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PROJECT REPORT
ON
SUBMITTED TO
UNIVERSITY OF PUNE
2011-2012
BY
T.Y. BBA
ROLL NO: 13
(SUBJECT TEACHER)
1
ACKNOWLEDGEMENT
The satisfaction euphoria that accompanies the successful completion of any work would be
incomplete unless we mention the name of the person(s), who made it possible, whose
constant guidance and encouragement served as a beckon of light and crowned our efforts
with success. I consider it a privilege to express through the pages of this report, a few words
of gratitude and respect to those who guided and inspired in the completion of this project.
Firstly I’d like to express my respect, deep gratitude and regards to the Principal Mr.
Dhanesh Kalal and our Head of Department Prof.B.W. Khalkar,
My sincere thanks to my project guide and subject teacher Ms Megha Kukreja and all the
other faculty members, for guiding me throughout the project.
Lastly, words fall short to express my sincere gratitude and thanks to my family and friends
who knowingly or unknowingly encouraged and constantly assisted me in every work.
However, I accept the sole responsibility for any possible errors of omission and would be
extremely grateful to the readers of this project report if they bring such mistakes to my
notice.
2
Sr. No Contents Pg. No.
a. Title Page
b. Certificate By The College i
c. Acknowledgement ii
d. Contents iii
1. Introduction 4
2. Organizational Profile 8
3. L & T Product/Service Profile 12
4. Ratio Analysis 19
5. Data Analysis And Interpretation 23
6. Findings And Recommendation 50
7. Summary And Conclusion 52
8. Annexure 53
3
C ha p t e r 1
INTRODUCTION
Project work is not a new methodology. Its benefits have been widely recognized for many
years in the teaching of subjects like Science, Geography, and History. Some teachers have
also been doing project work in their language lessons for a long time, but for others it is a
new way of working.
Projects allow students to use their imagination and the information they contain does not
always have to be factual.
Being basically historical in nature, the financial statements are more convenient for the first
two purposes. However, most readers of the financial statements are interested in the future,
i.e. by the Company’s ability to grow and prosper and the availability of the company to
adapt to varying conditions. Properly used, the analysis of financial statements can provide a
basis for projecting future and clues about how the company will respond to these future
situations.
From an external perspective, allows presenting the situation and possible evolution of the
entity to all external users: Interested Parties are as follows-
• Investors
• Management
• Trade unions
• Lenders
• Suppliers and trade creditors
• Tax authorities
4
• Researchers
• Employees
• Govt. and their agencies
• Stock exchange
Through the analysis of financial statements, we can respond to key questions in the running
of the institution:
1. What is the ability to pay short and long period for the entity?
2. Is it excessive inventory investment?
3. How Working Capital Account and how it is invested?
4. “Fixed assets are underutilized?
5. Does the performance you get is balanced with the investment?
6. Are profits properly invested?
7. In what areas the company is demonstrating success or failure?
Research framework: This study is based on the data about L & T for a detailed study of its
financial statements, documents and system ratios and finally to recognize and determine the
position of the company.
1. First type is the primary data which was collected personally to be used and studied to
prepare and reach the objectives already mentioned.
2. The secondary data which was already prepared so these data was only used to reach the
aims and objectives of this project. These data has been collected from the financial reports of
the company.
5
The sources of collecting the primary data was through interviews, observation and
questionnaire, however the secondary one was collected from the financial statements already
available to the employees of the company and some of which was published.
Personal Interview method requires a person known as the interviewer asking questions
generally in a face to face contact to the other person or persons.
In some cases, I had the chance to ask my questions personally from the Head of Accounts
department and Head of HR Department regarding the information I needed.
Different questions and information I could collect during these two methods are:
The secondary data I collected was through the study of the financial statements already
existed in the company in form of printed files or digital files reserved in the company for
further references. I had chosen these files because of the reliability and suitability of this
information which I was also sure about the accuracy of them.
6
1.4 LIMITATIONS OF THE PROJECT:
The ratios analysis is one of the most powerful tools of financial management. Though ratios
are simple to calculate and easy to understand, they suffer from serious limitations.
7
C ha p t e r 2
ORGANIZATIONAL PROFILE
2.2 HISTORY:
The evolution of L&T into the country's largest engineering and construction organization is
among the most remarkable success stories in Indian industry. L&T was founded in Bombay
(Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian
Toubro. Both of them were strongly committed to developing India's engineering capabilities
to meet the demands of industry.
