting,
ISO 9001 company employs with qualified & experienced engineers, scientists,
technical & supporting staff, possesses offices all over the country and other
organizational resources to contribute in industrialization process. Company's
corporate office at Ranchi is modern and equipped with a large computer network
and laboratories for testing and making models.

MECON has 4 SBU(Metals, Power, Oil & Gas, Infrastructure), technological

divisions and engineering divisions, special services division, equipment and
system design divisions, engineering and project site offices in India to carry
out specialized services in its diverse field of activities. Two of their regional
engineering offices are connected with latest communication channels to pool their
regional resources and serve the clients using fast communication tools including
VSAT communication facility/ internet access for providing engineering services
from distant locations.

MECON is registered with number of multilateral funding institutions and also has
exposure of providing engineering and consultancy services to projects in foreign
countries.

MECON as an organization have number of Memorandum of Understandings to meet the

technological requirements for wide spectrum of industries and infrastructure
development projects. Its scope of services includes the entire gamut of work
relating to setting up of projects in green as well as brown field from concept to
commissioning.

MECON has collaboration agreements with leading firms from the USA, Germany,
France, Italy, Russia, etc. in various fields. We are quite familiar in working
with collaborators who provide process know-how and basic engineering.

MECON has a large set up with about 2505 strong workforce, of which about 1192 are
graduate/postgraduate engineers in technical disciplines.

MECON has till date completed over 2700 consultancy assignments covering wide
range of fields and services. Further MECON has executed a large number of
assignments on turnkey/ EPC basis. Total value of turnkey (EPC) contracts
executed/ being executed by MECON exceeds Rs 27,000 Million.

MECON having implemented the TQM Philosophy in all spheres of its activities
through the well laid and documented procedures, MECON reviews and checks all
design calculations, drawings, specifications, data sheets, during design stage of
a project. Quality assurance (QA) plans are prepared and finalized before starting
a project. We are pleased to place on record that MECON has already received ISO
9001 Certification from RWTUV of Germany and incidentally we are the first
engineering and consultancy organization in India to receive this accreditation.

MECON Limited a Government of India Undertaking & recipient of ISO 9001

accreditation is a multi-disciplinary designing, planning, engineering,
consultancy and contracting organization. With head office at Ranchi and presence
in all metropolises and major cities spread throughout India, MECON has a large
pool of 1192 highly qualified & experienced engineers, scientists and matching
infrastructure facilities. MECON has undertaken over 2700 consultancy assignments
and executed 100 projects on turnkey/ engineering, procurement, construction &
commissioning (EPC) basis totaling investment to the tune of Rs. 27,000 million.

MECON is registered with various international agencies including World Bank,

Asian Development Bank, African Development Bank, ERDB and UNIDO. Since its
inception, MECON played a key role in the development of steel industries in India
and abroad including expansion/ augmentation and development of integrated steel
plants in India, Nigeria and other countries as well. MECON having engineered over
30 million tones of Steel Plants operating in India/ abroad is well conversant for
undertaking this magnitude of assignment.

Future:

The mission of the company is “To develop into an internationally recognized

centre of excellence for providing quality services in technical consultancy,
design, & engineering, design & supply of plant, equipment & systems, project
implementation from concept to commissioning for industrial development & up
gradation ventures, development of infrastructure and other service sectors.”

MECON is dealing the consultancy services in various fields.

FIELDS OF ACTIVITIES:
1. Power, Energy & Environment
2. Infrastructure
3. Oil & Gas
4. Metallurgy
5. Specialized Areas

1. Power, Energy & Environment :

Mecon has completed many detailed engineering & consultancy mega projects on the
power and energy besides that Mecon also makes arrangement for getting adequate
high tension power at one point within the plant boundary. From this point design
the plant substation power distribution and lighting systems including single line
diagram. Mecon also designs a suitable emergency power system, if required. While
completing the project Mecon also takes care of the environment so that the
citizen could get fresh and healthy environment.

