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RASTRIYA ISPAT NIGAM LIMITED
VISAKHAPATNAM
Sri.K.SANYASI RAO
ASST. GENERAL MANAGER (F&A)
Visakhapatnam Steel Plant
Visakhapatnam
Project Guide
Station: Visakhapatnam
Date : 17-01-2011
K.SANYASI RAO
ASST. GENERAL
MANAGER (F&A)
RASTRIYA ISPAT NIGAM LIMITED
Visakhapatnam Steel Plant
2
DECLARATION
Place: VISAKHAPATNAM
Date: 17-01-2011
3
ACKNOWLEDGEMENT
4
CHAPTER 1
5
GENERAL INTRODUCTION
The end products of the business transactions are the Financial Statements
comprising the position statement or Balance Sheet and the Income Statement or
Profit and Loss Account. Financial statements are the basics for the decision making
by the Management and as well as all other Stakeholder who are interested in the
affairs of the firm such as investors, creditors , customers ,suppliers , financial
institutions , employees ,potential investors , govt., and the general public.
The main objective of the study is to apply theoretical concepts to the practical
situations of RINL so as to compare and correlate the actual achievements with a
theoretical conclusion.
The main objectives of the study are:
6
METHODOLOGY OF THE STUDY:
1. Primary Data:
It is the information collected directly with out any references. In this study it
is gathered through interviews with concerned officers and staff, either individually or
collectively, sum of the information has been verified or supplemented with personal
observation conducting personal interviews with the concerned officers of Finance
Department of Visakhapatnam Steel Plant.
2. Secondary Data:
The Secondary Data was collected from already published sources such as,
Pamphlets of Annual Reports, Returns and Internal Records, reference from Text
Books and Journals relating to Financial Management. The data collection includes:
(a) Collection of required data from Annual Reports of Visakhapatnam
Steel Plant.
(b) Reference from Text Books and Journals relating to Financial
Management.
7
LIMITATIONS OF THE STUDY:
8
CHAPTER-II
9
DEVELOPMENT OF STEEL INDUSTRY IN INDIA:
S No Year Growth
1. 1830 Osier Marshall heather constructed the first manufacturing
plant at port-motor in Madras Presidency.
2. 1874 James Erskin founded the Bengal Frame Works.
3. 1899 Jamshedji TATA initiated the scheme for an integrated
Steel Plant
4. 1906 Formation of TISCO
5. 1911 TISCO started production
6. 1918 TISCO was founded
7. 1940-1950 Formation of My sore Iron and Steel initiated at
Bhadravathi in Karnataka.
8. 1951-1956 First Five-Year Plan - The Hindustan Steel Limited (HSL)
was born in the year 1954 with decision of setting up three
plants each with 1 million tones ingot steel per year at
10
Rourkela, Bhilai, and Durgapur. TISCO started its
expansion programmed.
9. 1956-1961 Second Five-Year Plan - A bold decision was taken up to
increase the ingot steel output in India to 6 million tones
per year and its production at Roukema, Bhilai and
Durgapur Steel Plant started.
10. 1961-1966 Third Five-Year Plan – During the plan the three Steel
Plants under HSL & TISCO were expanded.
11. 1964 Bokaro Steel Plant came into existence
12. 1966-1969 Recession Period – Till the expansion programs were
actively existed during this period
13. 1969-1974 Fourth Five-Year Plan – Salem Steel Plant started.
Licenses were given for setting up of many Mini Steel
Plants and re-rolling mills Government of India. Plants in
south are each in Visakhapatnam and Karnataka. SAIL
was formed during this period on 24th January 1973.
14. 1974-1979 Fifth Five-Year Plan – The idea of setting up the fifth
integrated Steel Plant, the first re-based plant at
Visakhapatnam took a definite shape. At the end of the
Fifth Five-Year Plan the total installed capacity from six
integrated plants was up to 10.6 million tons.
15. 1979-1980 Annual Plan - The Erstwhile Soviet Union agreed to help
in setting up the Visakhapatnam Steel Plant.
16. 1980-1985 Sixth Five-Year Plan – Work on Visakhapatnam Steel
Plant started with a big bang and top priority was accorded
to start the plant. Schemes for modernization of Bhilai
Steel Plant, Rourkela Steel Plant, Durgapur steel plant and
TISCO were initiated. Capacity at the end of Sixth Five-
Year Plan from six integrated plants stood 11.50 million
tons.
17. 1985-1991 Seventh Five-Year Plan – Expansion works at Bhilai and
Bokaro Steel Plant completed. Progress of Visakhapatnam
Steel Plant picked up and the nationalized concept has been
introduced to commission the plant with 30 MT liquid steel
capacities by 1990.
18. 1992-1997 Eight Five-Year Plans – The Visakhapatnam Steel Plant
was commissioned in 1992. The cost of plant has become
11
around 8755 cores. Visakhapatnam Steel Plant started the
production and modernization of other steel plants is also
duly engaged.
19. 1997-2002 Ninth Five-Year Plant – Restructuring of Visakhapatnam
Steel Plant and other public sector undertakings.
No new steel plant came up, as the first plan was mainly agriculture oriented.
However, IISCO was allowed to expand form 1MT/year to 2 MT/year of ingots, and
from 0.5 MT/year to 1.0 MT/year of steel. And, the First Five-Year Plan
contemplated a new Steel Plant to be erected in Public Sector.
Thus the Hindustan Steel Limited (HSL) was born on 19 th Jan 1954 with the
decision of setting up three steel plants each with one million tons ingot steel per year
at Rourkela, Bhilai and Durgapur. Though TISCO and IISCO were scheduled to
expand, TISCO started its expansion program.
During this period, additional steel producing capacity was added and a
decision was taken to increase the ingot steel output in India to 6 million tons per
year. The three one million ton steel plant one each at Rourkela, Bhilai and Durgapur
12
were completed during this period. They started production during the end of this
plan.