Beginning with the import of machinery from Europe, L&T rapidly took on engineering and
construction assignments of increasing sophistication. Today, the company sets global
engineering benchmarks in terms of scale and complexity.
8
2.3 EARLY DAYS:
1. Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark, would
not have dreamt, as they were learning about India in history classes that they would,
one day, create history in that land.
2. In 1938, the two friends decided to forgo the comforts of working in Europe, and
started their own operation in India. All they had was a dream. And the courage to
dare.
3. Their first office in Mumbai (Bombay) was so small that only one of the partners
could use the office at a time!
4. In the early years, they represented Danish manufacturers of dairy equipment for a
modest retainer. But with the start of the Second World War in 1939, imports were
restricted, compelling them to start a small work-shop to undertake jobs and provide
service facilities.
5. Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This
crisis forced the partners to stand on their own feet and innovate. They started
manufacturing dairy equipment indigenously. These products proved to be a success,
and L&T came to be recognised as a reliable fabricator with high standards.
6. The war-time need to repair and refit ships offered L&T an opportunity, and led to the
formation of a new company, Hilda Ltd., to handle these operations. L&T also started
two repair and fabrication shops - the Company had begun to expand.
7. Again, the sudden internment of German engineers (because of the War) who were to
put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of
installation - an area where their capability became well respected.
9
3. In 1956, a major part of the company's Bombay office moved to ICI House in Ballard
Estate. A decade later this imposing grey-stone building was purchased by L&T, and
renamed as L&T House - its Corporate Office.
4. The sixties saw a significant change at L&T - S. K. Toubro retired from active
management in 1962.
5. The sixties were also a decade of rapid growth for the company, and witnessed the
formation of many new ventures: UTMAL (set up in 1960), Audco India Limited
( 1961), Eutectic Welding Alloys (1962) and TENGL (1963).
10
2.7 VISION:
The L&T vision reflects the collective goal of the company. It was drafted through a large
scale interactive process which engaged employees at every level, worldwide.
The Economic Times named Mr. A.M. Naik "Business Leader of the Year" for 2008.
L&T is among the top 100 Most Trusted brands of India as published in The Brand
Trust Report.
Mr. A.M. Naik was also awarded the Padma Bhushan by the President of India in
2009.
L&T Won Best Innovation in Logistics-Transportation award on 20 May 2011 from
India International Logistics Forum.
L&T Won The Financial Express-EVI Green Business Leadership Award for 2010-
11. The award was received from Dr.A.P.J. Abdul Kalam.
11
C ha p t e r 3
Hydrocarbon Mid & Downstream SBG provides a wide range of EPC solutions for
turnkey projects – green fuel / fuel quality up-gradation, residue upgradation; cracker
complex, polyolefin’s & aromatics projects for petrochemical industry; hydrogen,
fertilizers, gas processing, reformers & cracking furnaces; cross-country oil & gas
pipelines, gas gathering stations and crude oil terminals. Projects are executed on a
turnkey basis with detailed engineering support drawn from L&T-Chiyoda Limited –
an associate company of L&T.
Range:
Refinery projects.
Petrochemical projects.
Fertilizers.
Gas processing projects.
Modular process plants.
12
3.2 CONSTRUCTION:
3.2.1 Infrastructure Projects:
The Infrastructure IC undertakes construction of Heavy Civil projects through four strategic
Business Units, meeting international standards of quality. EPC services are offered for
transportation infrastructure projects as well as hydel and nuclear power projects. The BUs
include:
13
Leveraging the parent company’s project execution and management expertise, L&T Realty
is setting up large, mixed-use communities that include Corporate offices, Retail, Hospitality,
Leisure & Entertainment and Residences. Each of the development is designed to be an urban
destination for new India to work, shop, live and collaborate.
3.3.3 Petrochemicals:
The product range comprises reactors, vessels, heat exchangers and equipment for various
services including high-pressure, high-temperature, hydrogen service, cryogenic application,
etc. Major equipment supplied include multi wall reactors, ‘Pacol’ and ‘Hydro bon’ reactors,
polypropylene and polyethylene reactors, transfer line and ultra-sensitive exchangers and
continuous polymer-ization reactors / finishers, methanol converters, heli-towers, bayonet-
type heat exchangers, screw-plug exchangers and a range of high pressure heat exchangers
and pressure vessels and equipment for cryogenic application. The process / thermal and
mechanical design of all heat transfer equipment is also carried out with in-house developed
software including Finite Element Analysis, detailed FIV analysis and also members of HTRI
and HTFS.