Mecon undertakes the project in the following areas-

• Power
• Power Reforms (APDRP)
• Transmission & Distribution
• Energy Audit
• SCADA
• Industrial Gases
• Environmental Engineering
2. Infrastructure :
MECON's vast experience in handling Mega projects such as steel plants and other
industrial plants has led to the development of expertise in the field of
Infrastructure Development Projects.
MECON undertakes projects in the following areas -
• Ports, Harbours and Material Handling
• Roads, Highways, Bridges, Traffic and Transportation
• Rail Track Engineering
• Architecture and Town Planning
• Water Management & Sanitation
• Mining & Agglomeration
• Refractories & Cement Plants
• Central Ordnance Depots (MOD)
• Office complex with service facilities

3. Oil & Gas :

MECON's experience in Chemical and Petro-chemical engineering springs from its
long association with Steel Plants, where it was involved in coke ovens and
chemical byproduct recovery.
• Refineries & petro-chemical
• Long distance Pipelines
• LNG/ LPG Terminals
• Ocean Engineering
• CNG Terminals
4. Metallurgy :
MECON has been directly involved in the installation of practically all the
integrated steel plants in India.
Over 4 decades of experience in the complete spectrum of "Steel making" puts MECON
in a position of great strength in this sector - right from coal carbonization to
blast furnaces for Iron making to Steel to continuous casting to a variety of
rolling mills and processing lines to chemical by-product recovery.
MECON has played a pioneering role in ushering in the first gas based direct
reduction plant of about 0.9 million tone capacity.
Its services range across the following sections -
a) Ferrous
o Iron making
o Steel making
o Coal & Coke
o Coal By products

b) Finishing Zone
o Rolling Mills And Processing Lines
o Mint Projects
Refractories plant, Bhilai
Steel plant
c) Aluminium, Copper, Lead & Zinc
o Aluminium, Copper, Lead and Zinc.

d) Specialized Services
o Corrosion Protection (including Cathodic Protection)
o Powder Metallurgy

5. Specialized Areas :
MECON's expertise spans a number of fields related to Metallurgy, Oil and Gas,
Energy & Environment and Infrastructure.
These are -
• Chemicals
• Defense
• Fire Protection
• General Manufacturing Shops
• Health
• Industrial Automation
• Information Technology
• Inspection
• Instrumentation & Control
• ISO 9001/ ISO 14001
• Procurement
• Structural Steel
• Telecommunication
• Training

FINANCIAL STATEMENT ANALYSIS

FINANCIAL SATEMENT ANALYSIS :

“Financial statement analysis is a process of evaluating the relationship between
component parts of a financial statement to obtain a better understanding of a
firm’s position and performance.”

-- Metcalf and Titrad

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 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 the company 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.

ANALYSIS PROCEDURE:
The analysis of financial statement involves following procedure:
 First of all the depth objective and extent of analysis will be determined
by the analyst. The determination of these basic facts determines the scope of
analysis, tools and data of how many years are required.
 Before analyzing the data it is necessary for the analyst to go through the
various financial statements of the particular firm.
 The analyst should collect all important information from the management of
the company that are required while analyzing the data.
 Before starting the analysis of the data, all financial statements should be
arranged according to the convenience of the analyst.
 Now the actual analysis is made. For analysis any of the tools of financial
statement analysis may be used.
 After analysis interpretation is made and the inferences drawn from the
analysis may be used.

NEED OF STUDY:
The analysis and interpretation of financial statement is an important accounting
activity. The end users of business financial statements are interested in these
statements primarily as an aid to determine the financial position and the result
of the operations. Since the MECON LIMITED is one of the leading company in the
field of consultancy and engineering services providing. Thus various transactions
occur in order to maintain the financial soundness of the company, thus the
financial position of the company need to be predicted correctly. The need arises
to conduct this study is to diagnose the information contained in the financial
statement so as to judge the profitability and the financial soundness of the
MECON LIMITED.

OBJECTIVE OF THE STUDY

1. To estimate the earning of the MECON LIMITED.
2. To gauge the financial position and financial performance of the MECON Ltd.
3. To determine the long-term liquidity of the funds as well as solvency.
4. To decide about the future capacity of the MECON Ltd.
5. To decide about the future prospects of the firm.
6. To give some conclusions and if necessary to offer suitable suggestion for
the financial performance in the inadequacies highlighted by the study.
LIMITATIONS OF THE STUDY:
The study conducted has few limitations some of which are:
1. The study has been conducted in the short period of time (2 weeks).
2. The study is based on the analysis of 6 years data.
3. The study is based on the data presented in the annual reports of MECON Ltd.
4. The price level changes are not considered.
5. There may be some fractional difference in calculations.