In addition to the above BSP and DSP each were having the capacity to
produce 300,000 tons of pig iron for sale.
During this period, the three steel plants under HSL, TISCO, and IISCO were
expanded as shown below. However, these could be completed only by 1968 – 1969.
The ambling expansion program taken up during the Third Five-Year Plan
could not be completed during that period. All the expansion programs were actively
executed during this period
Balancing facilities were incorporated in all the steel plants. Salem Steel Plant
work was taken up during this period. Licenses were given for setting up of many
Mini Steel Plants and Rolling Mills. Government accepted the idea of setting up two
more Steel Plants in the South one at Visakhapatnam and other at Hospet in
Karnataka. Both of them were envisaged to produce plain low Carbon Steel Products
13
initially with a capacity of 2 MT/year of ingots. Steel authority of India Ltd., was also
formed during this period on 2nd Jan 1973. Central Research and Development
Organization was set up in June, 1973 to tackle the research and development
problems of Iron and Steel Industry.
Annual plans 1979 to 1980: various plans named above were reviewed and the
progress on different plants consolidated. Soviet – Union has agreed to help in setting
up the Vizag steel plant.
Almost all the units in the expansion work of Bhilai and Bokaro to 4 MT
completed. Progress of Vizag Steel Plant picked up and the rationalized concept has
been introduced to commission the plant with 3 MT liquid steel capacities by 1990.
14
All units of Vizag Steel Plant were commissioned by July, 1992. Government
of India has given permission to set up Mini Steel Plants in Private Sectors.
Global Scenario:
As per IISI
In March 2005 World Crude Steel output was 92.8MT when compared to
March 2004 (87.2 MT), the change in percentage was 6.5%.
China remained the world’s largest Crude Steel producer in 2005 also
(27.5MT) followed by Japan (9.6MT) and USA (8.1MT). India occupied the
8th position (8.8MT)
The global economy witnessed a gradual recovery from late 2003 onwards.
China has become one of the major factors currently driving the world
economy.
15
As a result of these economic developments IISI has projected an increase by
6.2% or 53 million metric tones in 2004 in the global consumption of finished
steel products. IISI has split the growth into two separate areas, China and the
Rest of the World (ROW). Steel consumption in China has been estimated to
increase by 13.1% or 31 met in 2004.
With the economic liberalization that was initiated in 1992, Indian Steel
Industry has to accept the inevitable i.e. to appreciate the implications of low import
duty rated, face foreign competition and some how improve its strengths and
competitive edge to produce good quality products at lower prices and learn to
survive in the market place. Following liberalization, the steel Industry is well set on
the path of globalization. The dynamics of the World Steel Industry has a close
relation with Indian steel Industry. Presently in India, Steel products are being
produced from four different sources viz.,
16
Integrated Steel Plants
Re-rolling Mills
Integrated Steel Plants have larger capacity and produce Steel from basic raw
materials and the other three categories mentioned are characterized by low
investment and low break-even point.
Labour intensive.
They would have all facilities including raw materials resources, water supply,
Inter dependency of all the processing units on the proceeding and succeeding
17
Bhilai Steel Plant
The New Industrial policy has opened up the iron and steel sector for private
investment by
(a) Removing it from the list of industries reserved for public sector and
18
Imports of foreign technology as well as foreign direct investment are freely
permitted up to certain limits under an automatic route. Ministry of Steel plays the
role of facilitator, providing broad directions and assistance to new and existing steel
plants, in the liberalized scenario.
STEEL:
At present, total (crude) steel making capacity is over 34 million tons and
India, the 8th largest producer of steel in the world, has to its credit, the capability to
produce a variety of grades and that too, of international quality standards. As per the
ratings of the prestigious “World Steel Dynamics”, Indian HR products are classified
in the Tier II category quality products- a major reason behind their acceptance in the
world market. EU, Japan has qualified for the top slot, while countries like South
Korea, USA share the same class as India.
In pig iron also, the growth has been substantial. Prior to 1991, there was only
one unit in the secondary sector. Post liberalization, the AIFIs has sanctioned 21 new
projects with a total capacity of approx 3.9 million tones. Of these, 16 units have
already been commissioned. The production of millions in 2002-0n ton3. During the
year 2003-04, the production of Pig Iron was 5.221 million tones.
19
Market Scenario:
• Efforts are being made to boost demand particularly in rural areas and
also to increase exports.
Production:
respectively.
under:-
20
Demand- Availability of iron and steel in the country is projected by Ministry
of Steel annually.
quality.
Distribution controls on iron & steel removed except 5 priority sectors, viz.
Price increases of late have taken place mostly in long products than flat
products.
Iron & Steel are freely importable as per the extant policy.
India has been annually importing around 2.05 Million Tones of Steel.
21
Import duty on several raw materials used by the steel sector like non-coking
coal, met coke and nickel has been reduced to 5%. Import duty on coking coal
Iron & Steel are freely exportable and India is a net exporter of steel.
Advance Licensing Scheme allows duty free import of raw materials for
exports.
Duty Entitlement Pass Book Scheme (DEPB) also facilitates exports. The
Government has temporarily suspended the DEPB on iron & Steel &
ferroalloys w.e.f 27th March 2004 as a measure to increase Iron & Steel
availability in the domestic market.
Steel Exporter’s Forum has been set up to boost steel exports.
An Anti Dumping Directorate has been set up under the Ministry of
Commerce with adequate power to fight trade actions while remaining within
the WTO framework.
Customs Duty:
• The peak rate of Custom Duty has been reducing sharply during the
last 5 years. In the interim budget for 2004-05, announced in
January’2004 the peak rate was reduced from 25% to 20%. In 2004 the
Customs Duty on carbon steel items and pig iron was further reduced
to 5%.
• The custom duty on scrap was nil.
• Import duty on coking coal has been reduced to ‘nil’, and on
metallurgical coke reduced to 5%.
Excise Duty:
22
The Government has taken a number of steps to ensure the availability of iron
and steel items which inter-alias includes reduction in Excise Duty by 16% with
addition to Educational Cess 2% on 16%.