3.3.4 Fertiliser:
L&T's Heavy Engineering has contributed significantly to the growth of the Fertiliser
industry in India and abroad. The division has supplied critical Equipment for over 50
Ammonia and Urea projects. L&T's Heavy Engineering has contributed significantly to the
growth of the Fertiliser industry in India and abroad. It has supplied critical Equipment for
over 50 Ammonia and Urea projects.
14
3.3.5 Coal Gasification:
With rising cost of oil and natural gas, Syn-gas from coal gasification is becoming a cost-
effective alternative feedstock for fertilizers, chemicals (methanol, etc.), power and coal
liquefaction plants.
3.3.6 Aerospace:
L&T offers design, manufacture and supply of components, subsystems and systems for
aerospace applications. L&T’s precision manufacturing facilities are geared to meet the
exacting demands of aerospace manufacture. State-of-the-art facilities give L&T the
capability to achieve high accuracy levels in the manufacture of systems and subsystems of
satellites and launch vehicles in metals and in advanced composites. L&T carries out in-
house development of welding procedures for exotic materials and special machining
processes for space application.
16
3.5.2 Electrical Systems:
L&T is the market leader for switchboards in India. It manufactures custom-built
switchboards with conventional as well as intelligent protection, control and communication
to meet the power distribution and motor control needs of key industries. It’s Power Control
Centers (PCC) and Motor Control Centers (MCC) are installed at major and prestigious
plants in India. L&T manufactures maximum number of panels every year and has a steady
market share. It associates with its customers at the project conceptualization stage and the
association continues even after the project is commissioned.
The range of custom-built switchboards comprises fully drawout PCCs and MCCs,
distribution boards and control panels. Its PCC type TF is rated up to 6000A and houses
L&T-made Air Circuit Breakers to take care of power distribution. The MCC type TQ is
rated up to 5000A.Marine Business has developed marinised switchgear, switchboards,
distribution boards, starters and control systems for application onboard Naval Ships as well
as commercial ships.
17
3.7 INFORMATION TECHNOLOGY:
Larsen & Toubro Infotech:
L&T Infotech focuses on information technology and software services. Its clients include
industry leaders like Marsh & McLennan, Standard
Life,Travelers, Chevron, Freescale, Hitachi, Ingram Micro, Infineon, Sanyo, Lafarge, ABSA.
P&G, Johnson and Johnson,CitiGroup, Barclays, eCORPUS, Marathon, Texas
Instruments, Qualcomm, LG and Samsung among others.It offers services and solutions for
the following industries: banking and financial services, insurance, energy and
petrochemicals, manufacturing.
Larsen & Toubro Infotech Limited, a 100 per cent subsidiary of the L&T, offers software and
services with a focus on Manufacturing, BFSI and Communications and Embedded Systems.
It also provides services in the embedded intelligence and e Engineering space.
18
CHAPTER 4
RATIO ANALYSIS
4.1 THEORY:
The most important task of a financial manager is to interpret the financial information in
such a manner, that it can be well understood by the people, who are not well versed in
financial information figures. The technique by which it is so done, known as ‘Ratio
Analysis’.
‘Ratio’ is a relationship between two or more variables, expressed in (i) percentage, (ii) rate
and (iii) proportion.
Different ratios appeal to different people. Management, having the task of running a
business efficiently, will be interested in all ratios. A supplier of goods on credit will be
particularly interested in liquidity ratios, which indicate the ability of the business to pay its
bills. Existing and future shareholders will be interested in investment ratios, which indicate
the level of return that can be expected on an investment in the business. Major customers,
intent on having a continuing source of supply, will be interested in the financial stability, as
revealed by the capital structure, liquidity and profitability ratios. Debenture and loan stock
holders will be interested in the ability of a business to pay interest, and ultimately to repay
the capital. A banker, giving only short-term loans, will be interested mainly in the liquidity
of the business, and its ability to repay those loans.
The overall advantage of ratios is that they enable valid comparisons to be made between
businesses of varying size, and in different industries.
All the problems of a business can’t be solved by ratio analysis. It will merely give a general
indication of a trend, at the same time spotlighting any divergence from normality. This
knowledge, however, should enable management to correct whatever may be going wrong in
the business.
Step 1: Collection of information, which are relevant from the financial statements and then
to calculate different ratios accordingly.
Step 2: Comparison of computed ratios with the past ratios of the same organization or with
the industry ratios.