RESEARCH METHODOLOGY
SOURCES OF DATA
The sources of data to conduct this study mainly include primary data and
secondary data.
PRIMARY DATA
1. The information gathered through discussion held with the executives of the
finance department of the MECON Ltd.

SECONDARY DATA
1. Data collected from the annual report of MECON Ltd.
2. Data collected from the published report of MECON Ltd.
3. Articles collected from official website of MECON Ltd.

The data collected from the above mentioned sources will be processed, analyzed,
interpreted and presented in the study.

METHODOLOGY USED
1. TYPES OF FINANCIAL STATEMENT ADOPTED
Following two types of financial statements are adopted in analyzing the firm’s
financial position.
a) BALANCE SHEET
b) INCOME STATEMENT

2. TYPES OF FINANCIAL STATEMENT ANALYSIS

The financial statements are analyzed based on two basic analysis :
a) HORIZONTAL ANALYSIS – In horizontal analysis we use comparative statements
and trend analysis.
b) VERTICAL ANALYSIS- In vertical analysis we use common size statement and
financial ratios.

3. TOOLS USED FOR FINANCIAL STATEMENT ANALYSIS

Following financial analysis tools are used in order to interpret the financial
position of the firm.
• RATIO ANALYSIS
• TREND ANALYSIS
• COMPARATIVE ANALYSIS
• COMMONSIZE ANALYSIS

RATIO ANALYSIS
“Ratio analysis of financial statement is 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 series of statements.”

-- Myers

The ratio analysis is a tool which is very useful for individuals to instantly
assess a company or industry by making two basic types of comparisons with the
help of the financial statement of the company. First, the analyst can compare a
present ratio with past ratios for the organization to determine if there has been
an improvement or deterioration or no change over time. Second, the ratios of one
organization may be compared with similar organizations or with industry averages
at the same point in time. This is a type of "benchmarking" so that one may
determine whether the organization is "average" in performance or doing better or
worse than others. For the professional, conducting such in-depth analyses is
critical, allowing an analyst to make an informed business or investment decision.
Ratio analysis can reveal much about an industry. However, there are several
points to keep in mind about ratios. First, financial ratios are "flags"
indicating areas of strength or weakness. One or even several ratios might be
misleading, but when combined with other knowledge of an industry, ratio analysis
can tell much about that industry. Second, there is no single correct value for a
ratio. The observation that the value of a particular ratio is too high, too low,
or just right depends on the perspective of the analyst. Third, a financial ratio
is meaningful only when it is compared with some standard, such as another
industry trend, ratio trend, a ratio trend for the specific industry being
analyzed.
In trend analysis, industry ratios are compared over time, typically years. Year-
to-year comparisons can highlight trends and point up the need for action. Trend
analysis works best with five years of ratios.
Advantages and Uses of Ratio Analysis
The ratio analysis is generally used people to workout a particular financial
characteristic of the company in which they are interested. Ratio analysis helps
the various groups in different manner some them are as:-
1. To workout the profitability: Accounting ratios help to measure the
profitability of the business.
2. To workout the solvency: With the help of solvency ratio, solvency of the
company can be measured. These ratios show the relationship between the
liabilities and assets.
3. Helpful in analysis of financial statement: It helps the outsiders just like
creditors, shareholders, debenture holders, bankers to know about the
profitability and ability of the company to pay them interest and dividend etc.
4. Helpful in comparative analysis of the performance: It determines the
performance of the company compared to the previous years.
5. To simplify the accounting information: Accounting ratios are very useful
as they briefly summarize the result of detailed and complicated computations.
6. To workout the operating efficiency: It helps to workout the operating
efficiency of the company with help of various turnover ratios.
7. To workout short-term financial position: Ratio helps to workout the short-
term financial position of the company with help of the liquidity ratios.
8. Helpful for forecasting purpose: Accounting ratios indicate the trend of the
business. The trend is useful for estimating future and preparing the budget.
Limitations of Ratio Analysis:
In spite of many advantages, there are certain limitations of the ratio analysis
techniques and they should be kept in mind while using them in interpreting
financial statements. The following are the main limitations of the accounting
ratios:
1. Limited comparability: Different firms apply different accounting policies.
Therefore the ratio of one firm cannot also be compared with the ratio of other
firm. Some firms may value the closing stocks on LIFO basis while some other firm
may value on FIFO basis. Similarly there may be difference in providing the
depreciation of the fixed assets or certain of provisions for doubtful debts etc.
2. False result: Accounting ratios are based on data drawn from accounting
records. In case that the data is correct, then only the ratio is correct. For
example, valuation of stock is based on very high price, the profits of the
concern will be inflated and it will indicate a wrong financial position. The
data, therefore must be absolutely correct.
3. Effect of price level changes: Price level changes often make the comparison
of figures difficult over the period of time.
4. Qualitative factors are ignored: Ratio analysis is a technique of
quantitative analysis and thus, ignores the qualitative factors, which may be
important in decision making. For example, average collection period may be equal
to standard credit period, but debtors may be in the list of doubtful debts, which
is not disclosed by ratio analysis.
5. Effect of window dressing: In order to cover up their bad financial position
some company resort to window dressing.
6. Costly technique: Ratio analysis is a costly technique and can be used by
big business houses. Small business units are not able to afford it.
7. Misleading result: In the absence of absolute data, the result may be
misleading. For example, the gross profit of two firms is 25%. Whereas the profit
earned by one is Rs. 5,000 and sales are Rs. 20,000 and profit earned by the other
one is Rs. 10,00,000 and sales are 40,00,000. Even the profitability of the two
firms is same but the magnitude of their business is quite different.
8. Absence of standard university accepted terminology: There are no standard
ratios, which are universally accepted for comparison purposes.