DF LEVY:
23
CHAPTER-III
COMPANY PROFILE
24
Plant was the effect of the persistent demands and mass movements. It is another step
towards increasing the country’s steel production.
The decision of the Government to set up an integrated steel plant was laid
down by the then Prime Minister Smt. Indira Gandhi. The Prime Minister laid the
foundation stone on 20th January 1971.
The Government of India and USSR signed an agreement on 12th June 1979
for the co-operation in setting up 3.4 million tones integrated Steel Plant. The project
was estimated to cost to Rs.3, 897.28 crores based on prices as on 4th Quarter of
1981.However, on completion of the construction and commissioning of the whole
Plant in 1992, the cost escalated to Rs.8, 755 crores based on prices as on 2nd Quarter
of 1994.
Unlike other integrated Steel Plants in India, Visakhapatnam Steel Plant is one
of the most modern steel plants in the country. The plant was dedicated to the nation
on 1st August 1992 by the then Prime Minister, Sri.P.V.Narasimha Rao.
It has set up two major Blast Furnaces, the Godavari and the Krishna, which
are the envy of any modern steel making complex.
The economy of a nation depends on core sector industries like iron and steel.
Steel is the basic input for construction, machines building and transport industries.
Keeping in view the importance of steel the following integrated steel plant with
25
foreign collaborations was constructed in the public sector in the post independence
era.
ORGANIZATION CHART
VISION:
We shall:
Harness our growth potential and sustain profitable growth.
26
Deliver high quality and cost competitive products and be the first choice of
customers.
Be a respected corporate citizen, ensure clean and green environment and develop
Mission:
To attain 16 million tone liquid steel capacity through technological up
-gradation, operational efficiency and expansion, to produce steel at international
standards of cost and quality, and to meet the aspirations of the stakeholders.
Core Values:
Commitment
Customer satisfaction
Continuous improvement
Concern of environment
The modern era in steel making began with the introduction of Henry
Bessemer's & Bessemer process in the late 1850’s. This enabled steel to be produced
27
in large quantities cheaply, so that Mild Steel is now used for most purposes for
which wrought iron was formerly used. This was only the first of a number of
methods of steel production. The Gilchrist-Thomas process (or basic Bessemer
process) was an improvement to the Bessemer process, lining the converter with a
basic material to remove phosphorus. Another was the Siemens-Martin process of
open hearth steelmaking which like the Gilchrist-Thomas process complemented,
rather than replaced, the original Bessemer process.
Whole on the one hand, HRD should appropriately harness the employee
potential for the attainment of the company objectives, the company on the
in human talent gets the best opportunity for self expression, all round
People are more than mere resources and therefore it will be the company’s
sincere endeavor to treat people with all the respect and that is warranted when
HRD does not refer to training alone, nor it is just a new name for training. In
All functional and divisional heads responsible for various activities of the
company will imbibe the HRD spirit and suitability integrate HRD into their
30
HRD Objectives of Visakhapatnam Steel Plant:
management decisions and actions with the requisite care, concern and
developmental approach.
To initially enable the employees and the organization achieve its mission and
It is widely recognized that the work itself and the work environment are
factors are paramount importance for health and well-being of the working and
general population. Most industrial jobs are inherently associate with certain working
conditions which are inimical to health and workers exposed to them sooner or later
succumb to their adverse influence unless adequately protected. The principles of
occupational risk management may be the same in developed and developing
countries. However, there can be a wide diversity in practice. A major trend in the
regulation of industrial risks to human health and the environment is the provision of
relevant information to all stakeholders and risk bearers. The British Standard
Institute (BSI): Occupational Health and Safety Assessment Series (OHSAS)
specification provide theoretical insights to enable an organization to control its
occupational health and safety (OH&S) risks and improve its performance.
31
Visakhapatnam Steel Plant (Vizag Steel) is an ISO 9001, ISO 14001, and
OHSAS 18001, certified public sector organization in India. It is the only steel plant
in India, had all the three certificates. This paper reviews key aspects like hazard
identification and risk assessment(HIRA) carried out in 50 departments for physical,
chemical and Biological hazards, risk control measures taken, dissemination of
occupational risk management information to 17,000 workforce as a part of OHSAS
18001 certification process. We summarize the role of occupational health services
department in hazard identification, risk assessment and risk control at various
working environments with an emphasis on continual improvement and occupational
risk management.
Objectives:
Instill right attitude amongst employees and facilitate them to excel in their
Quality Policy:
customer.
32
Follow clearly documented procedures for achieving expected quality standard
Dry Quenching of hot coke and production of steam and power from hot inert
gases.
3200 cu. m Blast Furnace having belled-less top equipment with conveyor
charging.
Use of on-line heat treatment “Temp core” processes for reinforcement bars.
33
First integrated steel plant to receive ISO 9002 certification for all its products.
Major Units:
ANNUAL CAP.
DEPARTMENTS UNITS (3.0 MT STAGE)
(‘000T)
3 Batteries each of 67 ovens & 7 Mts
COKE OVERNS 2,261
Height
2 Sinter machines of 312 Sqm grate
SINTER PLANT 5,256
area each
BLAST FURNACE 3,400 2 Furnaces of 3200 cu m volume each
3 LD Converters each of 150 Cum.
STEEL MELT SHOP 3,000 Volume and size 4 strand bloom
casters
LMMM 710 4 Stand finishing Mill
WRM 850 2 x 10 Stand finishing Mill
MMSM 850 6 Stand finishing Mill
Statistical Information:
34
YEAR EXECUTIVES NON-EXECUTIVES
31-3-1997 2617 14570
31-3-1998 2617 14572
35
16000 31-3-1997
14000 31-3-1998
31-3-1999
12000 31-3-2000
10000 31-3-2001
31-3-2002
8000
31-3-2003
6000 31-3-2004
4000 31-3-2005
31-3-2006
2000
31-3-2007
0 31/03/2008
EXECUTIVES NON- 31/03/2009
EXECUTIVES 31/03/2010
Engineering -14.34%
Diploma -10.33% Engineering
Diploma
ITI -39.35%
36
DIVISION-WISE MAN POWER:
Works -82.03%
Works
AWARDS:
1. ISO 9002 for SMS and all the down stream units – a unique distinction in
11. ISPAT Suraksha Puraskar (1st prize) for largest accident free period 1991-94.
12. PM Trophy for the year 2002-03 as the Best Integrated Steel Plant
37
15. Safety innovation award in 2006
The imagination and creativity of employees have always been key success
factors for the company. Employees of RINL have always been at the forefront in
contributing ideas for process improvements. Voluntary involvement of
employees in 4251 quality circles projects is a testimony of the interest exhibited
by employees in process improvements.
