Financial analysis Ratio Analysis:An integral aspect of financial appraisal is financial analysis, which takes into account the

financial features of a project, especially source of finance. Financial analysis helps to determine smooth operation of the project over its entire life cycle. The two major aspects of financial analysis are liquidity analysis and capital structure. For this purpose ratios are employed which reveal existing strengths and weakness of the project. 1) Liquidity ratios- Liquidity ratio or solvency ratios measure a projects ability to meet its current or short-term obligations when they become due. Liquidity is the pre-requisite for the very survival of a firm. A proper balance between the liquidity and profitability is required for efficient financial management. It reflects the short-term financial strength or solvency of the firm. Two ratios are calculated to measure liquidity, the current ratio and quick ratio. a) Current ratioThe current ratio is defined as the ratio of total current assets to total current liabilities. It is computed by, Current assets Current ratio Current liabilities

Particulars Current assets

2004 91.47

2005

2006

2007

2008

101.72 112.76 128.7 145.25

Current liabilities 144.32 127.66 121.59 96.05 80.09 Current ratio 0.634 0.767 0.927 1.339 1.8134

Current ratio 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1.8134 1.339 0.927 0.634 0.767

Current Ratio

3 Years

InterpretationIt is an indicator of the extent to which short term creditors are covered by assets that are expected to be converted to cash in a period corresponding to the maturity of claims. The ideal current ratio is 2:1. The firm current ratio indicate that the firm is in a position to meet its short term obligation because the ratio is in increasing trend , by observing the above table we can say that though the firm does not maintain ideal current ratio, it is still in a position to meet its current obligations. After clearing all the dues the firm is still in a position to maintain liquidity.

b) Acid test or quick ratioIt is a measure of liquidity calculated dividing current assets minus inventory and prepaid expenses by current liabilities. Since inventories among current assets are not quite liquid (means not quickly converted into cash), the quick ratio excludes it. The quick ratio includes only assets, which can be readily converted into cash and constitutes a better test of liquidity. It is often called as quick quick ratio because it is a measurement of a firms ability to convert its assets quickly into cash in order to meet its current liabilities.

Particulars Quick assets

2004 60.47

2005 67.65

2006 75.28

2007

2008

87.47 99.9

Current liabilities 144.32 127.66 121.59 96.05 80.09 Current ratio 0.534 0.53 0.62 0.911 1.247

Quick ratio 1.4 1.2

Quick Ratio

1.247 0.911 0.62

1 0.8 0.6 0.4 0.2 0 1 2 3 Years 0.534 0.53

Interpretation-

Acid test ratio is a rigorous measure of firms ability to service short term liabilities. The usefulness of the ratio lies in the fact that it is widely accepted as the best available test of liquidity position of a firm. Generally an acid test ratio of 1:1 is considered satisfactory as a firm can easily meet all its current claims. In the case of the above firm the quick ratio is in increasing trend by year on. So it shows that firm is capable of paying its quick short term obligations

2. Capital structure ratio

The long-term lenders/creditors would judge the soundness of a firm on the basis of the long term financial strength measured in terms of its ability to pay the interest regularly as well as repay the installment of the principal on due dates or in one lump sum at the time of maturity. The long term solvency of firm can be examined by using leverage or capital structure ratios. The leverage or capital structure ratios may be defined as financial ratios which throw light on the long term solvency of a firm as reflected in its ability to assure the long term lenders with regard to (i) periodic payment of interest during the period of the loan and (ii) repayment of the principal on maturity or in predetermined installments at due dates. a) Debt equity ratio- This ratio measures the long term or total debt to shareholders equity. This ratio reflects claims of creditors and shareholders against the assets of the firm. Debt Equity Ratio is given by: Long term debt Debt Equity Ratio = Shareholders equity

Particulars Debt

2004

2005

2006

2007

2008

82.00 61.50 41.00 20.05 0.00

Equity(Promoter contribution) 56.38 54.07 56.88 68.94 84.49 Debt equity ratio 1.454 1.14 0.721 0.291 0.00

Debt equity ratio 1.6 1.4 1.2

Debt/Equity

1.454 1.14

1 0.8 0.6 0.4 0.2 0 1 2 3 Years 4 5 0.291 0 0.721

InterpretationThe debt equity ratio is an important tool of financial analysis to appraise the financial structure of the firm. The ratio reflects the relative contribution of creditors and owners of the business in its financing. A high ratio shows a large share of financing by the creditors of the firm; a low ratio implies the a smaller claim of the creditors. Debt Equity ratio indicates the margin of safety to the creditors. The debt-equity ratio is in decreasing and in 2008 it become nil, which implies that the owners are putting up relatively more money of their own.