On the basis of the purposes of exploration, ratio can be classified into four
broad groups.
TYPES OF RATIO:
1. PROFITABILTY RATIO:-
Profitability ratios measure the firm's use of its assets and control of its
expenses to generate an acceptable rate of return.
a) Profit margin:
Profit margin is also called – Return on sales, Net Margin, Net profit margin or
Net Profit Ratio, all refer to a measure of profitability. It is calculated using
a formula and written as a percentage or a number.
 PROFIT MARGIN = NET INCOME / SALES
The profit margin is mostly used for internal comparison. It is difficult to
accurately compare the net profit ratio for different entities. Individual
businesses' operating and financing arrangements vary so much that different
entities are bound to have different levels of expenditure, so that comparison of
one with another can have little meaning. A low profit margin indicates a low
margin of safety: higher risk that a decline in sales will erase profits and
result in a net loss.

b) Gross margin:
Gross margin is also known as Gross profit margin or Gross Profit Rate can be
defined as the amount of contribution to the business enterprise, after paying for
direct-fixed and direct-variable unit costs, required to cover overheads (fixed
commitments) and provide a buffer for unknown items. It expresses the relationship
between gross profit and sales revenue.
It can be expressed in absolute terms:
Gross Profit = Revenue − Cost of Goods Sold
As the ratio of gross profit to sales revenue, usually in the form of a
percentage:
GROSS MARGIN PERCENTAGE = (GROSS PROFIT) * 100
REVENUE
Cost of goods sold includes variable and fixed costs directly linked to the
product, such as material and labor. It does not include indirect fixed costs like
office expenses, rent, administrative costs, etc.
Higher gross margins for a manufacturer reflect greater efficiency in turning raw
materials into income. For a retailer it will be their markup over wholesale.

c) Return on Equity:
Return on Equity (ROE), which is also known as Return on average common equity or
return on net worth, measures the rate of return on the ownership interest
(shareholders' equity) of the common stock owners. ROE is viewed as one of the
most important financial ratios. It measures a firm's efficiency at generating
profits from every dollar of net assets (assets minus liabilities), and shows how
well a company uses investment dollars to generate earnings growth. ROE is equal
to a fiscal year's net income (after preferred stock dividends but before common
stock dividends) divided by total equity (excluding preferred shares), expressed
as a percentage.
ROE = NET INCOME / TOTAL EQUITY
d) Operating Income Margin:
Operating Income Margin is also known as Operating profit margin. It is a
measurement of what proportion of a company's revenue is left over, before taxes
and other indirect costs (such as rent, bonus, interest etc.), after paying for
variable costs of production as wages, raw materials, etc. A good operating margin
is needed for a company to be able to pay for its fixed costs, such as interest on
debt.
OPERATING INCOME MARGIN =
OPERATING INCOME / NET SALES

e) Return on Asset (ROA):