Safety and health of employees has always been the prime concern in the plant
and all efforts have been made to leverage upon the safety initiatives to maximize
employee morale and satisfaction. These initiatives have yielded positive results
with a 13.33% reduction in reportable accidents when compared to year 2007-08.
38
CHAPTER-IV
39
Financial Ratio Analysis
Introduction:
The traditional financial statements comprising the balance sheet and the profit
and loss account are proving the information related to the financial operation of the
firm. They provide some extremely useful information that mirrors the financial
position on a particular date in terms of the structure of assets, liabilities and owner’s
equity and so on. The profit and loss account shows the results of operations during a
certain period of time in terms of the revenues obtained and the cost incurred during
the year. Therefore, much can be learnt about a firm from a careful examination of its
financial statements. Users of financial statements can get further insight about
financial strengths and weaknesses of the firm if they properly analyze information
reported in these statements. Management should be particularly interested in
knowing financial weakness of the firm to take suitable corrective actions. The future
plans of the firm should be laid down in view of the firm’s financial strengths and
weaknesses. Thus, financial analysis is the starting point for making plans, before
using any sophisticated forecasting and planning procedures. Understanding the past
is a pre-requisite for anticipating the future.
40
The term ratio refers to the numerical or quantitative relationship between two
items/variables. This relationship can be expressed as:
1. Percentages, say, Net Profits are 25% of Sales (assuming Net Profit of
3. Proportion of numbers (the relationship between Net profits and Sales is 1:4).
These alternative methods of expressing items, which are related to each other,
are, for purpose of financial analysis, referred to as ratio analysis. It should be noted
that computing the ratios does not add any information already inherent in the above
figures of profits and sales. What the ratios do is that they reveal the relationship in a
more meaningful way so as to enable us to draw conclusions from them. The
rationale of ratio analysis lies in the fact that it makes related information comparable.
A single figure by itself has no meaning but when expressed in terms of a related
figure, it yields significant inferences. For instance, the fact that the Net profits of a
firm amount to, say Rs. Ten Lakhs throws no light on its adequacy or otherwise. The
figure of Net profit has to be considered in relation to other variables. How does it
stand in relation to sales? If, therefore, Net profits are shown in terms of their
relationship with items such as Sales, Assets, Capital employed, Equity capital and so
on, meaningful conclusions can be drawn regarding their adequacy.
To carry the above example further, assuming the capital employed to be Rs.50
lakh and Rs.100 lakh, the Net profit are 20% and 10% each respectively. Ratio
analysis, thus, as a quantitative tool, enables analysts to draw quantitative answers to
questions such as; are the Net profits adequate? Are the assets being used efficiently?
Is the firm solvent? Can the firm meet its current obligations and so on?
41
As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that presents facts on a comparative basis
and enables the drawing inference regarding the performance of a firm. Ratio
analysis is relevant in assessing the performance of a firm in respect to the following
aspects.
1. Liquidity position
2. Long-term solvency
3. Operational efficiency
4. Overall profitability
6. Trend analysis
1. Liquidity position:-
With the help of ratio analysis conclusions can be drawn regarding the
liquidity position of a firm. The liquidity position of a firm would be
satisfactory if it is able to meet its current obligations when they become due.
A firm can be said to have the ability to meet its short-term liabilities if it has
sufficient liquid funds to pay the interest on its short-maturing debt usually
within a year as well as to repay the principal. This ability is reflected in the
liquidity ratio of a firm. The liquidity ratios are particularly useful in credit
analysis by banks and other suppliers of short-term loans. Common liquidity
ratios include The Current ratio, Quick ratio and The operating Cash flow
ratio.
2. Long-term solvency:-
Ratio analysis is equally useful for assessing the long-term financial viability
of a firm. This aspect of the financial position of a borrower is of concern to
the long-term creditors, security analysts and the present and potential owners
of a business. The long-term solvency is measured by the leverage/capital
structure and profitability ratios, which focus on earning power and operating
efficiency. Ratio analysis reveals the strength and weaknesses of a firm in this
respect. The leverage ratios, for instance, will indicate whether a firm has a
reasonable proportion of various sources of finance or if it is heavily loaded
42
proportion of various sources of finance or if it is heavily loaded with debt in
which case its solvency is exposed to serious strain. Similarly the various
profitability ratios would reveal whether or not the firm is able to offer
adequate return to its consistent with the risk involved. It includes Debt-equity
ratio, Cash coverage ratio, the times interest earned ratio etc.
3. Operating Efficiency:-
Another dimension of the usefulness of the ratio analysis, relevant from the
view point of management, is that it throws light on the degree of efficiency in
the management and utilization of its assets. The various activity ratios
measure this kind of operational efficiency.
4. Overall Profitability:-
Unlike the outside parties, which are interested in one aspect of financial
position of a firm, the management is constantly concerned about the over-all
profitability of the enterprise. That is, they are concerned about the ability of
the firm to meet its short-term as well as long-term obligations to its creditors,
to ensure a reasonable return to its owners and secure optimum utilization of
the assets of the firm. This is possible if an integrated view is taken and all the
ratios are considered together.