19
4.3 CLASSIFICATION OF RATIOS
20
4.4 CHART SHOWING APPLICATION OF DIFFERENT RATIOS:
21
4.5ADVANTAGES OF RATIO ANALYSIS
Ratio analysis is a very important and useful tool for financial analysis. It serves much
purpose and is helpful not only for internal management but also for prospective investors,
creditors and other outsiders. The following are the important uses (advantages) of ratio
analysis:
i. It is an important and useful tool to exercise check upon the efficiency with which the
working capital is being used (managed) in a business enterprise. Efficient
Management of working capital.
ii. It helps the management of business concern in evaluating its financial position and
efficiency of performance,
iii. It serves as a sort of health test of a business firm, because with the help of this
analysis financial managers can determine whether the firm is financially healthy or
not.
iv. A ratio analysis covering a number of past accounting (financial) periods clearly
shows the trend of changes in the business position (i.e. whether the trend in financial
position, income position etc. is upward, or down-ward or static). The progress or
downfall of a business concern is clearly indicated by this analysis. Used to measure
the trend of the Business.
v. It helps in making financial estimates for the future (i.e., in financial forecasting).
vi. It helps the task of managerial control to a great extent.
vii. It helps the credit suppliers and investors in evaluating a business firm as a desirable
debtor or as a potential investment outlet.
viii. With the help of this analysis ideal (standard) ratios can be established and these can
be used for the purpose of comparison of a firm’s progress and performance.
ix. This analysis communicates important information regarding financial strength and
standing, earning capacity, debt (borrowing) capacity, liquidity position, capacity to
meet fixed commitments (charges), solvency, capital gearing, working capital
management, future prospects etc. of a business concern.
x. This analysis may be employed for the purpose of comparing the working result and
efficiency of performance of a business enterprise with that of other enterprises
engaged in the same industry (Inter-firm comparison).
xi. It helps the management of a business concern to discharge their basic functions of
planning, coordinating, controlling etc.
xii. It serves as an instrument for testing management efficiency.
22
Chapter 5
23
Book Value (Rs) 352.4 303.28
Income
Sales Turnover 44055.6 37187.5
Excise Duty 398.84 317.31
Net Sales 43656.7 36870.2
Other Income 1781.28 2321.67
Stock Adjustments 559.49 -422.99
Total Income 45997.5 38768.9
Expenditure
Raw Materials 12372.3 9593.53
Power & Fuel Cost 355.45 334.08
Employee Cost 2884.53 2379.14
Other Manufacturing Expenses 19886.1 16913.3
Selling and Admin Expenses 2103.38 1854.23
Miscellaneous Expenses 773.7 325.58
Preoperative Exp Capitalized -37.87 -36.25
24
5.3 LIQUIDITY RATIOS:
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
5.3.1 Current Ratio = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
1.24
1.238
1.236
Mar'11
1.234
Mar'10
1.232
1.23
1.228
1.226
1.224
Current Ratio
Interpretation:
This ratio indicates how the expected current claims are covered by current assets. The ideal
ratio is 2:1 but here the ratio shows fewer amounts of current assets to pay the current
liabilities.
25
𝑸𝒖𝒊𝒄𝒌 𝑨𝑺𝒔𝒆𝒕
5.3.2 Quick / Acid Test Ratio = 𝑸𝒖𝒊𝒄𝒌 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
1.195 1.19
1.19
1.185
Mar'11
1.18 Mar'10
1.175 1.17
1.17
1.165
1.16
Quick Ratio
Interpretation:
This ratio is a better tool to measure the ability to honor day to day commitments. The ideal
ratio is 1:1, which means that the liquid assets should be equal to liquid liabilities. Here the
liquid assets are slightly more than the liquid liabilities that mean the company has the ability
to pay its short-term liabilities.
26
5.4 SOLVENCY RATIO
𝑳𝒐𝒏𝒈−𝑻𝒆𝒓𝒎𝑫𝒆𝒃𝒕
5.4.1 Debt-Equity Ratio = 𝑺𝒉𝒂𝒓𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑭𝒖𝒏𝒅∗
0.37
0.37
0.36
0.35 Mar'11
Mar'10
0.34 0.33
0.33
0.32
0.31
Debt-Equity Ratio
Interpretation:
This ratio is calculated to measure the comparative proportion of borrowed funds and
shareholders’ funds invested in the firm. The ideal ratio should be 2:1, but here the ratio is
much more lower which means that the company is not taking any risk and is mainly used in
shareholders’ funds for financing its requirements.
