CHAPTER IV

DATA ANALYSIS AND INTERPRETATION

INTRODUCTION :

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 P&L account. If financial statements are properly analyzed
and interpreted, that can provide valuable insight into a firms performance.
Analysis of financial statements is in the interest of the lender both short-term as
well as long term investors, security analyst, managers, and others. It is helpful in
assessing corporate excellence judging credit worthiness, forecasting fund ratings,
bankruptcy, and assessing market risk.
Financial statement analysis may be done for a variety of purposes, which
may range from a simple analysis of short-term liquidity position of the firm to
comprehensive assessment of the strengths and weakness of the firm in various
areas.
Ratio analysis is the most powerful and commonly used technique for
financial analysis. Ratio analysis is one of the techniques of financial analysis
where ratios are used as a yardstick for evaluating the financial condition and
performance of the firm. The ratio analysis involves comparison for a useful
interpretation of the financial statements. A single ratio itself does not indicate

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favorable or unfavorable condition. It should be compared with some standard.

Here I used past ratios method to compare the performance of the company.

Standards of comparison may consist of

Past ratios- i.e., ratios calculated from the past financial statements of the
same firm.
Competitors ratios- i.e., ratios of some selected firms, especially the most
progressive and successful competitor at the same point in time.
Industry ratios- i.e., ratios of the industry to which the firm belongs; and
Projected ratios- i.e., ratios developed using the projected, or Performa,
financial statements of the same firm.
Note : In this project the comparison is made with PAST RATIOS OF THE
COMPANY and which is easiest way to evaluate the companies performance and
the change reflects whether the companys performance has improved,
deteriorated or remained constant over period of time.
4.1 RATIO ANALYSIS:
MEANING
Financial Analysis is the process of identifying the financial strength and
weakness of the firm by properly establishing relationship between the items of
balance sheet and profit and loss account. In other words, financial analysis is the

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process of evaluating the relationship between the components of the financial

statement to get better understanding of firms position and performance.

Financial Interpretation means explaining the significance of financial

data simplified by way of financial analysis.
Ratio Analysis/Accounting Ratios
Financial ratio analysis is a fascinating topic to study because it can teach
us so much about accounts and businesses. When we use ratio analysis we can
work out how profitable a business is, we can tell if it has enough money to pay its
bills and we can even tell whether its shareholders should be happy is defined as
systematic use of ratios to interpret the financial statement so that strength &
weakness of the firm as well as historical performance & current financial
condition can be determined.
This relationship can be expressed as
1] Percentages.
2] Fractions.
Ratio analysis can also help us to check whether a business is doing better
this year than it was last year; and it can tell us if our business is doing better or
worse than other businesses doing and selling the same things.
What do we want ratio analysis to tell us?

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The key question in ratio analysis isnt only to get the right answer: for
example, to be able to say that a businesss profit is 10% of turnover. We have to
start working on ratio analysis with the following question in our heads:
What are we trying to find out?

Isnt this just blether, wont the exam just ask me to tell them that profit is
10% of turnover? Well, we have to understand what it means to say that profit is
10% of turnover.
We can use ratio analysis to try to tell us whether the business
1. is profitable
2. has enough money to pay its bills
3. could be paying its employees higher wages
4. is paying its share of tax
5. is using its assets efficiently
6. has a gearing problem
7. is a candidate for being bought by another company or investor
And more, once we have decided what we want to know then we can decide
which ratios we need to use to answer the question or solve the problem facing us.

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 Lets look at the ratios we can use to answer these questions.

The Ratios
We can simply make a list of the ratios we can use here but its much better
to put them into different categories.
The categories are:

1.

Profitability: has the business made a good profit compared to its

turnover?
1. Return Ratios: compound to its assets and capital employed, has the

business made a good profit?

2. Liquidity: does the business have enough money to pay its bills?
3. Asset Usage or Activity: how has the business used its fixed and current

assets?
4. Gearing: does the company have a lot of debt or is it financed mainly by

shares?

Users of Accounting Information

Now we know the kinds of questions we need to ask and we know the

ratios available to us, we need to know who might ask all of these questions! The
list of categories of readers and users of accounts includes the following people
and groups of people:
Investors
Lenders

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 Managers of the organization

Employees
Suppliers and other trade creditors
Customers
Governments and their agencies
Pubilc
Financial analysts
Environmental groups
Researchers: both academic and professional
What do the Users of Accounts Need to Know?
The users of accounts that we have listed will to know the sorts of things
we can see in the table below: this is not necessarily everything they will ever need
to know, but it is a starting point for us to think about the different needs and
questions of different users.

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Table 4.1 : Users of Accounts Information

Investors

To help them determine whether they should buy shares in the

business, hold on to the shares they already own or sell the shares
they already own. They also want to assess the ability of the
business to pay dividends.

Lenders

To determine whether their loans and interest will be paid when due

Managers

Might need segmental and total information to see how they fit into
the overall picture

Employees

Information about the stability and profitability of their employers

to assess the ability of the business to provide remuneration,
retirement benefits and employment opportunities

Suppliers and
other trade
creditors

Businesses supplying goods and materials to other businesses will

read their accounts to see that they dont have problems: after all,
any supplier wants to know if his customers are going to pay their
bills!

Customers

The continuance of a business, especially when they have a long

term involvement with, or are dependant on, the business

Governments and
their agencies

The allocation of resources and, therefore, the activities of business.

To regulate the activities of business, determine taxation policies
and as the basis for national income and similar statistics

Local community

Financial statements may assist the public by providing information

about the trends and recent developments in the prosperity of the
business and the range of its activities as they affect their area

Financial analysis

They need to know, for example, the accounting concepts employed

for inventories, depreciation, bad debts and so on

Environment al
groups

Many organizations now publish reports specifically aimed at

informing us about how they are working to keep their environment
clean.

Researchers

Researchers demands cover a very wide range of lines of enquiry

ranging from detailed statistical analysis of the income statements

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and balance sheet data extending over many years to the qualitative
analysis of the wording of the statements

4.1.1 COMPONENTS OF WORKING CAPITAL :

The components of working capital are:
Cash Management
Receivables Management
Inventory Management
I. CASH MANAGEMENT:
Cash is the important current asset for the operation of the business. Cash is
the basic input needed to keep the business running on a continuous basis; it is
also the ultimate output expected to be realized by selling the service or product
manufactured by the firm. The firm should keep sufficient cash, neither more nor
less.
Cash is the liquid form of an asset. It is the ready money available in the firm
or with the business, essential for its operations. A firm needs the cash for the
following three purposes:
a) The Transaction Motive:
The firm should keep cash to conduct its business in the ordinary course.
The firm needs cash primarily to make payment for purchases, sales, wages
and salaries etc.
b) The Precautionary Motive:

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The firm should keep cash to meet contingencies in future. It provides a

cushion or buffer to withstand some unexpected emergency.

C)

The Speculative Motive:

To tap profits from opportunities arising from fluctuations in commodity

prices, security prices, interest rates etc. the company with surplus cash is in
a better position to exploit such situations.
II. RECEIVABLES MANAGEMENT
Receivable represents amounts owed to the firm as a result of sale of goods
or services on the ordinary course of business. These are claims of the firm against
its customers and form part of its current assets. These receivables are carried for
the customers. The period of credit and extent of receivables depends upon the
credit policy followed by the firm. The main purpose of maintaining or investing
in receivables is to meet competitors, to increase sales, and to maintain a cordial
relationship with the clients.
Receivables management is the process of making decisions relating to
investment in trade debtors. However, at the same time, investment in this current
asset involves cost considerations also. Therefore there is always a risk of bad
debts too.