5. Inter-firm Comparison:-
Ratio analysis not only throws light on the financial position of a firm but also
serves as a stepping stone to remedial measures. This is made possible due to
inter-firm comparison and comparison with industry averages. A single figure
of a particular ratio is meaningless unless it is related to some standard or
norm. One of the popular techniques is to compare the ratios of a firm with
the industry average. An inter-firm comparison would demonstrate the firm’s
position vis-à-vis its competitors.
6. Trend Analysis:-
43
Ratio analysis enables a firm to take the time dimension into account. In other
words, whether the financial position of a firm is improving or deteriorating
over the years. This is made possible by the use of trend analysis. The
significance of a trend analysis of ratios lies in the fact that the analysis can
know the direction of movement, i.e., whether the movement is favorable or
unfavorable. For example, the ratio may be low as compared to the norm but
the trend may be upward. On the other hand, though the present level may be
satisfactory but the trend may be a declining one.
Ratio Analysis-Limitations:
Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers from
various limitations. The operational implication of this is that while using ratios, the
conclusions should not be taken on their face value. Some of the limitations, which
characterize ratio analysis, are
i. Difficulty in comparison.
i. Difficulty in comparison:-
One serious limitation of ratio analysis arises out of the difficulty associated
with there comparability. One technique that is employed is inter-firm
comparison. But such comparison is vitiated by different procedures adopted
by various firms.
Differences in basis of inventory valuation (e.g.:- last in first out,
basis);
44
Capitalization of lease;
on.
45
are based. They are as good as the data itself, nevertheless, they are an
important tool of financial analysis.
statements. Before calculating ratios one should see whether proper concepts
The purpose of the user is also important for the analysis of ratios. A creditor,
ratios. The purpose (or) object for which ratios are required to be studied
should always be kept in mind for studying various ratios. Different objects
ratios. The ratios should match the purpose for which these are required.
Ratio Analysis-Conclusion:
Calculating a large number of ratios without determining their need in the present
context may confuse the things instead of solving them. Only those ratios should be
selected which can throw proper light on the matter to be discussed.
Unless otherwise the ratios calculated are compared with certain standards one
current ratio (2:1), may be industry standards, may be projected ratios etc.
46
The comparison of calculated ratios with the standards will help the analyst in
The ratios are only the tools of analysis but their interpretation will depend
upon the caliber and competence of the analyst. He should be familiar with
A wrong interpretation may create havoc for the concern since wrong
conclusions may lead to wrong decisions. The utility of ratios is linked with
The ratios are only guidelines for the analyst; he should not base his decisions
conclusions.
The study of ratios in isolation may not always prove useful. The
interpretation should use the ratios as guide and may try to solicit any other relevant
information which helps is reaching a correct decision.
Ratio Analysis-Types:
Several ratios, calculated from the accounting data, can be grouped into
various classes according to financial activity or function to be evaluated. As stated
earlier, the parties interested in financial analysis are short-term and long-term
creditors, owners and management. Short-term creditors` main interest is in the
liquidity position or the short-term solvency of the firm. Long-term creditors`, on the
other hand, are more interested in the long-term solvency and profitability of the firm.
Similarly, owners concentrate on the firm’s profitability and financial condition.
Management is interested in evaluating every aspect of the firm’s performance. They
have to protect the interests of all parties and see that the firm grows profitably. In
view of the requirements of the various users of ratios, we may classify them into the
following four important categories:
47
LIQUIDITY RATIOS
LEVERAGE RATIOS
ACTIVITY RATIOS
PROFITABILITY RATIOS
LIQUIDITY RATIOS:
It is extremely essential for a firm to be able to meet its obligations as they
become due. Liquidity ratios measure the firm’s ability to meet current obligations.
In fact, analysis of liquidity needs the preparation of cash budgets and cash
and Fund Flow statements; but liquidity ratios, by establishing a relationship between
cash and other current assets to current obligations provided a quick measure of
liquidity. A firm should ensure that it does not suffer from lack of liquidity, and also
that it does not have excess liquidity. The failure of a company to meet its obligations
due to lack of sufficient liquidity, will result in a poor creditworthiness, loss of
creditors` confidence, or even in legal tangles resulting in the closure of the company.
A very high degree of liquidity is also bad; idle assets earn nothing. The firm’s funds
will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a
proper balance between high liquidity and lack of liquidity. The most common ratios,
which indicate the extent of liquidity or lack of it, are:
1. CURRENT RATIO
2. QUICK RATIO
3. CASH RATIO
1. CURRENT RATIO:
48
Current assets
Current Ratio =
Current liabilities
Current assets include cash and those assets, which can be converted into cash
within a year, such as Marketable Securities, Debtors and Inventories. Prepaid
expenses are also include in current assets as they represent the payments that will not
be made by the firm in future. Current Liabilities include Creditors, Bill payable,
Accrued expenses, Short-term bank loan, and Income Tax Liability and Long-term
debt maturing in the current year.
The current ratio is a measure of the firms` short-term solvency. The higher
the current ratio, the larger is the amount of rupees available per Rupee of current
liability, the more is the firms` ability to meet current obligations and the greater is the
safety of funds of short-term creditors.
2. QUICK RATIO:
Quick assets
Quick Ratio =
Quick liabilities
Quick assets or Liquid assets mean those assets which are immediately
convertible into cash without much loss. All current assets except prepaid expenses
and inventories are categorized in liquid assets. Quick liabilities means those
liabilities, which are payable within a short period. Normally, Bank overdraft and
Cash credit facility, if they become permanent mode of financing are in quick
liabilities.
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3. CASH RATIO:
LEVERAGE RATIOS:
The short-term creditors like bankers and suppliers of raw material are more
concerned with the firms` current debt-paying ability. On the other hand, long-term
creditors like debenture holders, financial institutions etc., are more concerned with
the firms` long-term financial strength. In fact, a firm should have strong short-as
well as long-term financial position. To judge the long-term financial position of the
firm, financial leverage, or Capital structure, ratios are calculated. These ratios
indicate mix of funds provided by owners and lenders. As a general rule, there should
be an approximate mix of debt and owner’s equity in financing the firms` assets.