27
𝐩𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐲 𝐟𝐮𝐧𝐝
5.4.2 Proprietary ratio = X 100
𝐭𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬
0.732
0.73
0.728
0.726 Mar'11
0.724 Mar'10
0.722
0.72
0.718
0.716
0.714
Proprietary ratio
Interpretation:
This ratio indicated the proportion of proprietors funds used for financing the total asset. The
above ratio shows that the company is not utilizing its external funds adequately.
28
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔
5.4.3 Current asset to fixed asset Ratio= 𝑭𝒊𝒙𝒆𝒅 𝒂𝒔𝒔𝒆𝒕𝒔
1.65
1.6
1.55
Mar'11
1.5
Mar'10
1.45
1.4
1.35
1.3
1.25
Current Asset to Fixed asset
Interpretation:
This ratio shows the proportion of current assets to fixed assets here the ratio shows that the
amount of current assets is more than the amount of fixed assets.
29
5.5 PROFITABILITY RATIOS:
𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕
5.5.1 Gross Profit Ratio = X 100
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔
20.08
20.5
20
19.5
19 Mar'11
18.5 Mar'10
17.55
18
17.5
17
16.5
16
GP Ratio (%)
Interpretation:
This ratio shows the margin left after meeting the purchases and manufacturing cost. Here the
GP ratio is high enough to cover expenses like administrative, selling and distribution etc.
30
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
5.5.2 Net Profit Ratio = X 100
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔
11.87
12
9.07
10
8 Mar'11
Mar'10
6
0
Net Profit Ratio (%)
Interpretation:
This ratio shows the earnings left for shareholders’, higher the ratio the better it is. The
profitability of the firm has declined to 9.06% in March’11 from 11.86% in March’10
31
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕
5.5.3 Operating Profit Ratio = X 100
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔
13.47
13.5
13.4
13.3 Mar'11
Mar'10
13.2 13.11
13.1
13
12.9
Operationg Profit Ratio(%)
Interpretation:
This ratio establishes the relation between the net sales and the operating net profit. Operating
net profit is the profit arising out of business operations only; here the operating profit ratio
shows the increasing trend.
32
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕,𝒕𝒂𝒙 𝒂𝒏𝒅 𝒑𝒓𝒆𝒇𝒆𝒓𝒓𝒆𝒏𝒄𝒆 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒕,𝒊𝒇 𝒂𝒏𝒚
5.5.4 Return on Equity Ratio = X 100
𝑬𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔 𝒇𝒖𝒏𝒅
23.95
25
18.44
20
Mar'11
15
Mar'10
10
0
Return On Equity Ratio(%)
Interpretation:
The funds available for equity shareholders’ in March’10 was more than that in March’11.
This ratio shows the productivity of the owned funds. Here the productivity of the funds has
decreased from the previous year. This ratio is also known as return on net worth.
33
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙
5.5.5 Return on total assets = X 100
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
17.42
18
16 13.64
14
12 Mar'11
10 Mar'10
8
6
4
2
0
Return On Total assets(%)
Interpretation:
This ratio is also called return on investment. The ratio compares the net profit after tax with
total assets. The above ratio shows declining trend in terms of return on total asset.
34
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙
5.5.8 Return on Capital employed = X 100
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅∗
Capital Employed = Equity + preference + reserves and surplus + long term debt – fictitious
assets
28.5
28
27.5
27
26.5 Mar'11
26 Mar'10
25.5
25
24.5
24
23.5
23
Return on capital emploued
Interpretation:
In Mar’10 28.01% capital was utilized whereas in Mar’11 the capital utilization percentage
reduced to 24.75 %.
35
5.6 ACTIVITY/ TURNOVER/EFFICIENCY RATIOS:
𝒏𝒆𝒕 𝒔𝒂𝒍𝒆𝒔
5.6.1 Debtors turnover ratio = 𝒂𝒗𝒈.𝒅𝒆𝒃𝒕𝒐𝒓𝒔
3.5
3.5
3.45
3.4 Mar'11
Mar'10
3.35 3.3
3.3
3.25
3.2
DTR (times)
𝟑𝟔𝟓 𝒅𝒂𝒚𝒔
DTR in (No. of Days) = 𝑫𝑻𝑹 (𝒊𝒏 𝒏𝒐.𝒐𝒇 𝒕𝒊𝒎𝒆𝒔)
Interpretation:
The above ratio indicates that the debtors have made payments 3.5 times and 3.3 times during
the period. From this the average collection period is 104 and 111 days for the years Mar’11
and Mar’10 respectively. This shows that the collection period is long and needs to be
reduced.