Return on assets is an indicator of how profitable a company is before leverage,
and is compared with companies in the same industry.
RETURN ON ASSET = PROFIT MARGIN * ASSET TURNOVER
Since profit margin is the ratio of net income to sales whereas asset turnover is
the ratio of sales to total asset. Therefore return on asset may also be
represented as -
RETURN ON ASSET = NET INCOME / TOTAL ASSET
Since the figure for total assets of the company depends on the carrying value of
the assets, some caution is required for companies whose carrying value may not
correspond to the actual market value. Return on assets is a common figure used
for comparing performance of financial institutions (such as banks), because the
majority of their assets will have a carrying value that is close to their actual
market value. Return on assets is not useful for comparisons between industries
because of factors of scale and peculiar capital requirements (such as reserve
requirements in the insurance and banking industries

2. LIQUIDITY RATIO:-
Liquidity ratios measure the availability of cash to pay debt.
a) Current ratio:
The current ratio is a financial ratio that measures whether or not a firm has
enough resources to pay its debts over the next 12 months. It compares a firm's
current assets to its current liabilities. It is expressed as follows-
CURRENT RATIO = CURRENT ASSET / CURRENT LIABILITIES
The current ratio is an indication of a firm's market liquidity and ability to
meet creditor's demands. Acceptable current ratios vary from industry to industry.
If a company's current assets are in this range, then it is generally considered
to have good short-term financial strength. If current liabilities exceed current
assets (the current ratio is below 1), then the company may have problems meeting
its short-term obligations. If the current ratio is too high, then the company may
not be efficiently using its current assets
b) Acid-test or Quick ratio or Liquidity ratio:
The Acid-test or quick ratio measures the ability of a company to use its near
cash or quick assets to immediately extinguish or retire its current liabilities.
It represented as:
QUICK RATIO OR ACID-TEST RATIO OR LIQUIDITY RATIO=
QUIK ASSET
CURRENT LAIBILITIES
Quick assets include those current assets that presumably can be quickly converted
to cash at close to their book values. Such items are cash, cash equivalents such
as marketable securities, and some accounts receivable. This ratio indicates a
firm's capacity to maintain operations as usual with current cash or near cash
reserves in bad periods. As such, this ratio implies a liquidation approach and
does not recognize the revolving nature of current assets and liabilities. The
ratio compares a company's cash and short-term investments to the financial
liabilities the company is expected to incur within a year's time.
Therefore, Acid-test ratio or Quick ratio or Liquidity ratio may also be
represented as
ACID-TEST RATIO or QUICK RATIO or LIQUIDITY RATIO =
[CURRENT ASSET – (INVENTORES + PREPAYMENTS)]
CURRENT LIABILITIES
c) Working Capital:
Working capital compares current assets to current liabilities, and serves as the
liquid reserve available to satisfy contingencies and uncertainties. A high
working capital balance is mandated if the entity is unable to borrow on short
notice. The ratio indicates the short-term solvency of a business and in
determining if a firm can pay its current liabilities when due.
WORKING CAPITAL=
CURRENT ASSET – CURRENT LIABILITIES
d) Cash Ratio:
Indicates a conservative view of liquidity such as when a company has pledged its
receivables and its inventory, or the analyst suspect’s severe liquidity problems
with inventory and receivables.
CASH RATIO =
CASH EQUIVALENT + MARKETABLE SECURITIES
CURRENT LIABILITIES

3. EFFICIENCY RATIO:
Efficiency ratios measure the effectiveness of the firm’s use of resources.
Efficiency ratio is also known as activity ratio or turnover ratio.
a) Total Asset Turnover:
Asset turnover is a financial ratio that measures the efficiency of a company's
use of its assets in generating sales revenue or sales income to the company.
TOTAL ASSET TURNOVER = NET SALES (OR REVENUE)
AVERAGE TOTAL ASSET
Asset turnover measures a firm's efficiency at using its assets in generating
sales or revenue - the higher the number the better is the performance. It also
indicates pricing strategy: companies with low profit margins tend to have high
asset turnover, while those with high profit margins have low asset turnover.
b) Cash Turnover:
Cash Turnover measures how effective a company is utilizing its cash.
CASH TURNOVER = NET SALES
CASH
c) Working Capital Turnover:
Working capital turnover ratio is also known as Sales to Working Capital Ratio. It
indicates the turnover in the working capital per year. A low ratio indicates
inefficiency, while a high level implies that the company’s working capital is
working too hard.
WORKING CAPITAL TURNOVER = NET SALES
AVERAGE WORKING CAPITAL