The manner in which assets are financed has a number of implications. First,
between debt and equity, debt is more risky from the firms` point of view. The firm
has a legal obligation to pay interest on debt holders, irrespective of the profits made
or losses incurred by the firm. If the firm fails to debt holders in time, they can take
legal action against it to get payment and in extreme cases, can force the firm into
liquidation.
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b. Their earnings will be magnified, when the firm earns a rate of return on the
total capital employed higher than the interest rate on the borrowing funds.
The process of magnifying the shareholders return through the use of debt is
Leverage ratios may be calculated from the balance sheet to determine the
proportion of debt in total financing. Many variations of these ratios exist; but all
these ratios indicate the same thing-the extent to which the firm has relied on debt in
financing assets. Leverage ratios are also computed from the profit and loss items by
determining the extent to which operating profits are sufficient to cover the fixed
charges.
The relationship describing the lender contribution for each rupee of the
owner’s contribution is called DEBT-EQUITY RATIO. DEBT – EQUITY
RATIO is directly computed by the following formula.
DEBT
Debt-Equity Ratio =
EQUITY
PROPRIETARY RATIO:
This ratio states relationship between share capital and total assets.
Proprietor’s equity represents equity share capital, preference share capital and
reserves and surplus. The latter ratio is also called capital employed to total assets.
EQUITY SHARE CAPITAL
Proprietary Ratio =
TOTAL TANGIBLE ASSETS
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PROPRIETORS EQUITY
(OR)
TOTAL TANGIBLE ASSETS
This ratio indicates the extent to which earnings can decline without resultant
financial hardship to the firm because of its inability to meet annual interest cost. For
example, coverage of 5 times means that a fall in earnings unto (1/5 th ) level would be
tolerable, as earnings to service interest on debt capital would be sufficiently
available. This ratio is measured ad follows:
EBIT
Interest Coverage Ratio = ---------------------------------
INTEREST CHARGES
This ratio indicates the extent to which Equity capital is invested in the net
fixed assets. It is expressed as follows:
FIXED ASSETS
Fixed Assets To Net Worth =
NET WORTH
Net Worth is represented by Equity Share Capital plus Reserves and Surpluses. If the
fixed assets are more than the Net Worth, difficulties may arise, as the depreciation
will reduce profit. This also means that creditors have contributed to fixed assets.
The higher this ratio, the less will be the protection to creditors. If this ratio is too
high, the firm may find itself handicapped, as too much capital is tied up in fixed
assets but not circulating.
ACTIVITY RATIOS:
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Funds creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales. Activity
ratios are employed to evaluate the efficiency with which the firm managers and
utilizes its assets. These ratios are also called Turnover Ratios because they indicate
the speed with which assets are being converted or turned over into sales. Activity
ratios, thus, involve a relationship between sales and assets. A proper balance
between sales and assets generally reflects that assets are managed well. Several
activity ratios can be calculated to judge the effectiveness of asset utilization.
Inventory turnover ratio indicates the efficiency of the firm in producing and
selling its products. It is calculated by dividing the cost of goods sold by the average
inventory.
A firm sells goods for cash and credit. Credit is used marketing tool by a
number of companies. When the firm extends credits to its customers, debtors
(accounts receivables) are created in the firms` accounts. The debtors are expected to
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be converted into cash over a short period and, therefore, are included in current
assets. The liquidity position of the firm depends on the quality of debtors to a greater
extent. Debtors turnover ratio indicates the velocity of debt collection of a firm. Un
simple wards it indicates the number of times average debtors are turned over during a
year.
Credit Sales
The fixed assets turnover ratio measures the efficiency with which the firm is
utilizing its investments in fixed assets, such as land, building, plant and machinery,
furniture, etc. It also indicates the adequacy of sales in relation to the investment in
fixed assets. The fixed assets turnover ratio is sales divided by net fixed assets. The
firm assets turnover ratio should be compared with past and future ratios and also with
ratio of similar firms and the industry average. The high fixed assets turnover ratio
indicates efficient utilization of fixed assets in generating sales, while low ratio
indicates inefficient management and utilization of fixed assets.
This ratio indicates the extent to which the debts have been collected in time.
The debt collection period indicates the average debt collection period. This ratio is a
good indicator to the lenders of the firm, because it explains to them whether their
borrower is collecting from its debt in time. An increase in this period indicates
blockage of funds in debtors.
Sales
Fixed Assets Turnover Ratio =
Net fixed assets
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WORKING CAPITAL TURNOVER RATIO:
Working capital turnover ratio indicates the velocity of the utilization of net
working capital. This ratio indicates the number of times the working capital is
turned over in the course of a year. This ratio measures the efficiency with which the
working capital is being used by a firm. A higher ratio indicates efficient utilization
of working capital and low ratio indicates otherwise. But a very high working capital
turnover ratio is not a good situation for any firm and hence care must be taken while
interpreting the ratio. Making of comparative and Trend Analysis can at best use this
ratio for different firms in the same industry and for various periods. This can be
calculated as follows:
Sales
Working Capital Turnover Ratio =
PROFITABILITY RATIOS:
A company should earn profits to Survive and Grow over a long period of
time. Profits are essential, but it would be wrong to assume that every action initiated
by management of a company should be aimed at maximizing profits, irrespective of
social consequences.
Profit is the difference between revenues and expenses over a period of time (usually
a year). Profit is the ultimate “Output” of a company, and it will have no future if it
fails to make sufficient profits. Therefore, the financial manager should continuously
evaluate to the efficiency of the company in term of profits. The profitability ratios
are calculated to measure the operating efficiency of the company. Besides
management of the company, creditors and owners are also interested in the
profitability of the firm. Creditors want to get interest and repayment of principle
regularly. Owners want to get a required rate of return on their investment. This is
possible only when the company earns enough profits.