36
𝒄𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔
5.6.2 Fixed assets turnover ratio =𝒏𝒆𝒕 𝒇𝒊𝒙𝒆𝒅 𝒂𝒔𝒔𝒆𝒕𝒔
2.05
Mar'11
1.95
Mar'10
1.9
1.85
1.8
Fixed assets turnover ratio
Interpretation:
This ratio is more important for manufacturing concerns, as it indicates the utilization of
fixed assets. The above ratio shows that 2.04 rupees of sales are generated per rupee of
investment in fixed assets.
37
𝒏𝒆𝒕 𝒔𝒂𝒍𝒆𝒔
5.6.3 Working capital turnover ratio =𝒏𝒆𝒕 𝒘𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍
Mar’11 Mar’10
Net sales 43656.71 36870.19
Net working capital 6861.35 5041.36
Working capital turnover 6.36 7.31
ratio
5
Mar'11
4 Mar'10
0
working capital turnover ratio
Interpretation:
The indication given by this ratio is the number of times working capital is turned around in a
particular period. The above ratio shows that the working capital is turned around 6 to 7 times
during the given periods.
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𝑵𝒆𝒕 𝒔𝒂𝒍𝒆𝒔
5.6.4 Sales to capital employed ratio = 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅∗
10
9
8
7
Mar'11
6
Mar'10
5
4
3
2
1
0
Sales to Capital Employes rario
Interpretation:
This ratio indicated sales per rupee of capital employed. The above ratio indicates better
utilization of capital employed which will result in higher amount of turnover.
39
𝒄𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒔𝒐𝒍𝒅
5.6.5 Inventory turnover ratio= 𝒔𝒕𝒐𝒄𝒌
23
22.5
22
Mar’11
21.5 Mar'10
21
20.5
20
19.5
inventory turnover ratio
𝟑𝟔𝟓 𝒅𝒂𝒚𝒔
Inventory turnover ratio (in no. of days) = 𝑰.𝑻.𝑹 (𝒊𝒏 𝒏𝒐.𝒐𝒇 𝒕𝒊𝒎𝒆𝒔)
Interpretation:
The indication given by this ratio is the no. of times the finished stock is turned over during a
given accounting period. The above ratio shows that the stock was turned over 22.8 times
during the accounting year 2011 and 20.8 times during 2010. This shows the rapid turnover
of stock and a holding period of 16 and 17.5 day.
40
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔
5.6.7 Total assets turnover ratio=𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
1.5
1.5
1.49
1.48 Mar'11
Mar'10
1.47 1.46
1.46
1.45
1.44
Total asset turnover
Interpretation:
This ratio shows relationship between total assets and net sales. Net sales are 1.5 times the
total assets in March’11 and 1.46 times in March’10.
41
𝒆𝒒𝒖𝒊𝒕𝒚 𝒄𝒂𝒑𝒊𝒕𝒂𝒍
5.6.8 Equity to total assets ratio= 𝒕𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔
0.732
0.73
0.728
0.726 Mar'11
0.724 Mar'10
0.722
0.72
0.718
0.716
0.714
equity to total assets ratio
Interpretation:
The above ratio shows that for 1 rupee of total asset 73 paisa of equity is required.
42
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒆𝒙𝒑𝒆𝒏𝒔𝒆𝒔
5.6.9 Operating expenses ratio = X 100
𝑵𝒆𝒕 𝒔𝒂𝒍𝒆𝒔
88
87.5
87
86.5 Mar'11
86 Mar'10
85.5
85
84.5
84
83.5
Operating Expenses ratio (in %)
Interpretation:
This ratio shows the relationship between operating expenses and net sales. Here it shows
that operating expenses are 87.8 % in Mar’11 and 85.06 % in Mar’10, i.e. the operating
expenses are very high compared to net sales.
43
5.7 COVERAGE RATIO
𝑬.𝑩.𝑰.𝑻
5.7.1 Interest coverage ratio =𝑰𝑵𝑻𝑬𝑹𝑬𝑺𝑻
Mar’11 Mar’10
E.B.I.T 7084.04 7021.6
Interest 1199.23 995.37
Interest coverage ratio 5.90:1 7.05:1
7.2
7 Mar'11
6.8 Mar'10
6.6
6.4
6.2
6
5.8
5.6
5.4
5.2
interest coverage ratio
Interpretation:
This ratio shows how much interest is payable compared to the E.B.I.T. This shows that the
company has very less amounts of fixed interest bearing securities.