3. Profitability ratios related to salesThese ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales. If adequate profits are not earned on sales, there will be difficulty in meeting the operating expenses and no returns will be available to the owners. A. Net profit margin-

It is also known as net margin. This measures the relationship between the net profits and sales of a firm. Depending on the concept of net profit employed. , this ratio can be computed as followsEarnings after tax Net Profit ratio = Net sales 100

Particulars

2004

2005 17.82 292.04

2006 27.05 321.24

2007 35.56 353.36

2008 43.75 388.7

Earnings after tax 10.68 Net sales Net profit margin 265.49

4.023% 6.102% 8.420% 10.06% 11.25%

Interpretation The net profit margin is indicative of managements ability to operate the business with sufficient success not only to recover from revenues of the period, the cost of services, the operating expenses and the cost of borrowed funds, but also to leave a margin of reasonable compensation to the owners for providing their capital at risk. A high profit margin would ensure the adequate return to the owners as well as enable the firm to withstand adverse economic conditions. A low net profit margin has the opposite implications. With respect to the above firm the net profit margin is increasing trend so it will show that the company is in good condition and the demand for the product is increasing.

4 . Profitability ratios related to InvestmentsReturn on InvestmentsReturn on investments measures the overall effectiveness of management in generating profits with its available assets. There are three different concepts of investments in financial

literature: assets, capital employed and shareholders equity. Based on each of them, there are three broad categories of ROIs. They are I. Return on assets, II. Return on total capital employed.

Return on assetsThe profitability ratio is measured in terms of relationship between net profits and assets. The ROA may also be called profit-to-asset ratio. It can be computed as followsNet profit after tax Return on Assets = Average total assets 100

Particulars Earnings after tax

2004 10.68

2005 17.82

2006 27.05

2007 35.56 200.54

2008 43.75 208.34

Average total assets 208.39 ROA

199.54 195.9

5.125% 8.93%
ROA

13.81% 17.73% 20.99%

5.13% 20.99% 8.93%

13.81% 17.73%

Interpretation-

Return on assets employed is favorable. That means the firm is in a position to employ its assets in an efficient manner.

Return on Capital EmployedIt is similar to ROI except in one respect. Here the profits are related to the total capital employed. The term capital employed refers to long term funds supplied by the lenders and owners of the firm. It is given by the formulaEBIT Return on Capital employed = Average total capital employed Particulars EBIT 2004 34.82 2005 42.24 2006 52.66 195.90 2007 62.04 2008 70.99 100

total capital employed 203.39 199.54 ROCE 17.2%

200.54 208.34 34.07%

21.16% 28.92% 30.9%

ROCE 35.00% 30.00% 25.00% Returns 20.00% 15.00% 10.00% 5.00% 0.00% 1 2 Years 3 ROCE 4 5 21.16% 17.20% 28.92% 30.90%

34.07%

Interpretation:-

The capital employed basis provides a test of profitability related to the source of long term funds. The higher the ratio, the more efficient is the use of capital employed. From the above table we can say that the ROCE is quite high. Compared to previous years ratio. It is good for the company.

Repayment Period and debt service coverage A) Projections of performance and profitability
particulars A) Sales Less: Excise 2004 300.00 34.51 265.49 2005 330.00 37.96 292.04 2006 363.00 41.76 321.24 2007 399.30 45.94 353.36 2008 439.23 50.53 388.70

Net sales
B) cost of Production 1.Raw material consumed 2.Power & Fuel 3.Direct labor & wages 4.consumable stores 5.Repair & Maintenance 6.Othermanufacturingexpences 7.Depreciation 8.Preliminary expenses w/off

185.84 6.00 12.24 0.60 1.20 0.72 24.97 2.40

204.42 6.60 13.46 0.66 1.32 0.79 19.10 2.40

224.87 7.26 14.81 0.73 1.65 1.11 14.66 2.40

247.35 7.99 16.29 0.80 2.48 1.55 11.30 2.40

272.09 8.78 17.92 0.88 3.47 2.17 8.75 2.40

Total Cost of Production

Add: Opening stock Less: Closing Stock D)Cost of goods sold E) Gross Profit (B-D) F) Interest on 1) Term Loan 2) Working Captial Total G) Selling, administration Exp

233.47 0.00 4.50 229.47 36.02

248.76 4.50 4.78 248.78 43.56

267.49 4.78 5.14 267.13 54.11

290.16 5.14 5.58 289.72 63.64

316.46 5.58 6.09 315.96 72.74

12.80 6.75 19.55 1.20

10.03 6.75 16.78 1.32 25.45

7.26 6.75 14.01 1.45 38.65

4.50 6.75 11.25 1.60 50.80

1.73 6.75 8.48 1.76 62.51

H)Profit
(F+G))

Before

Taxation(E- 15.27

I) Provision for Taxation J) Profit after tax (H-I) K) Depreciation L) Net Cash accruals( J+K)