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Generally two major types of profitability ratios are calculated.
2. CASH MARGIN
3. OPERATING MARGIN
Gross profit margin reflects the efficiency with which the management
produces each unit of product. This ratio indicates the average spread between
the cost of goods sold and the sales revenue.
iii. A combination of variations in sales prices and costs, the margin widening,
and
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iv. Increases in the proportionate volume of higher margin items.
The analysis of these factors will reveal to the management that how a
depressed gross profit margin can be improved.
A low gross profit margin may reflect higher cost of goods sold due to the
firms` inability to purchase raw materials at favorable terms, inefficient utilization of
plant and machinery, resulting in higher cost of production. The ratio will also be low
due to fall in prices in the market, or market reduction in selling price by the firm in
an attempt to obtain large sales volume, the cost of goods sold remaining unchanged.
The financial manager must be able to detect the causes of a falling gross margin and
initiate action to improve the situation.
Sales – Cost of goods sold
(Or)
Gross profit
Gross Profit Margin Ratio =
Sales
Net profit is obtained when operation expenses, interest and taxes are
subtracted from the gross profit.
This ratio also indicates the firms` capacity to withstand in adverse economic
conditions. A firm with a high net margin ratio would be in an advantageous position
to survive in the case of falling selling prices, rising costs of production or declining
demand for the product. It would really be difficult for a low net margin firm to
withstand these adversities. Similarly, a firm higher net profit margin can make better
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use of favorable condition, such as rising selling prices; fall in costs of production or
increasing demand for the product. Such a firm will be able to accelerate its profits at
a faster rate than a firm with a low net profit margin will.
Sales
Cash profit excludes depreciation. It means Net profit after interests and taxes
but before depreciation. This ratio indicates the relationship between the profit, which
accrues in cash and sales. Greater percentage indicates better position and Vice-Versa
as it shows the correct profit earned by the firm.
Operating margin ratio is also known as Operating Net profit ratio. It is the
ratio of operating profit to sales. This ratio establishes the relationship between the
total cost incurred and sales. Operating profit is the Net profit after depreciation but
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Before Interests and Taxes. The purpose of computing this ratio is to find out the
overall operational efficiency of the business concern. It measures the const of
operations per rupee of sales.
1. RETURN ON INVESTMENT
3. RETURN ON CAPITAL
RETURN ON INVESTMENT:
The term investment refers to Total Assets. The funds employed in Net assets
are known as Capital Employed. Net assets equal net fixed assets plus current assets
minus Current liabilities excluding Bank loans. Alternatively, Capital employed in
equal to Net worth plus total debt.
EBIT (1-T)
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ROI (or) ROTA =
Total Assets
EBIT (1-T)
ROI (or) RONA =
NET Assets
Where ROTA and RONA respectively Return on Total assets and Return on
Net assets.
NET Worth is also known proprietors Net Capital Employed. The Return
should be calculated with reference to profits belonging to shareholders, and
therefore, profit shall be Net profit after interest and tax. The profit for this purpose
will include even non-trading profit. This is given as follows:
RETURN ON CAPITAL:
The ROCE is the second type of ROI. The term capital employed refers to
long-term funds supplied by the creditors and owners of the fund. It can be computed
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in two ways. First, it is equal to non-current liabilities (long-term liabilities) plus
owner’s equity. Alternatively, it is equivalent to Net Working Capital plus Fixed
Assets. Thus, the Capital Employed provides a basis to test the profitability related to
the sources of long-term funds. A comparison of this ratio with similar firms, with
the industry average and overtime would provide sufficient insight into how
efficiency the long-term funds of owners and creditors are being used. The higher the
ratio, the more efficient is the use of Capital Employed.
NET PROFIT AFTER TAX/EBIT
ROCE = X 100
Average Total Capital Employed
This ratio establishes a relationship between net profit and gross fixed assets.
This ratio emphasizes the profit on investment in Fixed Assets. This ratio is
expressed as follows:
Net profit
RETURN ON GROSS BLOCK = X 100
Gross Block
NET PROFIT is profit before Tax. Gross Block means Gross fixed assets i.e., Fixed
assets before deducting depreciation.
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CHAPTER-V
62
Liquidity ratios:
Current assets
Current ratio= -------------------------------------------
Current liabilities
12000
10000
8000
2000
0 INTEPRETATION:
2005-06 2006-07 2007-08 2008-09 2009-10
The current ratio during the study period that is from 2005- 2006 to 2009-
2010, it has been observe that ,in the year 2005 to 2006 it is very high that
is 5.20.
The current ratio has been decreasing, but the company is able to maintain
higher current ratio than that of ideal ratio.
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As the current ratio is higher than the ideal current ratio, the liquidity
position is said to be good.
LIQUID/QUICK RATIO:
Liquid assets
Liquid ratio = ---------------------------
Current liabilities
10000
8000
2000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
It has been observed that the quick ratio of VSP is high compared with
ideal ratio.
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As the quick ratio during the period of study is higher than that of then
ideal ratio, the liquidity position is very good.
ABSOLUTE ASSETS
Absolute liquid/ cash ratio: --------------------------------------
CURRENT LIABILITIES
8000
7000
Cash & bank
6000
5000 Absolute Assets
4000
3000 Current liabilities
2000
ABSOLUTE LIQUID
1000 RATIO
0
2005-06 2006-07 2007-08 2008-09 2009-10
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The absolute liquid/ cash ratio of VSP is more than the ideal ratio. It means
the company is enjoying high liquidity and secured position.
LEVERAGE RATIO:
Outsider’s funds
Debt Equity Ratio =----------------------------------------
Shareholders’ funds
14000
12000
10000
8000
Outsiders funds
6000 Shareholders funds
4000
2000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
Company is less dependent on outsiders funds.
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It can be concluded that the company is maintaining less percent of debt in its
capital structure.