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III. INVENTORY MANAGEMENT

BACKGROUND OF THE STUDY OF INVENTORY MANAGEMENT:
Every enterprise needs inventory for smooth running of its activities. It
serves as a link between the production and the distribution processes. There is
generally a time lag, between the recognition of a need and its fulfillment. The
greater the time lag, the higher the requirements of inventory. It also provides a
cushion for future price fluctuation.
The investment in inventories constitutes the most significant part of
current assets/working capital in most of the undertakings. Thus it is very essential
to have a proper control and management

of inventories. The purpose of

inventory is to ensure availability of materials in sufficient quantity as and when

required and also to minimize investment in inventories.
Inventories represent the second largest asset category for manufacturing
companies. The proportion of inventories to total assets generally varies between
15 and 30%.
Decisions relating to inventories are taken primarily by executives in
production, purchasing and marketing departments. Hence the importance of
inventory management cannot be overemphasized.

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What are inventories?

Every one, be it a firm, or an establishment or an individual, is familiar with
the word stock because each of these carry some items to meet their requirements.
In trade and industry, the word stock, is called inventories.
Objectives of scientific inventory control system:
Service to the customers
Continuity of productive operations
Economy in purchasing
Reduction of risk of loss
Reduction of administrative workload
Administrative simplicity
A manufacturing firm generally carries following six major kinds of
inventories:
1. Raw materials
2. Work-in-progress
3. Finished goods
4. Tools
5. Supplies
6. Machinery spares

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1. Raw materials:
Raw materials form a major input into the organization. They are required
to carry out production activities uninterruptedly. The quantity of raw
materials required will be determined by the rate of consumption and the
time required for replenishing the supplies. The factors like availability of
raw materials and Government regulations etc., too affect the stock of raw
materials.
2. Work-in-progress:
The work-in-progress is the stage of stocks, which are in raw materials and
finished goods. The raw materials enter the process of manufacturing but
they are yet to attain a final shape of finished goods. The quantum of workin-progress depends upon the time taken in the manufacturing: the more
will be the amount of work-in-progress.

3. Finished goods:
These are the goods which are ready for the consumers. The stock of
finished goods provides a buffer between production and market. The

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purpose of maintaining inventory is to ensure proper supply of goods to

customers. In some concerns the production is undertaken on order basis, in

these concerns there will be need for finished goods. The need for finished
goods inventory will be more when production is undertaken in general
without waiting for specific orders.
4. Consumables:
These are materials which are needed to smoothen the process of
production These materials do not directly enter production but they act as
catalysts etc,. Consumables may be classified according to their
consumption and criticality, Generally, consumable stores do not create any
supply problem and form a small part of production. There can be instances
where these materials may account for much value than the raw materials.
The fuel oil may form a substantial part of cost.
5. Spares:
The consumption pattern of raw materials, consumables, finished goods are
different from that of spares. The stocking policy of spares is different from
industry to industry. Some industries like transport will require more spares
than order concerns. The costly spare parts like engines: maintenance parts,
etc,. are not discarded after use but rather they are kept in ready position for

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future use. All decisions about spares are based on financial cost of
inventory on such spares and the cost that may arise due to their nonavailability.

Why do we have inventories?

To gain economy in purchasing
To keep pace with changing market conditions
To satisfy demand during period of replenishment
To carry reserve stocks to avoid stock outs
To stabilize production
To prevent loss of sales
To satisfy other business constraints
Historical Perspective of Inventory Management:
The management and control of Inventory is a challenge to all organization
in any sector of the economy. The problem of Inventory does not confine them to
profit making big firms. The same type of problem is encounter by social and nonprofit organization too.
Inventory problems have been encountered by every society, but it was not
until the 20th century that the analytical techniques were developed to study them.
The initial impetus for analysis expectedly cones from manufacturing sector. It
was until after World War II that a concerted effort an risk and uncertainly aspects

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of inventory has made. In theory, inventory is an area of organized operation that

is well developed.
Material is a very important factor of production. It includes physical
commodities used to manufacture the final end product. It is the starting point
from which the first operation starts. It is inventories and does not get waste and

exhaust (unless it is deteriorated) with the passage of time as labor is

wasted that it can be purchased on varying quantities according to the
requirements of firm where as often Clements of cost like labor and other services
cannot be easily varied once they are established. Materials account for nearly
60% of cost of production as it is clear from an analysis of the financial statements
of larger number of private and public sector organization.
According to the Indian Association of material marketing 64 paisa in a
rupee is spent in materials by Indian Industries, 16 paisa on labor and the rest of
one rupee on spent on overheads, thus the importance of material control lies in
the fact that any savings made in the cost of materials will go a long way in
reducing cost of the production and improving the profitability of a concern.
Studies by experts in this field have highlighted the fact that if an
organization can affect 5% saving in material cost, it would be as good as the
increasing the production or sales by about 36%.

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Proper control of materials is necessary from the time orders for purchase
of materials is placed with suppliers until they have been consumed. The object of
material may be reduced in other words, efforts are to be made to reduce the cost
material when it is purchased, stored and used.

Meaning and Definition:

Several authors have defined the term inventory. The more popular of them
are, the term inventory includes Raw-materials, work-in progress, finished
products, spares and others in order to meet an unexpected demand or distribution
in the future.
It can be used to refer to the stock of raw materials unhand at particulars,
goods in process of manufacturing, finished products, merchandise, purchased for
relate and others like tangible assets measured and counted in connection with
financial records and accounting records, the reference may be the stock of goods
owned by an enterprise at a particular time.
Yet another definition is that the term includes the following categories of
times. Production inventories, MRO inventories, in process inventories and
finished goods inventories.

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Turnover/activity ratios of the company

Introduction:
The assessment of asset usage is important as it helps us to understand the
overall level of efficiency at which a business is performing. Turnover ratios are
employed to evaluate the efficiency with which the firm manages and utilizes its
assets. These ratios are called as activity ratios. It is called as turnover ratio

because they indicate the speed with which assets are being converted or turnover
into sales. Thus it involves the relationship between sales and assets. A proper
balance between sales and assets reflects the assets are managed well. Higher the
rate of rotation the greater will be the profitability.
Our basic ratios for this section are
Stock turnover, debtors turnover and creditors turnover help us to assess the
liquidity position as well as giving us detailed information about stock control and
credit control of the company.
Different turnover ratios:
1.
2.
3.
4.
5.
These

Inventory or stock turnover ratio

Debtors turnover ratio
Creditors turnover ratio
Current assets turnover ratio
Working capital turnover ratio
Activity Ratios are also called the Turnover ratios or Performance

ratios. A turnover ratio or an Activity ratio is a measure of movement and indicates