4.58 10.69 24.97 35.66

7.64 17.82 19.10 36.92

11.59 27.05 14.66 41.72

15.24 35.56 11.30 46.86

18.75 43.75 8.75 52.5

B) Projected Cash Flow Statement

SL.NO A) Particulars Sources of funds 1.Net profit before interest and tax 2. Depreciation 3.Promoters capital 4.own contribution towards 5.term loan 6.working capital loan 7.Sundry creditior 8.Amortisationofpreliminaryexpences 34.82 24.97 51.38 5.00 102.50 50.00 7.74 2.40 0.77 2.40 0.85 2.40 0.94 2.40 1.03 2.40 42.24 19.10 52.66 14.66 62.04 11.30 70.99 8.75 2004 2005 2006 2007 2008

Total:

278.8

64.52

70.58

76.68

83.17

B)

Application of funds 1. Buldings 2. Land 3.Macinary 4.Electrification 5.Electricity Deposit 6.Preliminary Expenditure 6. Increase in receivables 7.incerase in stock of material 9.increase in stock of finished goods 10.Drawing/ Dividend 11.interest on loans 12.income tax 13.Repayment of term loans Total Surplus/deficit Opening Balance Add: surplus/ deficit Closing Balance 44.25 30.97 4.50 3.00 19.55 0.00 20.5 276.65 2.15 0.00 2.15 2.15 4.42 3.10 0.28 10.00 16.78 4.58 20.5 59.67 4.85 2,15 4.85 7.00 4.87 3.41 0.36 15.00 14.01 7.64 20.5 65.79 4.79 7.00 4.79 11.80 5.35 3.75 0.44 15.00 11.25 11.59 20.5 67.88 8.80 11.80 8.80 20.6 5.89 4.12 0.51 20.00 8.48 15.24 20.5 74.74 8.43 20.6 8.43 29.03 25.00 22.00 83.38 6.50 5.00

Projectd Balance Sheet

SL.NO Particulars A Captial & Liability Promoter captial Own contribution 0.00 56.38 64.07 0.00 71.88 0.00 83.94 0.00 104.49 0.00 2004 2005 2006 2007 2008

Less

Drawings Equity Retained Earning

3,00 53.38 10.69 64.07

10.00 54.07 17.82 71.88 61.50 8.52 50.00 7.64

15.00 56.88 27.05 83.94 41.00 9.37 50.00 11.59

15.00 68,94 35.56

20.00 84.49 43.75

104.49 128.25 20.50 10.31 50.00 15.24 0.00 11.34 50.00 18.75

Term loan(Debt) Sundry creditors Working Captial loan Provision for tax Grand Total Assets: Fixed assets land Electricity deposit Cash & Bank Balances Receivables Stock of material Stock of finished goods

82.00 7.74 50.00 4.58

203.39 199.54 195.90 200.54 208.34

89.91 22.00 5.00 2.15 44.25 30.97 4.50

70.81 22.00 5.00 7.00 48.67 34.07 4.78 7.20

56.14 22.00 5.00 11.80 53.54 37.48 5.14 4.80

44.84 22.00 5.00 20.6 58.89 41.23 5.58 2.40

36.09 22.00 5.00 29.03 64.78 45.35 6.09 0.00

Preliminary expences not w/off 9.60 Grand Total

208.39 199.54 195.9

200.54 208.34

Debt Service Coverage Ratio:(DSCR)

It is considered a more comprehensive and apt measure to compute debt service capacity of firm. It provides the value in terms of the number of times the total debt service obligations consisting of interest and repayment of principal in installments are covered by the operating funds available after the payment of tax : earnings after taxes, EAT+interest+Depreciation+Other non cash expenditure like amortization. EAT+interest+Depreciation+Other Non cash expenditure

DSCR

year

Net profit for the year Interest on term loan Repayment of term loan 19.55 16.78 14.01 11.25 8.48 20.5 20.5 20.5 20.5 20.5 Installments

2004 35.66 2005 36.92 2006 41.72 2007 46.86 2008 52.50

Particulars

2004

2005

2006

2007

2008

Net Cash Accruals 35.66 36.92 41.72 46.86 52.50 Instalment DSCR 20.5 1.74 20.5 1.80 20.5 2.03 20.5 2.29 20.5 2.56

Debt service coverage Ratio 3 2.5 2 1.5 1 0.5 0 1 2 Years 3 DSCR 4 5 DSCR 1.74 2.03 2.29 2.56 1.8

Interpretation:The higher the ratio, the better it is, A ratio of less than one may be taken as a sign of long term solvency problem as it indicates that the firm does not generate enough cash internally to service debt. in general, lending financial institution consider 2:1 as satisfactory ratio. In this project DSCR is in increasing trend it shows that firm is able to meet its debt obligation.