EBIT
Interest coverage ratio=---------------------------------------
FIXED INTEREST
3500
3000
2500 EBIT
2000
Fixed interest rate
1500
1000 Interest Coverage
500 Ratio
0
2005-06 2006-07 2007-08 2008-09 2009-10
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INTERPRETATION:
PROPRIETARY RATIO:
68
20000
15000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
Proprietary ratio is a test of long term financial position.
Except for the year 2009-10, all other years showing higher ratio, this
indicates sound long term financial position.
It is also indicating the sufficient use is being made of equity to finance the
business.
SOLVENCY RATIO:
Total Liabilities of outsiders
Solvency ratio =-------------------------------------------
Total assets
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(Rs. In Crores)
20000
15000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
Solvency ratio of VSP ltd during the year 2006-07 is high as compared to other years.
It solvency ratio is stable for last three years. It indicates the the solvency position of
FUNDED DEBT
Funded Debt To Total Capitalization =--------------------------------------
TOTAL CAPITALIZATION
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TABLE SHOWING YEAR-WISE FUNDED DEBT TO TOTAL
CAPITALIZATION RATIO (Rs. in crores)
14000
Secured loans
12000
10000 Unsecured loans
8000
Funded debt(A)
6000
4000 Share holder funds (B)
2000
Total capitalization
0 (A+B)
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
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During the year 2009-10, the funded debt to total capitalization is
9%.It is high as compared to other periods but in the real sense it is
quite low.
There is enough scope for the company to raise long term loans from
outsiders.
ACTIVITY RATIO:
NET SALES
Inventory Turnover Ratio =-----------------------------
AVG INVENTORY
72
10000
8000
6000
Net sales
4000 Avg inventory
2000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The Inventory Turn Over Ratio during the year 2009-10 was 3.46
Higher ratio also indicates that the company is not able to met the customers
demand properly.
No of working days
Inventory Conversion Period =---------------------------------------------
Inventory turnover ratio
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No. of working
days 365 365 365 365 365
Inventory
turnover ratio 5.91 6.55 6.13 6.85 7.24
Inventory
conversion 62 days 56 days 60 days 53 days 50 days
period
400
300
200 No.of working days
100
No.of working days Inventory turnover ratio
0
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10
INTERPRETATION:
the inventory has been disposed off or sold on an average of once in every 50
days.
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debtor turn
over ratio 68 times 41 times 59 times 64 times 53 times
12000
10000
2000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
No of Working Days
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Debtors turnover 60.97 41.48 58.59 55.68 67.12
ratio
Avg.collection 5 days 9 days 6 days 6 days 5 days
period
100%
80%
20%
0%
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
The avg collection period during the year 2009-10, is 5 days: it represents the
avg. no of days for which the firm has to wait before its receivables are
converted into cash.
During the period of study it has been observed that debt collection period
varies from 5 to 9 days
However, the avg. collection period during different periods is quite low. It
indicates the better quality of debtors and the efficiency of the debt collection
department.
Net sales
Working capital turnover ratio = -------------------------------------------------
Working capital
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TABLE SHOWING YEAR WISE WORKING CAPITAL TURNOVER RATIO
(Rs. in crores)
10000
INTERPRETATION:
The working capital turnover ratio during the year 2009-10 i 1.87 times. It
shows that only 1.05 of net current assets are used to generate 1 rupee of sales.
The higher working capital ratio indicates that the efficient utilization of
working capital.
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PROFITABILITY RATIOS:
Gross profit
Gross profit ratio = ---------------------------------*100
Net sales
12000
10000
8000
a.gross profit
6000
b. net sales
4000
2000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
It has been observed that the gross profit ratio is in increasing tread upto 2007-
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Sales are in increasing trend but the profit ratio is decreasing. It is due to
Operating profit
Operating profit ratio = ----------------------------------------*100
Sales
10000
8000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
Company recorded higher operating profit during 2008-09 and in other years,
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NET PROFIT RATIO:
Net profit
Net profit ratio = ----------------------------------------*100
Sales
12000
10000
8000
A.net profit
6000
B. net sales
4000
2000
0
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
Main attributable reason for the declining the profit is overall global meltdown
Even in adverse market conditions, the company is able to earn net profits.
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PROFITABILITY RATIOS BASED ON INVESTMENT:
14000
12000
10000
8000
Return on investment(A/B)
6000
B.share holders funds
4000
A.net sales
2000
0
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10
INTERPRETATION:
81
It has been observed that the ROI is fluctuating from year to year.
More reserves and surplus funds have been diverted to expansion activities
100%
80%
60%
B.equity share capital
40% A.net profit
20%
0%
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
Equity share capital is constant in in all the year whereas net profit is
fluctuating.
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Even though the return on equity capital is in decreasing position, the rate of
return in comparison with the marketing conditions is very satisfactory.
Global market conditions, increasing in operating costs, decrease in net profits
are the main reasons for the recording of low ratio.
INTERPRETATION:
83
Since the company is in expansion activity, the future earnings per share will
increase.
Net profit
Return on capital employed = -----------------------------------------
Capital employed
100%
80%
0%
2005-06 2006-07 2007-08 2008-09 2009-10
INTERPRETATION:
considering the present market conditions and from the security point of view.
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CHAPTER-VI
85
SUMMARY:
Visakhapatnam Steel Plant was founded on 20th Jan ’71 but became fully
operational on 1st Aug ’92. VSP is the first shore based integrated steel plant with
with the passage of years. The financial analysis of VSP by the use of various
86
SUGGESTIONS
The following suggestions will improve the financial position of the VSP.
PRODUCTION
processes.
consumption.
investment.
FINANCE
1) Improving financial leverage ratio for better returns.
PERSONNEL:
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4) Striving towards becoming the most chosen employer.
MARKETING
product.
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BIBLIOGRAPHY
BOOKS:
Leslie Chadwick
Barry J. Cooper
WEBSITES
http://vizagsteel.com
http://www.indiansteel.com
http://www.bee-india.nic.in.com
http://www.answer.com
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