44
LIQUIDITY RATIOS
1.24
1.24 1.23
1.22
1.2 1.19
Mar'11
1.18 1.17 Mar'10
1.16
1.14
1.12
Current Ratio Quick Ratio
Interpretation:
The current ratio and the quick ratio have slightly increased but the current ratio is less than
the ideal ratio which is 2:1. The company should make a provision to increase the current
assets.
45
SOLVENCY RATIOS
Debt-Equity Ratio 0.33:1 0.37:1
Proprietary ratio 73% 72%
Current asset to fixed asset 1.64:1 1.38:1
Ratio
1.8 1.64
1.6
1.38
1.4
1.2
1 Mar'11
0.73 0.72
0.8 Mar'10
0.6
0.33 0.37
0.4
0.2
0
debt-equity ratio proprietory ratio current assets to fixed
assests ratio
Interpretation:
The debt equity ratio has decreased which means that the company is mainly using its
shareholders funds to finance its activities. The proprietary ratio which shows the percentage
amount of funds used to acquire assets for the company. The current assets to fixed assets
ratio shows that the company has more amounts of current assets than its fixed assets which
may prove detrimental for its long term progress.
46
TURNOVER RATIOS
0 2 4 6 8 10
Interpretation:
The debtor turnover ratio has slightly increased over the period but the company needs to
shorten the collection period. The fixed assets turnover ratio has increased which is a good
sign. The working capital turnover ratio indicates that the working capital was turned over
more no. of times in 2010. The sales to capital employed ratio have decreased to 5.99 times
from 9.51 which means that the sales are 5.99 times the capital employed. The total assets
turnover is increased. For one rupee of total assets 73 paisa of equity is required. The
operating expenses are very high and need to be controlled.
47
PROFITABILITY RATIOS
GP Ratio 17.55% 20.08%
Net Profit Ratio 9.07% 11.87%
Operating Profit Ratio 13.47% 13.11%
Return on equity 18.44% 23.95%
Return on total assets 13.64% 17.42%
Return on capital 24.75% 28.01%
Employed
30.00%
25.00%
20.00%
15.00% Mar'11
Mar'10
10.00%
5.00%
0.00%
GP Ratio Net Profit Operating Return on Return on Return on
Ratio Profit equity total capital
Ratio assets Employed
Interpretation:
The gross profit margin and the net profit margin have decreased. The operating profit ratio
shows the increasing trend. All the three ratios viz. return on equity, return on total assets,
return on capital employed have decreased which means that the performance of the company
has deteriorated from the previous year.
48
COVERAGE RATIO
7.05
7.2
7
6.8
6.6
Mar'11
6.4
Mar'10
6.2 5.9
6
5.8
5.6
5.4
5.2
Interest coverage ratio
Interpretation:
The above ratio indicates the declining trend of the coverage ratio as the E.B.I.T has
decreased and the company has very less amounts of fixed interest bearing securities as
compared to the E.B.I.T.
49
Chapter 6
SR
NO RATIOS Mar'11 Mar'10 INCREASE DECREASE
1 Current Assets 1.24 1.23 0.1
2 quick ratio 1.18 1.16 0.2
3 debt equity ratio 0.33 37 0.4
4 proprietary ratio 0.73 0.72 0.1
5 current assets to fixed assets 1.64 1.38 0.26
6 Gross profit ratio 17.55% 20.08% 2.53%
7 net profit ratio 9.06% 11.86% 2.8
8 return on capital ratio 24.75% 28.01% 3.26%
9 return on equity ratio 18.44% 23.95% 5.51%
10 return on total assets 13.64% 17.42% 3.78%
11 equity to total assets ratio 0.73 0.72 0.1
12 inventory turnover ratio 22.8 20.8 2.00
13 debtors turnover ratio 3.5 3.3 0.2
14 turnover to fixed assets 2.04 1.91 0.13
15 operating expenses ratio 87.8% 85.06 2.74
16 total assets turnover ratio 1.50 1.46 0.4
17 fixed assets turnover ratio 2.04 1.91 0.85
18 working capital ratio 6.36 7.31 0.95
19 operating net profit ratio 13.47 13.11 0.36
20 interest coverage ratio 5.9 7.05 1.15
50
1. The Company’s’ current ratio is below the ideal ratio, the company should try to
increase the amount of current asset so that it can easily pay out its liabilities.