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as to how frequently an account has moved/turned over during a period it shows as

to how efficiently and effectively the assets of the firm are being utilized. The
activities ratios measure the effectiveness with which the firm uses its
resources. These ratios are usually calculated with reference to sales/cost of
goods sold and are expressed in terms of rates or times.
INVENTORY TURNOVER RATIO :
It indicates the efficiency of the firm in producing and selling it products. A
low ratio indicates that inventory does not sell fast and stable in the warehouse for
a long time. Where as high ratio is indicator of good inventory management for
judging inventory turnover ratio is ratio is good or bad it should be compared with
past and expected ratios. High ratio is also good from the view point of liquidity
and vice versa. Avg. Inventory is calculated by taking stock levels of raw
materials, working process and finished goods at the beginning of year & at the
end of the year & that is divided by two.
Formula:
Inventory turnover
ratio =

Cost of goods sold

Average inventory

Hence Avg. Inventory =

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Or

Sales
Closing Stock

(If there is no opening

stock)

Opening stock + Closing stock

2

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Table -4.2 Inventory turnover ratio

Years

Cost of goods
sold (Net sales )

Average inventory
(Closing stock)

Inventory
Turnover ratio

2005-06

85.95

39.25

2.19

2006-07

106.27

34.60

3.07

2007-08

115.85

32.34

3.58

2008-09

154.03

35.17

4.38

Fig.-4.1 Showing inventory turnover ratio

INTERPRETATION :
The ITR is increasing over the past few years indicating the companys
sound inventory policy. This result in minimizing of holding costs of inventory

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and also resulted in minimizing the funds blocked in inventory, at the same time it
also reduces the risk of loss of inventory due to theft, fire etc. and also minimizes
the loss which may occur due to obsolescence. Inventory turnover ratio signifies
the liquidity of the inventory. A high inventory ratio indicates brisk sales. Here we
see in the year of 2005-06 STR is less, increased in 2006-07, which shows the
sales are quick in that year compared to 2005-06. Again in 2007-08, it has been
increased to some extent but in 2008-09 it increased to greater extent.
INVENTORY CONVERSION PERIOD
Inventory period is the time lag between the purchase the purchase of raw
materials & sale of finished goods.
It includes:
Raw Materials Conversion Period
W-I-P Conversion Period
Finished Goods Conversion Period
Formula:
Inventory conversion period =

Number of days in a year

Inventory turnover ratio

Table -4.3 Inventory conversion period

Years
2005-06
2006-07
2007-08

No. of days in a
year
365
365
365

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Inventory
turnover ratio
2.19
3.07
3.58

Inventory
conversion Period
167
119
102
64

2008-09

365

4.38

83

Fig. 4.2 Showing Inventory conversion period

INTERPRETATION :
The ICP is decreasing over the past few years indicating the companys
sound inventory policy it indicates that companys inventory is moving quickly.
This results in minimizing of holding costs at the same time it also reduces
the risk of loss of inventory due to theft, fire etc And also minimizes the loss
which may occur due to obsolescence.
The above table and chart reveals that the inventory conversion period is
showing decreasing trend. From the year 2006-07 onwards it means it has
marginally improved. This signifies that the efficiency of the firm in producing
and selling has shown some improvement.

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Debtors Turnover Ratio (DTR)

Debtors constitute an important role in current assets. The quality of
debtors to great extent determines the firms liquidity. It indicates number of times
debtors are turned over during the year. Generally higher the value of debtors
turnover the more efficient is the management of debtors and at the same time
very high ratio implies firms inability due to lack of resources to sell on credit
there by losing sales and profits. Higher the ratio is better, since it indicate that
debts are being collected more promptly in general, short collection period is
preferable. Two ratios are used by financial analysts to great extent determines
firms liquidity. Two ratios are used by financial analysts to judge the liquidity of a
firm.
They are
1. Debtors turnover ratio, and
2. Debt collection period ratio.

Formula:
Debtors turnover ratio =

Net sales
Debtors

Table -4.4 Debtors Turnover ratio

Years

Net Sales

Debtors

Debtors
Turnover ratio

2005-06
2006-07
2007-08
2008-09

98.81
104.44
128.65
153.37

7.46
7.49
11.36
15.49

13.25
13.94
11.32
9.90

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Fig. 4.3 Showing Debtors Turnover ratio

INTERPRETATION :
. When we look at the graph the ratio is decreasing year after year. The
debtors turnover ratio is decreasing continuously in the past years. This puts a
question on the collection ability of the entity. The company has to review its
debtors policy and train the collection staff to improve its ability and skills in
collecting the amount. The company may also resort to some of the early
collection techniques like provide discount facilities for early payments, increasing
the interest rates for delaying the payments, also may fix the credit limits for each
debtor against the credit worthiness of the debtors.

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Debtors Collection Period (DCP)

Debtors collection period represents the average conversion period.
Debtors collection period is the average time taken to convert debtors into cash. It
can be calculated as follows,
Formula:
Debtors collection period=

Number of days in a year

Debtors turnover ratio

Table -4.5 Debtors Collection Period

Debtors turnover
ratio

Debtors
Collection Period
27.55

365

13.25
13.94
11.32

365

9.90

37

Year

No. of days in years

2005-06

365

2006-07

365

2007-08
2008-09

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26.18
32.24

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Fig. 4.4 Showing Debtors Collection Period

INTERPRETATION :
Debtors or Average collection period measures the quality of the debtors
since it measures the period with which the money is collected from them.

Debtors Collection Period ratio shows the increase in collection period in

2007-08 compare two last two years. Shorter the collection period implies prompt
payment of debtors.
It indicates the speed of their collection. Shorter the average collection
period, the better the trade credit management and better the liquidity of debtors,
as short collection period.
The debtors collection period is increasing, which is poor sign from the
companys point of view. It means the company is not in position to collect its
debts in time and is not even capable to manage its day to day activities.

Creditors Turnover Ratio

The creditors are interested in finding out how much time the firm is likely
to take in repaying its trade creditors. It indicates the speed with which the
payments for credit purchases are made to the creditors. The ratio can be
computed as followed

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Formula:
Creditors turnover ratio =

Total purchases
Creditors

It is similar to Debtors Turnover Ratio.

Credit Purchases
Total Purchase
OR
Average Creditors
Creditors

CTR =

Table -4.6 Creditor Turnover Ratio

Years

Total Purchases

Creditors

Ratio

2005-06

85.60

18.89

4.53

2006-07

105.91

23.17

4.57

2007-08

115.50

29.44

3.92

2008-09

153.64

27.77

5.53

Fig. 4.5 Showing Creditor Turnover Ratio

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INTERPRETATION :
A higher creditors ratio or Lower credit period enjoyed ratio. In, 2007-08
and 2008-09 KSDL has borrowed more amount of money compared to 2005-06
which is showing less than 1 creditors turnover ratio. This indicates creditors paid
slowly.There is no particular trend of the creditors collection period. However
compare to 2007-08 the period is increased in 2008-09. This indicates that the
company has been able to increase the payment period for its creditors, thus
making available working capital without blocking its other funds.
CURRENT ASSETS TURNOVER RATIO
Current assets turnover ratio is computed by dividing net sales by current
assets. The ratio indicates the extent to which the investment in current assets as
contributed towards sales. Thus it helps the firm to know its efficiency of utilizing
current assets.If the ratio is compared with a previous period. It indicates whether
the investment on current assets has been judicious or not. The ratio is calculated
as follows
Formula

Cost of Goods Sold (Net sales )

Current Assets

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Table -4.7 Current Assets Turnover Ratio

Year

Net sales

Current assets

Ratio

2005-06

98.81

70.02

1.41

2006-07

104.43

81.66

1.28

2007-08

128.65

88.17

1.46

2008-09

153.37

109.14

1.41

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Fig. 4.6 Showing Current Assets Turnover Ratio

INTERPRETATION :
There is fluctuation in current assets ratio from 2006-07 compared to all the
years, even though the ratio is more then 1 which shows management has better
utilized the current assets. But in the current year 2008-09 it had been better
utilized its current assets towards making sales of the company.
Gross Operating Cycle (GOC)
The firms gross operating cycle can be determined as inventory conversion
period plus debtors conversion period. The debtors conversion period is the time
required to inventory conversion period and debtors conversion period is referred
to as gross operating cycle or the time lag between the purchase of raw materials
and collection of cash for sale is Gross operating cycle. . Thus GOC is given as
follows,
Formula:
Gross operating cycle = Inventory conversion period + Debtors collection period.