4. LEVERAGE RATIO:
Debt ratios measure the firm's ability to repay long-term debt. Debt ratios
measure financial leverage.
a) Debt To Asset Ratio:
Debt to Asset Ratio is a financial ratio that indicates the percentage of a
company's assets is provided via debt. It is the ratio of total debt and total
assets. As total debt the company is having is the sum of total current
liabilities and long-term liabilities and total asset includes the sum of current
asset, fixed asset, and other asset such as ‘goodwill’. Therefore debt ratio is
represented as:
DEBT TO ASSET RATIO = TOTAL DEBT / TOTAL ASSET
or, DEBT TO ASSET RATIO = TOTAL LIABILITY / TOTAL ASSET
b) Debt TO Equity Ratio:
The debt to equity ratio (D/E) is a financial ratio indicating the relative
proportion of equity and debt used to finance a company's assets. It is equal to
total debt divided by shareholders' equity. The two components are often taken
from the firm's balance sheet or statement of financial position (so-called book
value), but the ratio may also be calculated using market values for both, if the
company's debt and equity are publicly traded, or using a combination of book
value for debt and market value for equity. Preferred shares can be considered
part of debt or equity. Therefore debt to equity is

represented as:
DEBT TO EQUITY = TOTAL DEBT (TOTAL LIABILITY)
TOTAL EQUITY
c) Long-term Debt To Net Working Capital Ratio:
Long-term debt to Net working capital ratio provides insight into the ability to
pay long term debt from current assets after paying current liabilities.
LONG-TERM DEBT TO NET WORKING CAPITAL RATIO =
LONG-TERM DEBT
CURRENT ASSET – CURRENT LIABILITIES

Analysis of financial ratios:

The analysis of ratios is done basically in three ways:
1. Time-Series Analysis: This is the easiest way to evaluate the performance of
the firm in which we compare the present ratio of the company with the past
ratios. As we compare the financial ratios over a period of time, therefore it
this process is known as time-series analysis.
2. Cross –Sectional analysis: This is another way to analyze the financial ratios
by comparing the ratio of firm with another firm of the same industry. This
process of analysis is also known as inter-firm analysis.
3. Industry Analysis: Through industry analysis, the ratio of the firm is compared
with the average ratio of the whole industry, to judge the financial situation of
the firm.

PROFIT MARGIN

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 NET INCOME -7082.95 -1072.23 1073.41 1611.66 2038.15

3331.78

2 SALES 28349.51 27114.60 17386.33 25379.08 36561.56

46621.37

3 PROFIT MARGIN RATIO -0.250 -0.040 0.062 0.064 0.056 0.071

ANALYSIS: Profit margin ratio is after –tax profit a company generates for each
rupee of revenue. Therefore higher profit margin ratio is preferred. Here we see
that in the company was facing a bad time in 2003 & 2004 as the profit margin
ratio was negative. But in 2005 it improved and remained almost constant in 2006.
Whereas in 2007 again it decreased slightly and then after in the next year it
improved and reached to 0.071but yet the profit margin is not up to satisfaction
level.
GROSS MARGIN PERCENTAGE

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 GROSS MARGIN -8039.90 -982.95 1301.46 2147.41

2645.69 4693.43

2 REVENUE 28349.51 27114.60 17386.33 25379.08

36,561.56 46,621.37

3 GROSS MARGIN %age -28.36 -3.63 7.49 8.46 7.24 10.07

ANALYSIS: Gross margin percentage is the profit calculated on the revenue. Here we
see that the gross margin percentage of the MECON LTD. was negative in magnitude
in the year 2003 and 2004. Which shows that the bad financial position of the
company. But later in the year 2005 it improved its condition; with a slight
increase in year 2006 again there is slight deep in ratio in the year 2007. Then
after in 2008 the economic situation of the company has become better as far as
this period is consult.
RETURN ON EQUITY