2. The Liquid assets of the company are enough to pay the short term liabilities.
3. The company is mostly using its share holders fund for financing its activities. It
should also utilize the various external funds available.
4. Current assets of the company are higher in amounts than the fixed assets, this shows
that the huge amount of fund need to be invested in fixed asset.
5. The net profit of the company has deteriorated resulting in fewer amounts of profits
available for shareholders compared to previous year.
6. The earnings per share have also reduced resulting in less amount of dividend per
share.
7. The proprietary ratio shows lesser dependence on external funds.
8. Since the last few years, L & T has had a huge amount of cash locked up in its debtors
(outstanding) cycle. As of FY10, the company has Rs. 11163 Cr. locked in
outstanding on a sales turnover of Rs. 37000 Cr. which works out to a debtor’s cycle
of 109 days. Also, the outstanding for more than six months is very high at Rs. 3163
Cr. which amounts to 28% of its total outstanding. For a company earning a net profit
of Rs. 3315 Cr. such a high outstanding; especially the more than 6 months figure
creates major cause for concern. Hence, in the wake of the first point, this high
outstanding become a further reason to worry.
9. The operating expenses of the company are very high which indicate the operating
inefficiencies of the company.
10. The sales of the company are very high as compared to the amount of capital
employed.
51
Chapter 7
Ratios make the related information comparable. A single figure by itself has no
meaning, but when expressed in terms of a related figure, it yields significant
interferences. Thus, ratios are relative figures reflecting the relationship between
related variables. Their use as tools of financial analysis involves their comparison as
single ratios, like absolute figures, are not of much use.
Ratio analysis has a major significance in analyzing the financial performance of a
company over a period of time. Decisions affecting product prices, per unit costs,
volume or efficiency have an impact on the profit margin or turnover ratios of a
company.
Financial ratios are essentially concerned with the identification of significant
accounting data relationships, which give the decision-maker insights into the
financial performance of a company.
The analysis of financial statements is a process of evaluating the relationship
between component parts of financial statements to obtain a better understanding of
the firm¡¥s position and performance.
The first task of financial analyst is to select the information relevant to the decision
under consideration from the total information contained in the financial statements.
The second step is to arrange the information in a way to highlight significant
relationships. The final step is interpretation and drawing of inferences and
conclusions. In brief, financial analysis is the process of selection, relation and
evaluation.
Ratio analysis in view of its several limitations should be considered only as a tool for
analysis rather than as an end in itself. The reliability and significance attached to
ratios will largely hinge upon the quality of data on which they are based. They are as
good or as bad as the data itself. Nevertheless, they are an important tool of financial
analysis.
52
CHAPTER 8
ANNEXURE
8.1 BIBLIOGRAPHY:
8.1.1Websites:
www.moneycontrol.com
www.larsenandtourbo.com
www.yahoomoney.com
www.wikipedia.com
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8.2 EXECUTIVE SUMMARY:
This project helped me to get the deeper understanding of the process of Financial Statement
Analysis and how decisions are taken to strengthen the financial position. For this study two
years ‘comparative Income Statement & Balance Sheet have been taken for calculating ratio
analysis. Main objective in undertaking this project is to supplement academic knowledge
with absolute practical exposure to day to day functions of the sector.
Financial analysis which is the topic of this project refers to an assessment of the viability,
stability and profitability of a business. This important analysis is performed usually by
finance professionals in order to prepare financial or annual reports. These financial reports
are made with using the information taken from financial statements of the company and it is
based on the significant tool of ratio analysis. These reports are usually presented to top
management as one of their basis in making crucial business decisions.
The project is based on the company Larsen and Tourbo which is India’s largest engineering
technology company. The company has vast scope as the infrastructure spending by the
government and corporate expansion plans will continue to drive L&T’s business. The
finance and IT subsidiaries of the company show a very strong performance, it is expected
that the investment in subsidiary and associate companies is expected to grow.
The company has a high degree of financial flexibility due to low gearing levels. The
company is not using its external funds adequately and is using its shareholders’ funds to
finance its major activities. L&T has huge amount of cash locked up in its debtors and it
needs to shorten its collection period. Delay in realization of payments could adversely affect
the working capital positions.
The project concludes with the findings and recommendations for the company. L & T is one
of the leading players in the Indian Engineering Industry. It is poised for good growth in
future considering the government focus and spending on Infrastructure & power, its strategic
plans and capacity expansions. But it needs to work on a plan to manage its operating
inefficiencies
54