Table -4.8 Gross operating cycle

Years

Inv.Conv.Prd

Dbtrs Colltn

G.P.C

2005-06

27.55

197.55

26.18

145.18

2007-08

167
119
102

32.24

134.24

2008-09

83

37

110

2006-07

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Fig. 4.7 Showing Gross operating cycle

INTERPRETATION :
The above given table and chart shows gross operating cycle is decreasing
year by year. In the year 2005-06 gross operating cycle is highest (192 days) but in

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the subsequent year it has decreased. But gross operating cycle is not absolute
measure for amount of funds invested in working capital.
The above graph tells us that company is following good inventory policy
and they are collected the debts properly in a specified time period. This will
definitely help company to carry over its day transaction very easily and are able
to manage inventory properly.
Net Operating Cycle (NOC)
In practice, a firm may acquire resources (such as raw materials) on credit
and temporarily postpone payment of certain expenses. Payables, which the firm
can defer, are spontaneous sources of capital to finance investment in current
assets. The creditors (payables) deferral period is the length of time the firm is able
to defer payments on various resource purchases. The difference between (gross)
operating cycle and payable deferral period (Accounts payable period) is net
operating cycle or net operating cycle is the time length between the payment for
raw material purchases and the collection of cash for sale.
Formula:
Net Operating Cycle = Gross operating Cycle-Creditors Conversion Period
Table -4.9 Net Operating Cycle
Years

G.O.C

C.C.P

N.O.C

2005-06

197.55

30

167.5

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2006-07

145.18

30

115.18

2007-08

134.24

30

104.24

2008-09

110

30

80

Fig. 4.8 Showing Net Operating Cycle

INTERPRETATION :
The above table and chart shows that the decreasing trend of net operating
cycle year by year. In the year 2005-06 net operating cycle is longer so it requires
more working capital but in the next year net operating cycle is shorter compare to
2005-06, it means the funds blocked in working capital has decreased and which is
favorable to the company.

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The company is following the strict payment policy with its creditors which
help company to get the cash discounts and other offers from the creditors and this
ratio shows they are in a good position to maintain the liquidity of the firm for a
longer period of time.
Net Working Capital Ratio:
The difference between current assets and current liabilities excluding short-term
borrowings are called net working capital. It measures the firm is liquidity and
firm is potential reservior of funds.
Formula:
Net working capital ratio =

Net working capital

Net assets

Table -4.10 Net Working Capital

Year

NWC

Net Assets

NWC Ratio

2005-06

43.13

49.16

0.88

2006-07

40.80

46.70

0.87

2007-08

40.62

46.52

0.87

2008-09

63.98

70.95

0.90

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Note : Net Assets include net fixed assets and net current asset

Fig. 4.9 Showing Net Working Capital

INTERPRETATION :
The above table shows that the net working capital ratio which is increase
in the year 2007 and in 2008 it remains the same but in the year 2009 it increased
slightly by 0.30 it indicates the firms reservoir of funds need to be increased.

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Working Capital Turnover Ratio

This is also known as Working Capital Leverage Ratio. This ratio indicates
whether or not working capital has been effectively utilised in making sales.

The WCTR can be computed as follows:

Net Sales
Net Sales
OR
Working capital
Net Current Assets

Table -4.11 Working Capital Turnover Ratio

years

Net sales

Net current assets

YOC turnover ratio

2005-06

98.81

43.13

2.29

2006-07

104.44

40.80

2.56

2007-08

128.65

40.62

3.17

2008-09

153.37

63.98

2.40

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Fig. 4.10 Showing Working Capital Turnover Ratio

INTERPRETATION :
This ratio tries to highlight is how effectively working capital is being used
in terms of the turnover. Here we can see there is increase in working capital
turnover ratio in all the four years from 2005-06 to 2006-07 but decreased in 2009.
This indicates working capital has not been effectively utilized in making sales i.e.
year by year, however in the year 2009 this had decreased indicating the funds are
blocked in working capital and thus reducing the funds available for funds.
Compared to the percentage of sales there is increase in percentage of net working
capital so this indicates the working capital has not been effectively utilized in
making sales i.e. year by year.

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 LIQUIDITY RATIO:
Liquidity ratio may be defined as financial ratio which throws light on short
term solvency of the firm. It measures the ability of the firm to meet its current
obligations i.e. working capital requirements.
A firm should ensure that it doesnt suffer from lack of liquidity and also
see that it doesnt have excess liquidity. Failure of a company is to not meet its
obligations due to lack of sufficient liquidity will result in a poor credit worthiness
and loss of creditors confidence. Therefore it is necessary to maintain a proper
balance between high liquidity and lack of liquidity. So liquidity ratio measures
the ability of a firm to meet its short terms obligations and reflects short-term
financial strength of the firm.
Credit analysts, those interpreting the financial ratios from the prospects of
a lender, focus on the downside risk since they gain none of the upside from an
improvement in operations. They pay great attention to liquidity and leverage
ratios to ascertain a companys financial risk.
Liquidity ratio needs establishing a relationship between cash and other
current assets to current obligations to provide quick measures of liquidity. These
ratios are also termed as working capital ratio or short-term solvency ratio. An
enterprise must have adequate working capital to run its day-to-day operations.

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Inadequacy of working capital may bring the entire business operation to a

grinding halt because of inability of the enterprise to pay for wages, materials and
other regular expenses.
The liquidity refers to the maintenance of cash, bank balance and those
assets which are easily convertible into cash in order to meet the liabilities as and
when arising. the liquidity ratios study the firms short term solvency and its
ability to payoff the liabilities. It should be intuitive to observe that a firm, no
matter how profitable it is, cannot continue to exist unless it is able to meet its
obligations as they arise. The day-to-day problems of financial management
consists of highly important task of finding sufficient cash to meet current
obligations. The short term liquidity risk, arises primarily from the need to finance
current operations. To the extent that the firm has to make payments to its
suppliers before it is paid for the goods and services it provides, a cash short fall
has to be met usually through the short term borrowings. Although this financing
of working capital needs is routinely done in most firms, the liquidity ratios have
been devised to keep a track on the extent of the firms exposure to the risk that it
will not be able to meet its short term obligations. Liquidity ratios as a group are
intended to provide information about a firms liquidity and the primary concern is
the firms ability to pay its current liabilities. Consequently , these ratios focus on
current assets and current liabilities.