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 NET INCOME -7082.95 -1072.23 1073.41 1611.66 2038.15

3331.78

2 TOTAL EQUITY 241.84 241.84 241.84 241.84

4013.84 10313.84

3 RETURN ON EQUITY -29.288 -4.434 4.439 6.664 0.508 0.323

ANALYSIS: As ROE measures the profitability of equity funds invested in the firm
and reveals how profitability of owner’s funds have been utilized by the firm. It
also indicates the profitability and potential growth. Here we see that in 2003 &
2004 the company had not better growth in terms of return on equity as but after
that the growth has increased for year 2005 & 2006 with increasing rate but in
year 2007 & 2008 it again has shown a rapid decline in the graph i.e., again low
potential growth during these period.
RETURN ON ASSET
 (Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 NET INCOME -7082.95 -1072.23 1073.41 1611.66 2038.15

3331.78

2 TOTAL ASSET 37419.54 32935.11 35551.58 32653.95 37992.41

68412.31

3 RETURN ON ASSET -0.189 -0.033 0.030 0.049 0.054 0.049

ANALYSIS: Return on Asset ratio measures the profitability of the firm in terms of
assets employed in the firm. Here for the company the ROA was least in the year
2003 and also not good in 2004. Afterwards it has improved every year but rate of
improvement is very slow. Again in 2008, there is a slight decrease in the ROA.
But overall the return on asset ratio is remaining constant from year 2006 to
2008.
CURRENT RATIO

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 CURRENT ASSETS 30613.21 26324.92 28411.74 25844.48

31052.46 61239.31

2 CURRENT LIABILITES 44898.96 34020.67 30966.16 26746.58

29500.74 52204.05

3 CURRENT RATIO 0.682 0.774 0.918 0.966 1.053 1.173

ANALYSIS: Looking at the Current ratio of last 6 years of Mecon Ltd. we see that
there is continuous increase. As the ideal value of the current ratio is
considered to be 2:1 for any firm, but Mecon have reached the figure of 1.17:1
only in the last financial year, so, the performance of the company is not up to
mark but as there is constant increase in the current ratio every year, on the
basis of that we can predict that it will attain a better height in the future.

QUICK RATIO

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 QUICK ASSET 30083.33 25976.38 28122.84 25378.94 30030.42

60157.15

2 CURRENT LAIBILITIES 44898.96 34020.67 30966.16 26746.58

29500.74 52204.05

3 QUICK RATIO 0.670 0.764 0.908 0.949 1.018 1.152

ANALYSIS: The quick ratio is much more exacting measure than the current ratio to
pay-off the debt of the company. A quick ratio of 1:1 is considered to be
satisfactory. Here we see that the quick ratio was below 1 in the year 2003 but
constantly it has improved and in 2007 & 2008 it has achieved the satisfactory
level, which is a good indication for the company and shows better liquidity
strength of the company.

WORKING CAPITAL

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 CURRENT ASSETS 30613.21 26324.92 28411.74 25844.48

31052.46 61239.31

2 CURRENT LIABILITES 44898.96 34020.67 30966.16

26746.58 29500.74 52204.05

3 WORKING CAPITAL -14285.75 -7695.75 -2554.42 -902.10

1551.72 9035.26

ANALYSIS: Working capital serves the liquidity reserves available to satisfy the
uncertainty. It shows the capacity of the firm to pay its current liability and it
is mandated if the company is unable to borrow on short notice. As from the year
2003 to 2006,s the working capital is negative in magnitude which shows that the
company was not in a good position but in 2007 it has not only improved its
position but also in 2008 its working capital has seen a tremendous growth of Rs.
75 crore which states that the performance of the company has become stronger.
 CASH RATIO

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 CASH EQUIVALENT 7747.89 7750.46 8986.92 12831.91

16004.43 32920.07

2 CURRENT LIABILITES 44898.96 34020.67 30966.16 26746.58

29500.74 52204.05

3 CASH RATIO 0.173 0.228 0.290 0.480 0.543 0.631

ANALYSIS: The cash ratio considers only the absolute liquidity available with the
firm. It tests short-term liquidity of the firm. Higher the ratio will be better
the economic situation will be of the firm. Here we see that in 2003 to 2005 there
was increase in the ratio but rate of increase was slow, but in 2006 it increased
suddenly at a higher rate and is continuously increasing every year, which means
cash in the company is increasing every year.