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The liquidity ratios provide a quick measure of liquidity of the firm by

establishing a relationship between its current assets and its current liabilities. If a
firm does not have sufficient liquidity it may not be in a position to meet its
creditworthiness.The liquidity ratios may be called the Balance sheet ratios
because the information required for the calculation of liquidity ratios is available
in the balance sheet only. Some of the common liquidity ratios are which give a
picture of a companys short term financial situation or solvency.
Current Ratio
Quick Ratio/liquid Ratio
Absolute liquid/cash ratio
CURRENT RATIO:
This ratio is an indicator of firms commitment to meet its short-term
liabilities. Higher ratio, better the coverage, 2:1 ratio is treated as standard ratio.
This ratio is also called as solvency/working capital ratio.
The current ratio is the ratio of the current liabilities. It is calculated by
dividing current assets by current liabilities.

Formula:

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Current ratio =

Current assets
Current liabilities

The current ratio is a measure of short-term solvency of the company.

It indicates the rupee of current assets available for each rupee of current liability.
The higher the current ratio the larger the amount of rupees available per rupee of
current liability and the greater the safety of the short-term creditors. This margin
of safety to the creditors is essential due to the unevenness of the flow of funds
through current assets and current account available to liquidate them are subject
to shrinkage of various reasons like obsolescence of inventory, bad debts, and
unexpected losses and so on. Thus current ratio represents the short-term liquidity
Buffer.

Table -4.12 Current Ratio

Year

Current assets

Current liabs

Ratio

2005-06
2006-07
2007-08
2008-09

70.02
81.66
88.17
109.14

26.89
40.86
47.55
45.16

2.60
2.00
1.85
2.42

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Fig. 4.11 Showing Current Ratio

INTERPRETATION :
The current ratio is showing decreasing trend when we look at the past four
years data. Even the current ratios in the past are less compared to conventional
ratio of 2:1. The CR is decreasing from 2:60 to 1:85 (yr 2006-2008) so it is a good
sign from the companys liquidity point of view. We can see company is following
aggressive policy because in 2007-08 current ratio is 1:85 which involves high
risk, but in year 2008-09 it has been increased from 1:85 to 2:42 when compare to
previous year, this shows companies solvency is good.

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QUICK/ ACID TEST/ LIQUID RATIO

This ratio is also termed as Acid Test Ratio or Liquid Ratio. This ratio
is ascertained by comparing the liquid assets (i.e. assets which are immediately
convertible into cash without much loss) to current liabilities prepaid expenses and
stock are no taken as liquid assets. The ratio is also an indicator of short term
solvency of the company. It measures the short term liquidity i.e. it measures short
term debt paying ability. Higher the ratio better the coverage standard ratio is 1:1.
Formula:
Quick ratio =

Quick assets (except stock and prepaid exp)

Current liabilities

Table -4.13 Quick Ratio/ Acid Test/ Liquid Ratio

Year

Quick Assets

Current liabs

Ratio

2005-06
2006-07
2007-08
2008-09

35.90
46.58
58.57
68.39

26.89
40.86
47.55
45.16

1.34
1.14
1.23
1.51

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Fig. 4.12 Showing Quick Ratio/ Acid Test/ Liquid Ratio

INTERPRETATION :
Cash ratio is much less than the conventional standard i.e.1:1. The ratio is
1 in all 4 years. It indicates creditors got there payment on time. Compare to quick
assets current liabilities are increasing very fast so they may not be able to service
the current liabilities so they should increase the quick assets adequately.

CASH/ABSOLUTE LIQUID RATIO

Cash is the most liquid asset. Here trade investments or marketable
securities are equivalent of cash therefore they are included in computation of cash
ratio. This ratio indicates the liquidity position of the company and its commitment
to meet its short-term liabilities standard ratio for this is 0.5:1.

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Formula:
Cash ratio =

Cash + bank balance

Current liabilities

Table -4.14 Cash/Absolute Liquid Ratio

Year

Cash + back
balance

Current liabs

Ratio

2005-06

19.57

26.89

0.73

2006-07

31.23

40.86

0.74

2007-08

33.44

47.55

0.70

2008-09

25.51

45.16

0.56

Fig. 4.13 Showing Cash/Absolute Liquid Ratio

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INTERPRETATION :
The companys absolute liquid assets are adequate to meet its day today
obligations. The entity has a adequate Cash ratio than the conventional standard
of 0.5:1. The ratio is less than 0.5 in all 4 years. It indicates that there is good
liquidity position of company and there is poor firms commitment to meet its
short-term liabilities.
PROFITABILITY RATIO :
A company should earn profit to survive and grow over a long period of
time. Profitability ratio is calculated to measure the operating efficiency of the
company. Profitability is an indication of the efficiency with which the operations
of the business are carried on. A lower profitability arises due to the large current
assets holdings. The management creditors and owners are interested in the
profitability of the firm. A profit is the ultimate output of the company and the
company will have no future if it fails to make sufficient profits. Therefore
company should evaluate the efficiency of the company.
Interested parties
Bankers
Financial Institutions
Creditors
Management

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Types
Generally two major types of the profitability ratio are calculated;
Profitability in relation to sales
Profitability in relation to investment.
Profitability Ratios Involves:
1 gross profit ratio
2 net profit ratio
3 operating expense ratio
4 return on investment ratio

The financial ratios and probably the most often used group of ratios is the
profitability ratios (P.ratio) the p.ratios measure the profitability or the operational
efficiency of the firm.there are two groups of persons who may be specifically
interested in the analysis of the analysis of the profitability of the firm.these
are (i) the management which is interested in the overall profitability and
operational efficiency of the firm and (ii) the equity shareholders who are
interested in the ultimate returns available to them.Both of these parties and any
other party such as creditors can measure the profitability of the firm in terms of
the P.Ratios .Different p.Ratios have been suggested to assess the profitability of
the firm from different angles. The performance of the firm can be evaluated in
terms of its earning s with reference to a given level of assets or sales or owner
interest etc. Broadly, the p.Ratios are calculated by relating the returns with
the (i) sales of the firm (ii)assets of the firm and (iii) the owners contribution

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OPERATING EXPENSES RATIO: (PERCENTAGE)

The operating expenses ratio explains the changes in the profit margin. It
tests the operational efficiency of the firm. The ratio should be low enough to
leave a portion of sales to give a fair return to the investors. The ratio is
complementary of net profit ratio. In case the NP Ratio is 20%, it means that the
Operating ratio is 80%. This includes cost of direct material, direct labour and
other overheads, viz., factory, office or selling. The ratio is the test of operational
efficiency with which the business is being carried on. The operating ratio should
be low enough to leave a portion of sales to give a fair return to the investment.
Formula:
Operating expenses ratio =

Operating expenses
X100
Net sales

Table -4.16 Operating Expenses Ratio

Years

Optng Expns

Net sales

Optng Expns

2005-06

48.87
55.20
61.35
73.44

98.81

49.46
52.85
47.69
47.88

2006-07
2007-08
2008-09

HBCC&M/BVB/WCM

104.44
128.65
153.37

91

Fig. 4.15 Operating Expenses Ratio

INTERPRETATION :
A comparison of the ratio will indicate the cost component is high or low in
the figure of sales. Here we can see there is continuous decrease in operating
expenses ratio compare to 2007-08. This shows that there is stable control on
expense of the company the reason for such decrease is due to the fact that major
expenses like salary are constant.s
RETURN ON INVESTMENT:
It is also called as over all profitability ratio or return on capital employed.
The higher the ratio the more efficient use of capital employed. It is called as
Return on investment (ROI) or return on capital employed (ROCE). It indicates
the percentage of return on the total capital employed in the business. Or in other

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words it tell us what returns management has made on the resources made
available to them before making any distribution of those returns.
The profitability of the firm can also be analyzed from the point of view of
the total funds employed in the firm. The term funds employed or the capital
employed refers to the total long term sources of funds. it means that the capital
employed comprises of shareholders funds plus long term debts.
Alternatively it can also be defined as fixed assets plus net -working capital.
As a matter of fact, the amount of capital employed, calculated in either way will
be same because these figures are based on the balance sheet of the firm and are
part of the basic accounting equation i.e;
i)
ii)

Shareholder funds+l.term debt+c.liabilities=fixed assets +current assets

Shareholder funds+l.term debts =fixed assets (current assets-current

liabilities)
iii) Shareholder funds+l.term debts= fixed assets+net working capital.
The RCE may be calculated as follows:
RCE=

Net profit After taxes+interest(1-t)

X 100
Average capital employed

Where t, = Tax rate on ordinary income

Or, RCE=

EBIT or PBIT
X 100
Average Capital Employed

Formula:

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Return on investment =

PBIT X100
Capital employed

Table -4.17 Return on Investment

Years

PBIT
2.91
4.80
12.24
94.07

2005-06
2006-07
2007-08
2008-09

Capital Employed
76.06
87.56
94.07
116.11

Ratio
0.04
0.05
0.13
0.10

Fig. 4.16 Showing Return on Investment

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INTERPRETATION :
Increase in the ratio shows company has utilized its resource effectively and
efficiently the result of which there is continuous improvement and increase in the
returns of the company.

Gross Profit Margin:

It reflects the efficiency with which management produces each unit of

product. This ratio indicates the average spread between the cost of goods sold and
the sales revenue. A high gross profit ratio is a sign of good management and low
gross profit ratio reflects higher cost of goods sold due to reduction in selling price
higher cost of production etc. The ratio expresses the relationship between gross
profit and net sales. The gross profit margin ratio tells us the profit a business
makes on its cost of sales, or cost of goods sold. Gross profit is the profit we earn
before we take off any administration costs, selling costs and so on.

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Formula:
Gross profit margin =

Gross profit X 100

Net sales

Table -4.18 Gross Profit Margin

Years

Gross Profit

Net sales

2005-06

2.91
4.80
12.24
12.44

98.81

2006-07
2007-08
2008-09

HBCC&M/BVB/WCM

104.44
128.65
153.37

Gross profit
margin ratio
2.95%
4.60%
9.51%
8.11%

96

Fig. 4.17 Showing Gross Profit Margin

INTERPRETATION :

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The ratio indicates the degree to which the selling price of goods per unit
may decline without resulting in losses from operations to the firm.Whilst sales
value and volumes may move up and down significantly, here we see there is
increase in GP Ratio of 2006-07 compare to 2005-06 might be because of increase
in the selling price of the goods sold with corresponding decrease in the cost of
goods sold or due to some other reasons. High gross profit ratio is sign of good
management & implies that the firm is able to produce at relatively lower cost.
However, gross profit should be adequate to cover its operating expenses and there
is increase in GP ratio shows improvement of the companies efficiency.
NET PROFIT MARGIN RATIO:
Net profit is obtained when operating expenses interest and taxes are
subtracted from gross profit. This ratio indicates companys capacity to withstand
adverse economic conditions. A company with high net margin ratio would be in
an advantageous position to survive in the phase of falling selling price rising
costs of production etc and vice versa. The net profit margin ratio tells us the
amount of net profit per 1 rupee of turnover a business has earned. That is, after
taking account of the cost of sales, the administration costs, the selling and
distributions costs and all other costs, the net profit is the profit that is left, out of
which they will pay interest, tax, dividends and so on.

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Formula:
Net profit margin ratio =

Profit after tax X 100

Net sales

Table-4.19 Net Profit Margin Ratio

Years

PAT

Net sales

Ratio

2005-06

1.79

98.81

1.81%

2006-07

3.58

104.44

3.43%

2007-08

8.82

128.65

6.85%

2008-09

11.68

153.37

7.61%

Fig. 4.18 Showing Net Profit Margin Ratio

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INTERPRETATION:
The net profit is the profit which is left after paying administration selling
and distribution and other costs. Here we can say the cost of sales has increased
2005-06 to 2008-09. This shows company has improved its operational efficiency
of the business, which is definite indication of improving condition of the
business.

LEVERAGE RATIO:
Leverage ratio is also called as capital structure ratio. This ratio helps in

ascertaining the long-term solvency of a firm which depends basically on these

factors.
(a) Whether the firm has adequate resources to meet its long-term funds
requirements;
(b) Whether the firm has used an appropriate debt-equity mix to raise long term
fund;
The different leverage ratios are as follows:
Debt ratio
(i)
Debt equity ratio
(ii)
Fixed assets to net worth ratio

As the debt involves firms commitment to pay interest over the long run
and eventually to repay the principal amount, the financial analyst, the debt lender,
the preference shareholders, the equity shareholders and the management will all

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pay close attention to the degree of indebtedness and capacity of the firm to serve
the debt. The more the debt a firm uses, the higher is the probability that the firm
may be unable to fulfill its commitments towards its debt lenders.
WORKING CAPITAL FINANCE IN KSDL
The working capital requirements are estimated by the business-planning
department. They prepare the budget for the working capital. The working capital
of the company is financed mainly by Secured loans, Unsecured loans etc,
SECURED LOANS:
The secured loans in KSDL, include the financial loans from financial
institutions, which is secured by hypothecation of movable properties, loans from
banks which is secured by Hypothecation of present and future Inventories and
receivable.
Debt Ratio
It expresses outside liabilities i.e. both long term & short term in term in
relation to total capitalization of firm.
The ratio is calculated as follows:

Formula:
Debt Ratio =

HBCC&M/BVB/WCM

Total Debt
Net Assets/Capital Employed
101

Table- 4.20 Debt Ratio

Years

Total Debt

Net Assets

Ratio

2005-06

46.89

76.04

0.62

2006-07

55.52

87.56

0.63

2007-08

57.59

94.07

0.61

2008-09

64.23

116.11

0.55

Fig. 4.19 Showing Debt Ratio

INTERPRETATION:

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Here we can see KSDL Company has no debt in 2006-07. Where as in

2004-05 and 2005-06 it has taken very less debt and paid off the same. This shows
companies strong financial internal resources of the company.
FIXED ASSETS TO NET WORTH RATIO:
This ratio indicates the extents to which equity interests are financing fixes
assets. If the ratio exceeds 1 or 100%, it shows that a portion of fixed assets is
being financed by long-term debt capital otherwise it is financed from net worth.
And if it is below 1, it means the non-existence of any long-term fixed interest
bearing financed in the firm.
Ratio is calculated as follows: fixed asset
Table-4.21 Fixed Assets to Net worth Ratio
Year

Fixed Assets

Net Worth

Ratio

2005-06

6.03

56.06

0.11

2006-07

5.89

72.89

0.08

2007-08

5.91

84.04

0.07

2008-09

6.98

97.04

0.07

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Fig. 4.20 Showing Fixed Assets to Net worth Ratio

INTERPRETATION:
This ratio is less then 1 or says less then 100% in all the three years. Hence
assets are not being financed by long-term debt capital.
CURRENT ASSETS TO FIXED ASSETS RATIO
This ratio establishes the relationship between Current Assets & Fixed
Assets. A higher ratio of Current Assets to Fixed Assets indicates that, the firm is
following a conservative Current assets investment policy. A lower ratio signifies
that the firm is following aggressive Current assets investment policy.
A conservative policy ensures liquidity position of the firm, but would
affect profitability of the firm. On the other hand, profitability would improve but
liquidity positions get affected in case of Aggressive investment policy. An

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Aggressive policy implies grater liquidity and lower risk. While an

Aggressive policy indicates higher risk and poor liquidity.
It is calculated by following formula:
Current Assets to Fixed Assets =

Current Assets
Fixed Assets

Table 4.23 Current Assets To Fixed Assets Ratio

Particular

2005-06

2006-07

2007-08

2008-09

Current
Assets (Cr)

70.02

81.66

88.17

109.14

Fixed Assets
(Cr)

6.04

5.89

5.91

6.98

Ratio

11.59

13.86

14.92

15.64

Fig. 4.21 Showing Current Assets to Fixed Assets Ratio

INTERPRETATION:
The ratio is showing increasing trend year after year which indicates that
the company following sound policy of investment when liquidity position of the
company is considered. This is good sign on the part of working capital of the
company is considered.

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INVENTORY TO WORKING CAPITAL RATIO

Significance: This ratio helps to know or forecast the firms requirement for
Working Capital to meet the inventories.
Inventory
Working Capital or Net Current Assets

Table -4.24 Inventory to Working Capital Ratio

years

Inventory

Working Capital

Ratio

2005-06

34.12

43.13

0.79

2006-07

35.09

40.81

0.86

2007-08

29.60

40.62

0.73

2008-09

40.75

63.98

0.64

Fig. 4.22 Showing Inventory to Working Capital Ratio

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INTERPRETATION:
It is observed that the ratio had not been increased in the year by year. This
indicates that there is requirement for the Working Capital because it is too less
than the Accepted. Therefore their arises need of forecast to be made for the
requirement of the Working Capital and also company is not making utmost use of
inventory upto their maximum limit and also their maximum limit and also
it is in below safety, or week Financial Position and liquid Assets Position is less.
4.2 FUNDS FLOW STATEMENT :
The term funds have a verity of meanings. There are people who take it
synonymous to cash and to them there is no difference between a funds flow
statement and a cash flow statement. The International Accounting Standard No. 7
on statement of changes in financial position also recognizes the absence of a
single. This statement is prepared in order to reveal clearly the various sources
wherefrom the funds are procured to finance the activities of a business concern
during the accounting period and also bring to highlight the uses to which these
funds are put during the said period. It helps the business executives of a business
in the efficient cash management and internal financial management of a business
concern.The table number 22 shows that there is decrease in networking capital
due to increase in investment in current liabilities. In the year 2006 the networking

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capital is 43.12 less than the year 2005 i.e.46.59. It means management of working
capital is improved. It is profitable to company.
The table number 23 shows that there is decrease in networking capital in
the years 2007 i.e.40.81. It is because of decrease in current assets and increase in
current liabilities in the year. decrease in networking capital is really favorable to
company.
The table number 24 shows that there is decrease in networking capital due to
increase in investment in current liabilities. In the year 2008 the networking capital
is 40.06 ess than the year 2007 i.e.40.81 . It means management of working capital
is improved. It is profitable to company.The table number 25 shows that there is a
drastic Increase in networking capital due to decrease in investment in current
liabilities that is 58.98 when compare to previous years. In the year 2008 the
networking capital is 40.06 less than the year 2009 ie..58.98 so its really not
favorable to company profitability.

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Table -4.25 Table showing the statement showing changes in working capital
for the year 2005 and 2006
Change in the working capital

31st march
2005
(Rs in crores)

31st march
2006
(Rs in crores)

a) Inventories

44.38

34.12

10.26

b) Sundry debtors

8.03

6.88

1.15

c) Cash & bank balance

11.22

19.57

8.35

d) Loans & advances

12.45

9.45

3.00

Total

76.08

70.02

a) other liabilities

9.17

8.10

1.07

b) Sundry creditors

5.2

3.78

1.42

c) Advances & progress payments

4.71

3.27

1.44

d) Trade deposit

1.53

1.93

0.4

e) Provisions

8.88

9.82

0.94

Total

29.49

26.9

Net wrkng capital (I-II)

46.59

43.12

3.47

3.47

3.47

46.59

3.47

3.47

Particular

Increase
(Rs in crores)

Decrease
(Rs in crores)

I. Current assets

II. Current liabilities

Decrease in networking capital

46.59

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Table -4.26 Table showing the statement showing changes in working capital
for the year 2006 and 2007
31st march

31st march

2006

2007

(Rs in crores)

a) Inventories

Particular

Change in the working capital

Decrease

(Rs in crores)

Increase (Rs in
crores)

(Rs in crores)

34.12

35.09

0.97

b) Sundry debtors

6.88

8.09

1.21

c) Cash & bank balance

19.57

31.23

11.66

d) Loans & advances

9.45

7.25

Total

70.02

81.66

a) Other liabilities

8.10

18.72

10.62

b) Sundry creditors

3.77

5.75

1.98

c) Advance from customer

3.27

2.98

0.29

d) Trade deposit

1.93

1.81

0.12

e) Provisions

9.82

11.59

Total

26.89

40.85

Networking capital (I-II)

43.13

40.81

I. Current assets

2.2

II. Current liabilities

Decrease in networking capital

43.13

HBCC&M/BVB/WCM

1.77

2.32

2.32

2.32

43.13

2.32

2.32

110

Table -4. 27 Table showing the statement showing changes in working capital
for the year 2007 and 2008
Change in the working capital

31st march

31st march

2007

2008

(Rs in crores)

(Rs in crores)

a) Inventories

35.09

29.60

b) Sundry debtors

8.09

14.63

6.54

c) Cash & bank balance

31.23

33.44

2.21

d) Loans & advances

7.25

10.49

3.24

Total

81.66

88.16

a) Other liabilities

17.46

19.19

1.73

b) Sundry creditors

5.75

8.29

2.54

c) Advances from customers

2.98

1.65

1.33

d) Trade deposit

1.81

1.75

0.06

0.19

e) Provisions

12.85

16.68

3.83

Total

40.85

47.56

Networking capital (I-II)

40.81

40.6

0.21

0.21

0.21

40.81

0.21

0.21

Particular

Increase
(Rs in
crores)

Decrease
(Rs in crores)

I. Current assets
5.49

II. Current liabilities

Decrease in networking capital

40.81

Source : KSDL Company Annual Report

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Table -4.28 Table showing the statement showing changes in working capital
for the year 2008 and 2009
Change in the working capital

31st march

31st march

2008

2009

(Rs in crores)

(Rs in crores)

Increase (Rs in
crores)

(Rs in crores)

a) Inventories

29.60

40.75

11.15

b) Sundry debtors

14.63

16.35

1.72

c) Cash & bank balance

33.44

25.51

7.93

d) Loans & advances

10.49

21.53

11.04

Total

88.16

104.14

a) other liabilities

19.19

15.60

3.59

b) Sundry creditors

8.29

5.66

2.63

c) Advance from customers

1.65

1.60

0.05

d) Trade deposit

1.75

1.80

0.05

e) Provisions

16.68

20.50

3.82

Total

47.56

45.16

Net working capital(I-II)

40.6

58.98

18.38

Increase in networking capital

18.38

18.38

58.98

58.98

18.38

18.38

Particular

Decrease

I. Current assets

II. Current liabilities

Source : KSDL Company Annual Report

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4.3 COMMON SIZE STATEMENTS:

SIGNIFICANCE :
This statement indicates the relationship of various items with some
common items, In the income statements the sale figure is taken as the base and all
other figures are expressed as percentage of sales. Similarly in the balance sheet
total assets and total liabilities is taken as base and all other figures are so
calculated could be easily compared with corresponding percentages in other
periods and meaningful conclusion can be drawn.
COMPRATIVE FINANCIAL STATEMENTS:
These statements are prepared in so as to provide time perspective to the
consideration of the elements of financial data more meaningful. The statements of
two or more years are prepared to show absolute data of two or more years,
increase or decrease in absolute date in value and items of percentages
comparatives statements can be prepared for income statements as well as balance
sheet.Comparative income statements this statement discloses the net profit or net
loss resulting from the operation of the business. Such statement shows the
operating results for number of accounting periods so that changes in absolute data
from one period to another may be stated in terms percentages. This statements
helps in deriving meaningful conclusions, as it is very easy to ascertain the
changes in sales volume, administrative expenses, selling and distribution

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expenses, cost of sales etc, this will be clear from the following comparative
income statements.
Comparative balance sheet-this statement is prepared on two or more
different dates can be used for comparing assets and liabilities and to find out any
increase or decrease in these items. This facilitates the comparison of figures of
two or more periods and provides information, which may be useful in forming an
opinion regarding the financial conditions as well as progressive outlook, of the
concern.
COMMON SIZE BALANCE SHEET
Table -4.29 Liabilities Common Size Balance Sheet
Liabilities

2006

2007

2008

2009

Share capital

31.82

40.43

31.82

35.81

31.82

30.87

31.82

25.91

1.51

1.70

13.68

13.27

26.77

21.80

Reserves & Surplus

Loan funds

19.99

25.40

14.66

16.50

10.04

9.74

19.07

15.53

Current liability

26.89

34.17

40.86

45.99

47.55

46.12

45.16

36.77

Total

78.7

88.85

103.09

122.82

Source : KSDL Company Annual Report

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Table -4.30 Assets Common Size Balance Sheet

Assets

2006

2007

2008

7.74

5.89

Differed Tax
Assets

3.21

Investment

0.00001

0.00001

0.00001

91.92

88.17

88.09

109.14

88.72

1.45

2.80

2.80

1.64

1.33

Miscellaneous Expenses

2.12

Total

78.08

89.68 81.66
2.72

1.29
88.84

100.09

5.90

6.04

70.02

5.91

2009

Fixed Assets

Current assets

6.63

%
3.21

6.98

5.67

5.25

4.27

0.00001

123.01

Source : KSDL Company Annual Report

INTERPRETATION:
The Common Size Balance Sheet reveal that proportion of fixed assts out
of total assets has increased whereas the proportion of current assets has increased
and there is increasing reliance of the firm on the current assets. Similarly, out of
the total liabilities the Proportion of the proprietors fund (capital +Res & surplus)
has increased and the proportion of external liabilities has increased since, no new
capital has been issued and the other liabilities have increased, the Proportion of
capital in the total financing of the firm has gone down from 30.87% to 25.91% of
previous years of 2008-2009.

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4.4 COMPARATIVE BALANCE SHEET FOR 2008-2009

Table -4.31 Assets Comparative Balance Sheet for 2008-2009
2008

2009

Increase

Decrease

%
Increase

%
Decrease

Fixed assets

5.91

6.98

1.07

18.10

Deferred tax

3.21

5.25

2.04

63.55

Investment

0.00001

0.00001

Current assets

88.17

109.14

20.97

23.78

Misc. Expenses

2.80

1.64

1.16

123.01

Assets

Total

100.09

41.43
-

COMPARATIVE BALANCE SHEET FOR 2008-2009

Table -4.32 Liabilities Comparative Balance Sheet for 2008-2009
Liabilities

2007

2008

Increase

Decrease

% Increase

% Decrease

Share Capital

31.82

31.82

Reserve& Surplus

13.68

26.77

13.09

95.69

Loan funds

10.04

19.07

9.03

89.94

Current liabilities

47.55

45.16

2.39

5.03

103.09

122.82

Total

Source : KSDL Company Annual Report

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INFERENCE:
o Fixed assets has been increased when compared to previous year by
increasing investment and also working capital and it has borrowed loans
both the years so it is effecting working capital.
o The current assets increasing by 20.97 when compare to last year position is
good it is managing its working capital and the working capital position is
good.
o The increase of reserve and surplus because of retention of the profits with
the company.
o There is loan funds borrowed from the banks and institutions,
o There is any Differed tax because of the tax implication relating to the
expenses resulting in timing differences.
So overall financial ratio and also position of the company is good and
progressing and is also profitable to the company and it is satisfactory to all the
employees and the company owner

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4.5 TREND ANALYSIS :

Trend ratios involve a comparison of ratios of a firm over a time, that is
present ratios are compared with past ratios of the same firm. Trand ratios indicate
the direction of changes in the performance-improvement, deterioration or
consistency- over the years. Under this method ratios trend percentage are
calculated for each item of the financial statements taking the figures of base year
as 100. The starting year is usually taken as the base year. The trend percentages
show the relationship of each item with its preceding years percentages. These
percentages can also be presented in the form of index numbers showing relative
change in the financial data of certain period. This will exhibit the direction to
which the concern is proceeding. These trend ratios may be compared with
industry in order to know the strong or weak points of concern. These are
calculated only for major items instead of calculating for all items in financial
statements.

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Table -4.33 Trend Percentage Analysis (TPA)

Year

2005-06

2006-07

2007-08

2008-09

Net sales

98.81

104.43

128.65

153.37

Less cost of goods sold

85.95

106.27

115.85

154.03

Add other income

1.72

1.90

2.10

6.06

Gross profit

2.91

4.80

12.24

12.44

Less other expenses

0.89

2.76

0.06

0.65

Net profit

2.02

2.04

12.18

13.09

2008

2009

Table -4.34 Trend percentage

Year

2006

2007

Net sales

100

105.68

130.20

155.22

Less cost of goods sold

100

123.64

134.79

179.21

Gross profit

100

164.94

255

427.49

Less other expenses

100

310.11

2.17

73.03

Net profit

100

101

603

648.02

Source : KSDL Company Annual Report

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INTERPRETATION:
On the whole all the three years were Good. We can see increase in volume
as well as profits. The figures of all three years when compared with sales had
been increased and the cost of goods sold increased and expenses had decreased
respectively except in the year 2007. This means that substantial portion of cost of
goods sold is not fixed but expenses portion is fixed in nature. This resulted in
increase in Net Profit. The position was good in all the three years and not only the
increase was there but the positive growth was also visible in all the three years.
Again, the increase in Net Profit was also more than compared to the increase in
sales in all three years, respectively. This again testifies that a substantial portion
of expenses is of fixed nature but cost of Goods sold is not fixed in nature but
there is control over the other expenses a part from manufacturing expenses by the
company so there is an good financial position or strength of financial by the
company.

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