ASSET TURNOVER

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 SALES 28,349.51 27,114.60 17,386.33 25,379.08 36,561.56

46,621.37

2 TOTAL ASSET 37,419.54 32,935.11 35,551.58 32,653.95 37,992.41

59,377.05

3 ASSET TURNOVER 0.758 0.823 0.489

0.777 0.962 0.785
ANALYSIS: Asset turnover ratio measures how effectively the company converts its
assets into sales. We see that the performance of the company improved in 2004
compared to 2003 but in 2005 the performance gets worse. Again it improves its
performance in 2006 and reached at a good level in the year 2007 but again it
could not maintain this growth and it declines in 2008 and reaches almost the same
level as in the year 2003.
WORKING CAPITAL
TURNOVER

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 SALES 28,349.51 27,114.60 17,386.33 25,379.08 36,561.56

46,621.37

2 WORKING CAPITAL -14285.75 -7695.75 -2554.42 -902.10

1551.72 9035.26

3 SALES TO WORKING (1.98) (3.52) (6.81)

(28.13) 23.56 5.16
CAPITAL
ANALYSIS: Working capital turnover ratio evaluates the efficiency with which the
firm manages and utilizes its working capital. A low working capital turnover
ratio indicates the inefficiency of the firm. We can see that the working capital
turnover ratio is decreasing continuously from the year 2003 to 2005 then it face
a tremendous decline in 2006 then after it improved at a very good rate but could
not maintain this and again declines in 2008. Therefore we see that the company is
not in a very good position as far as working capital turnover ratio is concerned.
DEBT TO ASSET RATIO

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 TOTAL DEBT 6758.84 2388.31 5747.31 3643.15 1669.95

107.11
(LONG TERM)
2 TOTAL ASSET 37419.54 32935.11 35551.58 32653.95 37992.41
68412.31

3 DEBT TO ASSET 0.181 0.073 0.162 0.112 0.044 0.002

ANALYSIS: Debt to asset ratio indicates the ability of the company to pay-back the
liabilities of the company. Less ratio value indicates that the company is
financially strong to pay-back the debt. Here from the data we see that in the
year 2003 the financial position was not compared to rest of the years. The ratio
decreased in 2004 but again it rose in 2005 but later on it has decreased
continuously and the ratio reached to 0.002 in the year 2008 which clearly shows
that the company has emerged financially very strong.
DEBT -EQUITY RATIO

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 TOTAL DEBT 5864.25 20018.14 20232.97 20669.01 17975.7

17018.06
(LONG TERM)
2 TOTAL EQUITY 241.84 241.84 241.84 241.84
4013.84 10313.84

3 DEBT TO EQUITY RATIO 24.248 82.774 83.663 85.466

4.478 1.650

ANALYSIS: This ratio is often referred in capital structure decision as well as

legislative capital decisions. Lenders also look for this ratio, as a high debt-
equity ratio means less protection for the creditors. Here we see that this ratio
24.248 in 2003 whereas in 2004 it had increased drastically and reached the value
of 82 and remained almost constant for another next two years but after that in
the year 2007 it reduced tremendously to 4.47 and came down to 1.65 in 2008. It
shows the position of company was bad from year 2003 to 2006 but became good in
2007 onwards.
LONG-TERM DEBT TO WORKING CAPITAL

(Rupees in Lakhs)
S.I PARTICULARS 2003 2004 2005 2006 2007 2008

1 TOTAL DEBT 6758.84 2388.31 5747.31 3643.15 1669.95

107.11
(LONG TERM)
2 WORKING CAPITAL -14285.75 -7695.75 -2554.42 -902.10
1551.72 9035.26

3 LONG-TERM DEBT TO -0.473 -0.310 -2.250 -4.039

1.076 0.012
WORKING CAPITAL

ANALYSIS: Long-term debt to Net working capital ratio provides insight into the
ability to pay long term debt from current assets after paying current
liabilities. As the current asset of the company was less than the current
liability in the years 2003 to 2006, therefore the graph shows the negative trend
which means the inability of the company to pay its long-term debt from working
capital. But in the year 2007 it improved and in the year 2008 it reached to 0.012
which shows the strong position of the company.
CONCLUSION

Finding and suggestion: