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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

CHAPTER1 INTRODUCTION
INTRODUCTION:FINANCE A CONCEPT:The great industrialist of modern times Mr.Henry Ford once said Money is an Arm or a Leg, you either use it or lose it. This statement though apparently simple, is very meaningful. It brings home the significance of money or finance in modern day world of global business. In modern times finance is the basic foundation upon which all other economic activities are carried on. It is the master key which provides access to all the resources being employed either in manufacturing or merchandising activities. The Sanskrit saying Arthah Sachivah, which means Finance reigns supreme, speaks volume for the importance and significance attached to the finance function in a company. It has rightly been said that Business needs Money to make more money. However, it is also true that money begets more money, only when it is properly managed. Hence, efficient management of every business enterprise is closely linked with efficient management of its finances only. In conclusion we can say that: Finance is regarded as The life line of a business enterprise. Finance is the backbone of every business. Acharya Institute of Graduate Studies
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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

MEANING OF FINANCE AND BUSINESS FINANCE:Finance is one of the major elements, which acts as a catalyst for the overall growth of the economy. Finance is the lifeblood of the economic activity. Finance refers to the application of skills for manipulated use and control of money. The term Business finance involves Raising of funds and their effective utilization keeping in view the overall objectives of the firm. Business Finance explains the two terms, Business and Finance. In common parlance the word Business refers to merchandising the operation of some sort of a shop or store, large or small. Business Finance refers to that activity which is concerned with the acquisition and application of funds in the process of meeting financial needs and overall objectives of a business enterprise.

DEFINITIONS:According to Bonneville and Dewey, Financing consists in raising, providing and managing of all the money or funds of any kind used in connection with the business. According to Prather and Wert, Business Finance deals primarily with raising, administrating and distributing funds by privately owned business units operating in non-financial fields of industry. According to H.G. Gathman and H.E. Dougall, Business Finance can be broadly defined as the activity concerned with planning, raising, controlling and administrating of funds in the business. Acharya Institute of Graduate Studies
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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

FUNCTIONS OF BUSINESS FINANCE:Finance functions can be classified into two types and they are: Recurring Finance Function and Non-Recurring Finance Function. Recurring Finance Function Recurring finance function encompasses all such financial activities which are regularly carried out for the efficient conduct of the operations of a firm, such as: a) Planning of funds b) Raising of funds c) Allocation of funds d) Allocation of income e) Control of funds Non Recurring Finance Function This refers to the use of financial activities that a functional activity has to prefer very rarely, preparation of financial plan at the time of promotion of the company or its product for the first time. The financial readjustment is done at the time of liquidity crisis and valuation of the firm at the time of merger. Successful handling of all such problems requires high level of financial skills and understanding of principles and techniques of finance from recurring to non-recurring situation.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

Meaning of Financial Management: Financial Management is a specialized function directly associated with the top management. The significance of this function is not only seen in the Line but also in the capacity of Staff in the overall administration of the company. The management makes use of various financial techniques, methods and devices for administrating the financial assets of the firm in the most effective manner. Financial management also includes Anticipating Financial Needs, Acquiring Financial Resources and finally Allocating of Funds in Business, which refers to three As of financial management.

Definitions of Financial Management:According to Joseph and Massie, Financial Management is the operational activity of a business i.e. responsible for obtaining and effectively utilizing the funds necessary for efficient operation. According to Archer and Ambrosia, Financial Management is the application of the planning and control functions to the finance function.

Objectives of Financial Management:The twin objectives of financial management are Profit maximization and Wealth maximization. Acharya Institute of Graduate Studies

A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

1) Profit Maximization: Financial management is concerned with efficient use of resources, mainly capital funds. Profit maximization is a term which denotes the maximum profit to be earned by an organization in a given time period. Earning Profits (OR) Profit Maximization by a company is a social obligation. Profit is the only means through which the efficiency of a company is measured. Points in Favour of Profit Maximization:a) Profit is a barometer through which the performance of a business unit can be measured. b) Profit enables the business to venture into risk taking. c) It ensures to maximize welfare of shareholders, employees and creditors. d) It increases the confidence of management in expansion and diversification program of the company. e) It attracts investors to invest their savings in different securities from time to time. f) It indicates the efficient use of funds for different purposes.

Points against Profit Maximization:a) Profit maximization does not consider the elements of risk. b) Profit is not a clear term, because it may be accounting profit, economic profit, profit before tax, profit after tax, net profit, gross profit or Earnings per share. c) It encourages corrupt practices to increase the profits. d) It does not consider the impact of time value of money. Acharya Institute of Graduate Studies
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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

e) The true and fair picture of the company is not reflected through profit maximization and there are other parameters which are equally important. f) Profit maximization attracts cut-throat competition. g) Huge profits attract unnecessary government intervention. h) It is a narrow concept and it affects long-term liquidity of the company.

2) Wealth Maximization: Wealth maximization is also called Value Maximization. It refers to the gradual growth of the value of assets of the company over a period of time. It is the net present value of a financial decision. Any financial action results in positive NPV, which creates wealth to the organization. If NPV is negative, it reduces the existing wealth to the shareholders. Wealth maximization is symbolically expressed as W = NP, where as W = Wealth of the firm N = Number of shares owned And P = Price per share in the market. The goal of financial management should be such that it should be beneficial to all those who are involved in the company such as owners, management, employees, customers, suppliers, etc..

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

Points in Favour of Wealth Maximization:a) It is a clear term and only present value of cash flow is taken into consideration. b) It considers the concept of time value of money. The present value of cash inflow and outflow helps management to achieve the overall objective of a company. c) The concept of wealth maximization is universally accepted, because, it takes care of interest of financial institutions, owners, employees and society as well. d) It guides the management in framing consistent strong dividend policy to reach maximum returns to the equity shareholders.

Points against Wealth Maximization:a) The objective of wealth maximization is a prescriptive one and not descriptive one. b) The objective of wealth maximization faces some difficulties between shareholders and management paving the way for conflict of interest.

Functions of Financial Management:1. Profitability 2. Diversification 3. Growth 4. Survival

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

5. Market Share 6. Cost Control / Reduction 7. Managing Competition.

MEANING OF FINANCIAL ANALYSIS:The most important step of accounting is the analysis and interpretation of the financial statements which results in the presentation of numerous data which in turn helps different categories of people in forming an opinion about the financial position of a business and as well as about its profitability. The most important objective of the analysis and interpretation of financial statements are to understand the significance and meaning of such financial statement datas to know the exact strength and weaknesses of a business unit. In a way it establishes strategic relationship between the items of the balance sheet, profit and loss account and other operative data, which is very meaningful.

Definition of Financial Analysis: According to Myres, Financial statement analysis is largely a study of relationship among the various factors in a business as disclosed by a single set of statement and a study of the trend of these factors as shown in a series of statements.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

FINANCIAL STATEMENTS:A financial statement is an organized collection of data according to logical, systematic and consistent accounting procedures. The purpose is to convey an understanding of financial aspects of a business from time to time. In a way it shows the position at a given point of time as in the case of balance sheet, or sometimes it reveals a series of activities over a given period of time, as in the case of profit and loss account. The term financial statement generally refers to two basic statements, such as Profit and Loss account and Balance Sheet. Apart from these two statements, a company may also prepare a statement of retained earnings and statement of changes in financial position. Definition:Financial statement is a schedule or a report which is prepared at the end of financial year by an accountant to reveal the financial positions of the enterprise which shows the result of its recent activities and an analysis of what has been done with earning. OBJECTIVES OR USES OF FINANCIAL ANALYSIS:Financial analysis is a helpful tool in assessing the exact financial position and profitability of a business. The following are some of the objectives of analysis of financial statements: 1. To identify the reasons for change in the profitability position of the business over a selected period.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

2. To judge the present and future earning capability or profitability of the business. 3. To identify the relevant important components of the financial position of the business. 4. To judge the operational efficiency as a whole and of its various components or departments. 5. To assess the short as well as long-term liquidity position of the firm for the benefit of the debenture holders and trade creditors. 6. To have a comparative study between different departments or cost centers. 7. It helps in building a database for making future forecast and preparing budgets. 8. It also helps in predicting possible bankruptcy and failure. 9. It provides decision makers a whole lot of information about the business to be used as a tool in decision making.

PROCESS OF FINANCIAL ANALYSIS:The analysis of financial statements is a process of evaluating the relationship between components of financial statements to obtain a better understanding of the businesses position and performance. The functional analysis is the process of selections, establishing relationship and evaluation. 1) The primary task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

2) The secondary step is to arrange the said information in a highlight, significant enough to establish a relationship. 3) The final step is interpretation and drawing of inferences and conclusions.

TYPES OF FINANCIAL ANALYSIS: On the basis of nature of the analysis:a) External analysis It is made by those persons who are not connected with the business. They do not have access to the detailed information of the company and have to depend mostly on published statements or records. Such type of analysis are made by investors, credit rating agencies, government agencies and research scholars. b) Internal analysis It is made by those persons who have full access to the books of accounts. They are a part of the business enterprise. Analysis of the financial statements and / or other financial data for managerial purposes for internal consumption only. The internal analyst can give more reliable result than the external analyst because of the access to a whole gamut of information available to him.

On the basis of objectives of analysis:a) Long-term analysis

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

This study is conducted to assess the long-term financial stability, solvency, liquidity, profitability, (or) Earning capacity of a business unit. The purpose is to know whether in the long run the business entity will be able to earn minimum amount which will be sufficient enough to maintain a reasonable rate of return on the investment so as to provide the requisite funds required for modernization, growth, and expansion of business apart from meeting its cost of capital. It also helps in long-term financial planning. b) Short-term analysis This study is conducted to determine short-term solvency, stability, liquidity and earning capacity of the business. The purpose of this analysis is to know whether in the short run a business will have adequate funds to meet its short term obligations which are very vital for conducting the day to day operations. It also helps in short-term financial planning.

On the basis of models operated by analysis:a) Horizontal (or) Dynamic analysis It is made to review and analyze financial statement of number of years. It is

useful for long-term trend analysis. b) Vertical (or) Static analysis It is made to review and analyze the financial statement of one particular year only, for example ratio analysis. TECHNIQUES OF FINANCIAL ANALYSIS:The analysis and interpretation of financial statement is used to determine the financial position and operational status as well. A number of techniques are Acharya Institute of Graduate Studies
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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

used to study the relationship between different statements. The following methods of analysis are used:

Comparative Financial Statements: The comparative financial statements are statements of the financial position at different periods of time. The different elements of financial position are shown in a comparative form, so as to facilitate easy comparison. Both the profit and loss account and Balance sheet can be prepared in the form of comparative financial statements.

Comparative Income Statements: The income statement discloses net profit or net loss or account of operations. A comparative income statement will show the absolute figures for two or more periods. The absolute changes from one period to another and if required the changes in items of percentages can be seen. Since the figures for two or more periods are shown side by side, with the help of this we can quickly ascertain whether sales have increased or decreased, whether cost of sales have increased or decreased etc. Therefore, only a glance of data incorporated in this statement will be helpful to arrive at useful conclusions.

Comparative Balance Sheet: Balance sheet of two or more different dates can be used for comparing assets and liabilities and finding out increase or decrease in those items. Therefore, in a single balance sheet the emphasis is on present position, it is the Acharya Institute of Graduate Studies
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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

change in the comparative balance sheet which attracts attention. This type of balance sheet is very helpful in studying the trends in a business concern.

Common size Financial Statements: Common size financial statements are those in which figures reported are converted into percentage to some common base. When this method is pursued, the income statement exhibits each expense item or group of expense items as a percentage of net sales, and net sales are taken at 100 percent. Similarly, each individual assets and liability classification is shown as a percentage of total assets and liabilities respectively. Statements prepared in this way are referred to as common size statements. Common size statements are prepared for one business entity over the years which would highlight the relative changes in each group of expenses, assets and liabilities. These statements can be equally useful for inter-firm comparisons, given the fact that absolute figures of two firms of the same industry are not comparable.

Trend Percentages: Trend percentages are very much helpful in making a comparative study of the financial statements over a period of several years. The way of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year. Each item of base year is taken as 100 and on that basis the percentages for each of the items of each of the years are calculated. These percentages can be taken as index number

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

showing the relative changes in the financial data resulting with the passage of time. This method is very much useful, analytical device for the management, since by substitution of percentages for large amounts, brevity and readability are achieved.

Fund Flow Statement: Funds flow statement is a financial statement, which indicates the various means by which the funds have been obtained during a certain period and the way in which these funds have been put to use during the same period. In short, it is the statement, which shows the movement of funds between two balance sheet dates. The fund flow statement is called by different names, such as statement of sources and application of funds, statement of changes in working capital.

Cash Flow Statement: Cash flow statement shows the movement of cash and their causes during the period under consideration. It may be prepared annually, half yearly, quarterly, monthly, fortnightly or even weekly. Cash flow statement is prepared to show the impact of financial policies and procedures adopted by the business on the cash position. It takes into account all such transactions which have a direct impact upon cash.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

It deals with the inflow and outflow of cash between two balance sheet dates. In other words, a statement of changes in a financial position of a firm on cash basis is called cash flow statement. Leverage Ratios: Leverage refers to an increased means of accomplishing some purpose. In financial management, it refers to employment of funds to accelerate rate of return to owners. It may be favorable. An unfavorable leverage exists if the rate of return remains to be lower. It can be used as a tool of financial planning by the management.

LEVERAGE DEFINITION:Leverage is defined as the action of a lever, and mechanical advantage gained by it. Christy and Roden defines Leverage as the tendency for profits to change at a faster rate than sales. It is a relationship between equity share capital and securities and creates fixed and dividend charges. Leverage is also known as gearing. According to James Horne, Leverage is the employment of an asset or funds for which the firm pays a fixed cost or fixed return.

TYPES OF LEVERAGES:Leverage types are of 3 types. 1. Financial Leverage Acharya Institute of Graduate Studies
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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

2. Operating Leverage & 3. Combined Leverage

1) FINANCIAL LEVERAGE: The use of long-term fixed interest bearing debt and preference share capital along with the equity share capital is called financial leverage or trading on equity. Financial leverage is a tool with which a financial manager can maximize the returns to the equity shareholders. It signifies the relationship between the earning power on equity capital and rate of interest on borrowed capital.

When a firm procures debt capital to finance its needs, it is said to have financial leverage. It tells us the extent of the change in Earning before Tax [EBT] due to change in operating income [EBIT]. It is calculated with the help of the following formula:-

Operating Income Financial leverage = Taxable Income OR Earnings before interest & tax Earnings after tax

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

2) OPERATING LEVERAGE: It occurs when with fixed costs the percentage changes in profits due to change in sales volume. It bears fixed cost and variable cost. It shows the extent of the change in Earnings before Interest and Tax [EBIT] as a result of change in sales volume. Two important points i.e., relating to fixed costs and breakeven point should be noted about operating leverage. The magnitude of the operating leverage is related to the fixed costs of the firm. If the fixed costs of the firm are relatively large, substantial portion of its contribution margin is appropriated to cover these fixed costs. Once the break-even point is reached, all contribution margins become profit of the concern, if there is small percentage of increase in earnings. On the other hand, a small drop in sales eliminates the entire earnings near the breakeven point. The significance of operating leverage lies in the face that it tells the finance manager about the impact of change in sales revenue & operating income. Thus, a firm with high degree of operating leverage will experience much large effect on EBIT because of small change in sales. As far as possible a firm should avoid operating under conditions of a high degree of operating leverage, as it is a high risk situation. It will be desirable to operate at sufficiently above the break-even point to avoid the danger of sharp fluctuations Acharya Institute of Graduate Studies

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

in profits because of variation in sales. It may be noted carefully that the degree of operating leverages goes on decreasing with every increase in sales volume above the break-even point. It is calculated by the following formulas.

Contribution Operating Leverage = EBIT / Operating Profit Percentage change in Income Degree of operating leverage = Percentage change in Sales

The total costs of operations of a business may be grouped into 3 categories: (i) Operating Fixed Cost is the cost which in aggregate tends to be unaffected by variations in volume of output. The amount of fixed cost tends to remain constant for all volumes of production within the installed capacity of the plant. E.g. Factory Managers salary, Factory rent, Administrative Staff Salary etc.

(ii) Operating Variable Cost is that cost which in aggregate tends to vary directly with variations in volume of output. Such costs increases as the production goes up, it decreases when production falls. E.g. materials, wages, etc.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

(iii) Semi variable/ Semi-fixed Operating Cost is that cost which is partly fixed and partly variable. E.g. Repairs and maintenance, power consumption, etc.

3) COMBINED LEVERAGE: This leverage shows the relationship between a change in sales & the corresponding variation in taxable income.

It is the product of both financial leverage & the operating leverage. It is also called as composite leverage. It is calculated by using the following formulas.

Combined Leverage = Operational Leverage x Financial Leverage. OR Contribution Combined Leverage = EBIT / Operating Profit Contribution = EBT X EBT EBIT

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

CHAPTER2 RESEARCH DESIGN Meaning :


RESEARCH:According to D.Slesinger & M.Stephenson in the encyclopedia of Social Sciences define research as The Manipulation of things, concepts or symbols for the purpose of generalizing to extend correct or verify knowledge, whether the knowledge aids in construction of theory or in the practice of an art.

RESEARCH METHODOLOGY:Research Methodology is a scientific and systematic way to solve research problems. A researcher has to design his methodology i.e., in addition to the knowledge of methods / techniques, he has to apply the methodology as well. The methodology differs from problem to problem.

RESEARCH DESIGN:Acharya Institute of Graduate Studies

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

According to Claire Selltiz and others A Research Design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. A Research Design is a logical and systematic plan prepared for directing a research study.

Title of the Study:-

A study on Financial Analysis and Leverage at DYNAMATIC TECHNOLOGIES LIMITED. Bangalore

Statement of Problem:M/s Dynamatic Technologies Limited Bangalore and its subsidiary companies are into manufacturing of different products with application in varied industries as wide as hydraulic gear pumps to agricultural tractor industry and agricultural equipment industry, supplying of aerospace components to aviation industry and manufacturing technology driven items to the defence sector.

The group is facing stiff competition in the market due to existence of other domestic and foreign players who are competing very fiercely. In this the DTL group should be in a position to analyze its financial and leverage factors to take corrective steps well in advance to overcome competitors by doing financial analysis. It helps to know the financial position Acharya Institute of Graduate Studies
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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

of the DTL group. It involves in analyzing of various financial statements such as profit and loss account, balance sheet, etcand the leverage analysis helps in knowing the risk involved carrying on the operations at DTL.

Objectives of the Study: To study and analyze the financial performance of DYNAMATIC GROUP. To judge the present and future earning capacity or profitability of the concern through leverage analysis. To know the methodology used by DYNAMATIC GROUP in the profit ratio. To get the knowledge of the financial evaluation techniques and analysis of annual reports in DYNAMATIC GROUP. To highlight the steps that is required to improve the financial performance and efficiency of the DYNAMATIC GROUP. To find the growth rate of DYNAMATIC GROUP. To come out with the findings and suggestions.

Scope of the Study:-

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

The study is conducted at DYNAMATIC GROUP in Bangalore, for the purpose of knowing the financial performance and analysis of its performance through leverage ratios. The study also covers the techniques to improve the level of financial performance of DYNAMATIC GROUP. The study also covers to find out the reasons for the fluctuations in the financial analysis.

Review of Literature:The literature survey is connected or concerned with the problem. The researcher should review and examine all available literature, theories, findings, formulas, etc.; first we should make preliminary review prior to problem selection, systematic review. We have referred the literatures in academic journals, annual reports and company reports.

Operational definition of concepts:Finance:- Finance can be broadly defined as the activity concerned with planning, raising, controlling and administering of funds in the business.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

Debit:- Means the amount owned by or due from an account or charged to an account for the benefit received by that account. In short, it means the benefit received by an account. Credit:- Means the amount owned to an account for the benefit given by that account in the belief that its value will be returned at a later date. Financial Statement:- Those statements which have a financial implication could be broadly termed as financial statement. Ex: - Comparative statements of cost of 2 products. Costs benefit analysis statements of 2 projects, etc.

According to John N Myer :- Financial statement provides a summary of the accounts of business enterprises, Balance Sheet reflecting assets and liabilities and income statement showing the results of operation during a certain period.

Growth Statement:- The Profit & Loss account and the balance sheet of the company reflects the growth and progress made in financial terms with the comparative figures for the previous year. The status of the company is truly reflected in these statements and is being used by different segments of the society for their own purposes.

Leverage :- Is the employment of asset or funds for which the firms pays a fixed cost or fixed return.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

Types of Leverages:1) Operating Leverage: Operating leverage shows the relationship between the changes in sales and the changes in the fixed operating income. Operating Leverage has impact mainly on fixed cost and variable cost and also on contribution. The following equation is developed by R.W.Johnson. Contribution Operating Profit ( EBIT)

Operating Leverage =

2) Financial Leverage: The process of variation in capital structure is called Financial Leverage or trade on equity. The variation in capital composition will have an impact on operating and taxable income of the company. Operating Income Financial Leverage = Taxable Income

3) Combined Leverage: This Leverage exhibits the relationship between a change in sales and in corresponding variation in taxable income. Contribution Combined Leverage = Acharya Institute of Graduate Studies Taxable 26 Income

A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

OR

Combined Leverage =

Operating Leverage x Financial Leverage

Ratio: Is an expression of quantitative relationship between two numbers. A financial ratio is the relationship between 2 accounting figures expressed mathematically.

Current Assets: Refers to cash and temporarily held assets (i.e., assets means for conversion into cash within a short period of time say, one year). These assets undergo changes frequently. So, they are called circulating, floating or fluctuating assets, examples of current assets are cash in hand, cash at bank, bills receivables, sundry debtors, closing stock, prepaid expenses, outstanding income, temporary investments, etc.

Current Liabilities: Are those liabilities which are required to be repaid within a short period of one year out of current assets. Example of current liabilities

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

are bills payable, sundry creditors, bank over draft, short term loans borrowed, outstanding expenses, incomes received in advance, etc.

EBIT: Earning before interest & tax is the difference between contribution & fixed cost (or) is the excess of contribution over fixed cost is the earning money before deducting the interest and tax.

EBT: Earning before Tax is the excess of EBIT over tax is the earning money before deducting the tax but after deducting the interest.

Contribution: Is the difference between sales & variable cost. It is the excess of selling price over the variable cost per unit. C = Sales Variable Cost C = Fixed Cost + Profit (or) Loss Sales: Refers to the goods which are sold by business organization.

Sampling Method: Sampling is simply the process of learning about the population on the basis of the sample drawn from it we have adopted the method of field study.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

Sources of Data Collection: The study is based on both primary data and secondary data. Primary Data:It was collected on all products manufactured by the firm, financial statements for respective years apart from information collected by consulting with the Manager and from schedules given by the Accounting Department.

Secondary Data:It was collected from companys annual reports, profile of the company, personal discussion with executives in the company, books, etc.

Plan of Analysis:All the data has been collected from the annual reports. The plan that has been used is first company profile and other information has been collected. Then the theoretical background has been collected. reports, information is collected for analysis. After these financial In the analysis the standard

methods has been used i.e., Tables and other types of charts has been used.

Limitations of the Study:1) The major limitation is that it is a representative study only and not an exhaustive one.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

2)

The study is based only on the data extracted from the annual reports of the DYNAMATIC GROUP.

3)

The study is conducted only at DYNAMATIC TECHNOLOGIES LIMITED Bangalore.

4)

Time constraints posed problem to undertake financial analysis, the time duration is only 2 months.

5)

Data is very relevant, it is confined to a particular period of time only, so it may even change in future.

6)

Some

of

the

details

are

not

provided

by

DYNAMATIC

TECHNOLOGIES LIMITED because of their confidentiality nature.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

CHAPTER SCHEME
CHAPTER 1 : INTRODUCTION
This chapter consists of a brief introduction of the topic as well as the importance of the topic in the present day scenario it contain short theoretical background to the topic as the related issue that are involved which is connected to the main theme of the study.

CHAPTER 2 : RESEARCH DESIGN


This chapter outlines the statement of problem, scope of the study, objective need, sources of data, research design, sampling technique, limitation of the study.

CHAPTER 3 : PROFILE OF THE D.T.L


This highlights the overall profile of the company and its development, history of the company and present status of the company.

CHAPTER 4 : ANALYSIS AND INTERPRETATION


This chapter provides information regarding the technique used for analysis supported by a descriptive interpretation which simplifies the figures into clear words.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

CHAPTER5 : FINDINGS, SUGGESTIONS AND CONCLUSIONS


It includes the findings, suggestion and conclusion.

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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

CHAPTER - 3

COMPANY PROFILE
BACKGROUND AND INCEPTION OF THE COMPANY :Dynamatic Technologies Limited (DTL) was incorporated on 8 th March 1973, promoted by Mr. J.K.Malhoutra, present Chairman. DTL was established with technical collaboration from Dowty Hydraulic Units Limited, U.K. it was then known as Dynamatic Hydraulics Limited. In 1984, it indigenized the technology and ended their collaboration with Dowty, becoming one of the key players in the hydraulic field in India and worldwide. Companys product range covers over 2800 varieties of Hydraulic Gear Pumps and Hydraulic Systems, which is their forte. They also have diversified applications in the Defense and Aerospace Sectors and in Metallurgy. With that start thirty three years ago, they have now come a long way with ever increasing scale of operations and plans for expansion. Companys main manufacturing plant as well as the Head Office is situated at Dynamatic Park, Peenya in Bangalore. They have two plants in Chennai and one plant each in Sweden & United Kingdom. NATURE OF BUSINESS CARRIED :With a proven track record spanning over a quarter of a century, they are now the largest producer of Hydraulic Gear Pumps in Asia. With state-of-theart manufacturing facilities, and incorporation of the latest process technologies in precision engineering, they have diversified into a number of related areas like Aerospace and the Automotive Components sector, thus creating a unique, vertically integrated manufacturing structure. Acharya Institute of Graduate Studies
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A study on Financial Analysis and leverages at DYNAMATIC TECHNOLOGIES LIMITED.

In addition to leading the Indian market with a share of 70 percent, company has also made a mark in the international arena as the fourth largest producer world-wide. They are the original equipment manufacturer for all the major tractor and earth moving equipment manufacturers in India like Mahindra & Mahindra, Eicher, Punjab Tractors, TAFE, HMT, BEML, BHEL, Telco, Godrej & Boyee, Bajaj, Larsen & Toubro, Mackneill Engineering, INgersoll Rand, Ashok Leyland, Hindustan Motors, Greaves, etc. In the recent past they have made inroads into the Aerospace and Defence sectors, expanding their horizons. The Pilotless Target Aircraft LAKSHYA was a prestigious project for their aerospace division, where they manufactured its wings and rear fuselage. They have also bagged the National Award for Excellence in Indigenization of Defence Equipment awarded by the Ministry of Defence. VISION, MISSION AND QUALITY POLICY :VISION :Companys vision is : Develop products and technologies in line with national priorities. Achieve global competence. To operate at the international level, to think global and to be the worlds largest producer of hydraulic gear pumps. Transform the organization into a knowledge based organization.

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MISSION :The companys mission statement states that : It has been Companys endeavor to keep abreast of the changes, both technological and societal, while chalking out the growth chart. Be it the ISO or other International Certifications. 9000 certification for quality systems or the ISO 14000 certification for environmental standards, they believe that their role in society is that of a responsible and accountable organization that is actively contributing to the society. Companys value system too reflects the commitment to quality and innovation in a societal context. COMPANY BELIEVES IN : Integrity. Being a quality driven organization. Being knowledge based organization. Raising the standard of living of all employees. Being non parochial meritocracy. Conforming to the highest environmental standards. HR policy is an offshoot of this philosophy. It aims to : Work towards a knowledge based organization, which believes in equal opportunities. Transcend all barriers of dogmatism. Align personal goals with the goals of the company, community, country and the world. Acharya Institute of Graduate Studies
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Improve the standard of living of all the DTL employees.

QUALITY POLICY :Dynamatic Technologies limited is involved in the design and manufacture of highly engineered components and systems for Hydraulic, Aerospace and Automotive applications. 1. It is the policy to provide creative & innovative solutions to delight the customers at cost-effective prices on a continuous basis. 2. By delivering superior value to the customers they will build a successful business model for themselves, capable of returning high yields to investors and improving the quality of life of all employees. 3. All processes will be eco friendly and be designed to eliminate wastage, and all employees will strive to constantly expand the boundaries of knowledge through imagination and diligence. 4. This policy is implemented through the quality system, which operates in accordance with ISO 9001, the international quality standards.

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PRODUCT PROFILE DYNAMATIC HYDRAULICS :DYNAMATIC HYDRAULICS is Asias largest producer of Hydraulic Gear Pumps, and one of the Top Five worldwide manufacturers of a wide range of sophisticated Hydraulic Valves and custom tailored hydraulic solutions extending from simple Hydraulic pumping Units to Sophisticated marine power Packs, Complex Aircraft Ground Support Systems to turnkey industrial installations. All these products are produced at State-of-the-Art manufacturing facilities located at Bangalore, and assembly is done in an air filtered environment to avoid initial contamination in the Applications. AGRICULTURAL SECTOR :Hydraulic Gear Pumps manufactured by Dynamatic have varied applications including Agricultural Tractors etc. Dynamatic is an original Equipment Supplier to all tractor manufacturers in India including Mahindra & Mahindra, Eicher Tractors, Punjab Tractors, Same Deutz-Fahr, Escorts Limited, Bajaj Tempo Limited, L & T, John Deere, new Holland India, etc. APPLICATIONS IN INDUSTRIES :The Company enjoys an overwhelming share of the Industrial Market for Hydraulic Gear Pumps in the country. Dynamatic pumps are used in Machine Tools and various other Fluid Power Systems. The Companys customers include BEML, Godrej & Boyee, Macneill Engineering, HMT, BHEL, Telco and Ashok Leyland amongst others. Acharya Institute of Graduate Studies
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APPLICATIONS IN EXPORTS :Dynamatic exports its products to over 30 Countries and its export segment is growing rapidly with the turnover growing strongly over the past few years. Exports are expected to constitute 15 20 percent of the companys turnover, in the next 2 years. Dynamatic products are used as Original Equipment in USA, UK, Canada and South Korea. The Company has developed specific products for use as Original Equipment in the tractor markets in USA, Germany, Mexico and Turkey. DYNAMATIC AEROSPACE :DYNAMATIC AEROSPACE, a division of Dynamatic Technologies Ltd., is a pioneer and a recognized leader in the Indian Private Sector for the development of complex aero structures. Instituted in 1995, this division is currently headed by Air Cmde, (Retd.) Ravish Malhotra, one of Indias two cosmonauts. Dynamatic Aerospace is one of the closely partnered Agencies of national importance like Ministry of Defence, Hindustan Aeronautics Limited, and other defence establishments on key projects including the Lakshya, Indias Pilotless Target Aircraft.

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HJT-36 Intermediate Jet Trainer and Sukhoi MK1 30 Fighter Bomber Products include the Wing and Rear Fuselage of the LAKSHYA, Ailerons Flaps for the wings for the HJT-36 and Fins, Ventral Fins, Slats, Vertical & Horizontal Stabilizer, Canards and Air Brakes for the Sukhoi 30 MK1 fighter bomber. Dynamatic Aerospace is considered to be one of the most reliable quality vendors to the DRDO and was presented with the Creative partner Award for the year 1998-99 by DRDO, ADE and ASIEO. The Aircraft division of HAL in Bangalore also presented this division with the HAL Best Vendor Award for 2002-03. Dynamatic Aerospace has the largest infrastructure in the Indian Private sector for manufacture of exacting Air Frame Structures and Precision Aerospace Components. This is the first time such capabilities have been built in the Indian Private Sector. The Division is now consolidating its position through collaborations with International Aerospace majors on exports initiatives. DYNAMETAL :DYNAMETAL, a division of Dynamatic Technologies, produces high quality Non-Ferrous Alloy and Castings for Industrial, Automotive and Aerospace Applications.

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DYNAMETAL incorporates use of latest metallurgical processes and differs radically from other conventional foundries as its heat treatment processes are designed to ensure castings are made with no inclusions, minimal melting loss and with the effective removal of gas from the metal. To achieve raw castings of high quality, DYNAMETAL uses sophisticated machinery like Tiltable gravity die casting machines, holding furnaces, impregnation plant, core shooters, sand core making facilities, leak testing machines and shot blasting machines. The division is capable of executing Aluminum Gravity Die Cast parts with intricate contours. AUTOMOTIVE :JKM Dae Rim Automotive Limited, a subsidiary of Dynamatic Technologies Limited, produces high quality ferrous and non-ferrous engine and transmission component for the burgeoning global automobile industry. JKM Dae Rim is the single source supplier of a wide variety of critical engine and transmission parts, for the Hyundai Santro and Accent Cars. The Company also caters to the requirements of other new generation cars and SUVs such as, TATA Indica and Sumo, FIAT Palio, Mahindra Scorpio, Volvo, etc.

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AREA OF OPERATION Dynamic Technologies Limited has its operations in India as well as in overseas. GLOBAL Dynamatic Technologies Limited has acquired the Hydraulic Business Division (Sweden Unit) of Sauer Danfoss Limited, UK, through its subsidiary Dynamatic Limited, UK. NATIONAL NATIONAL BRANCHES:following cities. New Delhi. Ahmedabad. Chennai. Coimbatore. Secunderabad. Mumbai. Pune. Kolkata. OWNERSHIP PATTERN :Dynamatic Technologies Limited (DTL), a public company was incorporated on 8th March 1973, promoted by Mr. J.K.Malhoutra, present Chairman of DTL. It also has technical collaboration from Dowty Hydraulic Acharya Institute of Graduate Studies
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The company has its branches in the

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Units Limited, U.K. and was then known as Dynamatic Hydraulics Limited. In 1984, it indigenized the technology and ended their collaboration with Dowty, becoming one of the key players in the hydraulics field in India and world wide. The board of Dynamatic comprises of nine directors, three of whom executive directors and six are non-executive directors including the chairman of the company, with the majority of them being independent directors. COMPETITORS INFORMATION A few renowned companies which are manufacturing Hydraulic Gear Pumps are:1. Mico 2. Eaton 3. Rexorth. 4. Catching Hydraulics Company Ltd. 5. Team Hydraulics 6. Columbus Hydraulic Company Inc. 7. Sun Hydraulics 9. Myzak Hydraulics In the Aerospace industry D.T.L. is the monopolist as there are no other competitors in Airframe structures and Precision aerospace components and D.T.L. is catering more towards the Indian Aerospace industry and its clients are mainly H.A.L.

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INFRASTRUCTURAL FACILITIES Aiming to achieve and sustain product excellence, DTL has cut no corners in establishing comprehensive world-class facilities for its entire range of products, the main assembly shops, the manufacturing and testing operations. DTL has got well equipped class rooms with the facilities of LCDs and OHPs, which are used to train the employees and trainee students. INTERNAL COMMUNICATION :Internal communication is usually through Inter Office Memos, which are sent to the required person/s/department. If the communication is intended for all the people in the company, it has to be put up on the notice board. They have three notice boards, one on the Hydraulics Shop Floor, one on the aerospace floor, the other on the first floor landing near the canteen and the third in the Aerospace Machine Shop. TELEPHONES AND INTERCOM :Company has three telephone lines. All incoming and outgoing calls are sourced through the EPABX at the reception. A few departments have direct external lines or can dial 0 to access external lines. E-MAIL :Almost all the departments have access to e-mail. Normally, based on the requirement of the department, their own personal email id with @dynamatics.net address it created within 3 working days.

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QUALITY POLICY CARDS :All employees are required to have one of their quality policy cards at all times within their premises. The Personnel Department will give the card at the time of joining. ACHIEVEMENTS / AWARDS Companys Achievements and awards are : HAL Best Vendor Award for Dynamatic Aerospace 2003. DTL received National Award for Excellence 2003. In 2001, Dynamatic was awarded the status of Recognized In-house R & D Unit by the Department of Scientific and Industrial Research (DSIR), Government of India, New Delhi. LRQU approved DTLs Quality Management System 2000. Dynamatic exports its products to over 30 countries and to its entire export segment also. Dynamatic is the only Indian manufacturer of pumps in this segment and therefore, has a cost advantage over its competitors. It expects expanding activity in this segment over the next decade.

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Dynamatic Aerospace has the largest infrastructure in the Indian Private Sector for manufacture of exacting Air Frame Structures and Precision Aerospace Components. Dynamatic is the market leader in the field of hydraulics. Dynamatic bags maiden order from John Deere, Germany 2003. Dynamatic Technologies Limited has acquired the Hydraulic Business Division (Sweden Unit) of Sauer Danfoss Limited, UK, through its subsidiary Dynamatic Limited U.K. on 15th June 2007.

FUTURE GROWTH AND PROSPECTS DTL is growing rapidly with the turnover growing strongly over the past few years. Exports are expected to constitute 15-20 percent of the companys turnover, in the next 2 years. The Company also expects to acquire better technologies to support overall business and gain overall inorganic business growth with a better synergic effect. Company looks forward to working closely with Northrop Grummans Electronic Systems sector to help meet the advanced technology requirements in both Aerospace and Defense products / Services identified by the Indian

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ministry of defense. It is the world-leading provider of advanced military radar, electronic warfare and other avionics systems.

SWOT ANALYSIS STRENGTH The company is Asias largest producer of Hydraulic Gear pumps and one of the top five world wide. Company is now supplying hydraulic gear pumps to all 14 tractor manufacturers in India. Over 85 percent of all agricultural tractors and construction equipment produced in India are powered by pumps produced by Dynamatic Hydraulics. The company has relentless drive to eliminate operational inefficiencies, introduction of more value added products to enable the company to increase its net profit by 52 percent. The improved overall performance has been leveraged by the company to negotiate substantial reductions in financial costs. The company imparts training to workmen for working on multiple machines along with combination of reengineering of processes, which has constantly increased the productivity levels.

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Company has leveraged the long term relationships and large market share built up over the years with existing customers, to offer additional products which incorporate state-of-the-art features at attractive price levels.

WEAKNESS Power intensive, dependant on power and any deficiency here results in under-utilization of capacity.

Requires constant upgradation with changing times in terms of plant and machinery.

No funds have been raised on short term basis and these have been used only for long term investment.

Variation of share prices of the company in stock market.

OPPORTUNITIES :The automotive components industry is poised to witness significant change over the next decade.

The outsourcing boom in auto component industry offers great opportunities for growth. Acharya Institute of Graduate Studies
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Company presently operates predominantly in the heavy vehicle segment which is characterized by high volumes and thin margins.

However, growth opportunities available in this segment makes it very attractive for any business.

Company wishes to grow rapidly in this segment and counter the pricing pressures by adding global customers like ford, Nissin and PSA and build high value addition to its existing suppliers by graduating to supply completed assemblies wherever possible rather than only parts.

Company is continuing to develop numerous variants of pumps used in the industrial sector, with an aim of increasing penetration in this lucrative and growing market.

With an aim to tap the rapidly growing infrastructure sector, company is putting in serious R & D efforts, to develop a range of cast-iron body pumps. This will open up new revenue streams for the company.

Company as approved at the last annual general meeting, has incorporated a subsidiary during the year, JKM global Pvt. Limited, based in Acharya Institute of Graduate Studies
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Singapore, with the aim of better focusing its efforts on the opportunities in the global market.

THREATS Enormous pricing pressures from customers can seriously pressurize margins which appear to be the biggest threat to this industry.

With the customs duty levels continuing to drop (and projected to reach WTO levels by 2008-09), the pricing structure may have to be suitably modified to counter expected imports.

Cost-push inflation, in terms of spiraling Aluminum price increases, is a cause of concern.

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CHAPTER 4 ANALYSIS AND INTERPRETATION


Table No. 1 TABLE SHOWING FINANCIAL LEVERAGES
Earnings before interest & tax (EBIT) F.L. = Earning before interest and tax interest & preference dividend % of Increase or decrease over the previous year -1 2 84 14

Year 2005 06 2006 07 2007 08 2008 09 2009 10 ANALYSIS :

F.L.s 1.276 1.263 1.293 2.358 2.536

% on the basis of year 2005-06 100% 99% 101% 185% 199%

The owners equity (equity share capital & resources) are used as a basis to raise loans on long term basis to expand the earnings of the stake holders after making the interest payouts. Thus earnings should be sufficient enough to match the earning of the share holders without going for long term debt borrowings. The above table shows that the F.L. for 2005 - 06 was 1.276 and decreased to 1.263 in the next year, but for the next 3 years it is on the increasing trend to 1.293, 2.358 and 2.536 respectively. Acharya Institute of Graduate Studies
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GRAPH No. 1 GRAPH SHOWING FINANCIAL LEVERAGES

3 2.536 2.5 2.358

2 1.276 1.263 1.293

1.5

0.5

0 2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION: It is inferred that the F.L is on the increase overall during the 5 years period gradually. This trend shows that the company has been in a position to use the long term debt borrowing and deploy it to gain sufficient income and also pay the interest burden comfortably.

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Table No. 2 TABLE SHOWING OPERATING LEVERAGE


Contribution O.L. = Earning before interest and taxes % on the basis of year 2005-06 100% 96% 105% 159% 114% % of the previous year -4 5 59 14

Year 2005 06 2006 07 2007 08 2008 09 2009 10

O.L. 2.506 2.404 2.638 3.973 2.857

ANALYSIS :
The O.L is obtained by dividing the contribution (i.e. sales variable cost) by EBIT as a matter of standard this differs from company to company and industry to industry and from time to time. An increasing trend over the period would be healthy for a growing company. In view of this O.L has been computed by taking raw material, power and fuel, stores and spares consumed costs only as variable costs. The above table shows that the OL for 2005-06 was 2.506 and decreased to 2.404 in the next year. In the next 2 years it has increased to 2.638 and 3.973 respectively, whereas in the last year it has decreased to 2.857.

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GRAPH No. 2 GRAPH SHOWING OPERATING LEVERAGE


3.973 4 3.5 3 2.5 2 1.5 1 0.5 0 2005 06 2006 07 2007 08 2008 09 2009 10 2.506 2.638 2.404 2.857

INTERPRETATION: It is inferred that the operating leverage was more or less at the same level in the first 3 years and in the last year. It is only during 2008-09 that the OL was very high. This can be attributed to the company earning huge profits compared to other years.

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Table No. 3 TABLE SHOWING COMBINED LEVERAGE


C.L. = Financial leverage X Operating Leverage % on the basis of year 2005-06 100% 95% 107% 294% 228% % of the previous year -5 7 194 128

Year 2005 06 2006 07 2007 08 2008 09 2009 10

C.L. 3.182 3.036 3.410 9.368 7.245

ANALYSIS :
The combined leverage indicates the ability of the company to use the long term debt borrowing as well as the contribution towards paying interest and taxes and still being in a position to earn and grow.

The above tables shows the CL for the year 2005-06 stands at 3.182 and decreased marginally to 3.036 in the next year. But for the next 2 years it gradually increased to 3.410 and 9.368 respectively. It took a dip in the last year and was at 7.245, which is high when compared to 2005-06, but marginally low when compared to 2008-09.

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GRAPH No. 3 GRAPH SHOWING COMBINED LEVERAGE


9.368

10 9 8 7 6 5 4 3 2 1 0 2005 06 2006 07 2007 08 3.182 3.036 3.41

7.245

2008 09

2009 10

INTERPRETATION: It is inferred that the combined leverage is stable for the first 3 years and only during 2008-09 and 2009-10 it has seen a substantial increase. This can be attributed to the company being in a position to earn huge profits even after paying interest and taxes and have sufficient funds. The company has the capability to grow further and achieve higher C.L.

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Table No. 4 TABLE SHOWING ABSOLUTE LIQUIDITY RATIO


Absolute liquid assets ALR =

Current liability

Particulars / years Absolute Liquid asset Current liability A.L.Ratio

2005 06 6737750 248281899 0.027

2006 07 7337977 347068391 0.021

2007 08 42390612

2008 09 58058000

2009 10 27409000

816891159 697609000 698769000 0.052 0.083 0.039

ANALYSIS :
Absolute liquid ratio refers to absolute liquid assets such as cash in hand / bank and marketable securities which are at the disposal of the company to pay off current liabilities. The acceptable norm for this ratio is 50% or 0.5:1. The ALR has been stable for the first 2 years at 0.027 and 0.021 respectively. There has been a marginal increase in the next 2 years and is at 0.052 and 0.083 and dropped off to 0.039 in the last year.

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GRAPH No. 4 GRAPH SHOWING ABSOLUTE LIQUIDITY RATIO

0.09 0.08 0.07 0.06 0.05 0.04 0.027 0.03 0.02 0.01 0 2005 06 2006 07 2007 08 0.021 0.052

0.083

0.039

2008 09

2009 10

INTERPRETATION: It is inferred that the ALR is way below the acceptable standards and this is due to the company holding huge amount of current liabilities which have grown to very high levels over the period without any corresponding increase in the absolute liquid assets.

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Table No. 5 TABLE SHOWING CURRENT RATIO


Current Assets Current Ratio =

Current liability

Particulars / years Current asset Current liability Current Ratio

2005 06
476194665 248281899

2006 07
539066033 347068391

2007 08
1056478451 816891159

2008 09
124680500 0 697609000

2009 10
1195468000 698769000

1.918

1.553

1.293

1.787

1.711

ANALYSIS :
The current ratio refers to the ability of the company to meet its current liabilities through its current assets. As a matter of thumb rule this ratio should be at 2:1, i.e., the current assets should be double the current liabilities and this is considered as satisfactory.

The current ratio is below the standards during the entire period of study. During 2005-06 it is marginally less at 1.918 and has decreased to 1.553 and 1.293 over the next 2 years. It has increased to 1.787 and 1.711 during 2008-09 and 2009-10 respectively.

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GRAPH No. 5 GRAPH SHOWING CURRENT RATIO


1.918 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2005 06 2006 07 2007 08 2008 09 2009 10 1.553 1.293 1.787 1.711

INTERPRETATION: It is inferred that the e company has to improve upon its current assets compared to current liabilities as it is below the standard. The management of current assets needs to be looked into very seriously.

It is some what better in the first year only and in the rest of the years the current liabilities have increased more than the current assets.

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Table No. 6 TABLE SHOWING NET PROFIT RATIO


Net profit after tax Net Profit Ratio = X 100

Net sales

Particulars Net Profit (after taxation) Net Sales N/P Ratio

2005 06
87037518

2006 07
99880743

2007 08
185767326

2008 09
312848000 293658100 0

2009 10
390812000

933270356

1114428664

2743490827

2977227000

9.326

8.962

6.771

10.653

13.126

ANALYSIS :
The net profit ratio establishes a relationship between net profit (after taxes) and sales and reflects the efficiency of the management in all the activities of the firm. This ratio indicates the overall measure of the companys profitability, the higher the better. While computing net profit after tax, other incomes have been excluded even by the company. The net profit ratio was at 9.326 during 2005-06 and decreased to 8.962 and 6.771 in the next 2 years respectively. During 2008-09 it increased to 10.653 and further increased to 13.126 in the last year.

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GRAPH No. 6 GRAPH SHOWING NET PROFIT RATIO


13.126

14 12 9.326 10 8 6 4 2 0 2005 06 2006 07 2007 08 2008 09 8.962 6.771 10.653

2009 10

INTERPRETATION: It is inferred that the net profit ratio decreased in 2006-07 and 2007-08 when compared to 2005-06 and this can be attributed to disproportionate increase in the net profit when compared to net sales. The percentage of profit on the net sales has been good in the last 2 years. This indicates that the margin earned has improved and is good for the company.

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Table No. 7 TABLE SHOWING RETURNS ON SHARE HOLDERS INVESTMENT IN %


Net profit after interest & tax ROI = X 100

Share holder investment (ESC, PSC + R&S)

Particulars Net Profit (after interest & taxation) Share holders investment ROI Ratio

2005 06

2006 07

2007 08

2008 09

2009 10

87037518

99880743

185767326

312848000

390812000

262967543

337976061

659101674

134888400 0

1460685000

33.09

29.55

28.18

23.19

26.75

ANALYSIS :
Returns on share holders investment, popularly known as ROI is the relationship between net profits after interests and tax and the shareholders funds. The higher the percentage the better for owners of the investment. The ROI ratio was at 33.09 during 2005-06 and decreased to 29.55, 28.18, 23.19, over the next 3 years. It increased marginally to 26.75 in the last year.

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GRAPH No. 7 GRAPH SHOWING RETURNS ON SHARE HOLDERS INVESTMENT IN %


33.09 29.55 30 25 20 15 10 5 0 2005 06 2006 07 2007 08 2008 09 2009 10 28.18 26.75 23.19

35

INTERPRETATION: The ROI ratio has been on the declined over the period due to the reason that the share holders investment (capital + reserves) have been on the increase over the period and even though the net profit has increased. The portion of dividend declared being very small and a substantial portion has been transferred to reserves and surplus. There has been no major increase in shareholder capital structure.

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Table No. 8 TABLE SHOWING RETURNS ON EQUITY CAPITAL


Net profit after tax - preference dividend Return on equity capital =

Equity share capital (Paid up )

Particulars Net Profit after tax (-) Preference divided Equity share capital (paid up) Returns on equity capital ratio

2005 06

2006 07

2007 08

2008 09

2009 10

87037518

99880743

185767326

312848000

390812000

41935600

41935600

48107030

54147000

54147000

207.55

238.17

386.15

577.77

721.76

ANALYSIS :
Equity shareholders are the real owners of the company and assume highest risk, they are more interested in the profitability of the company and the performance of the company will be judged on the basis of return on equity capital of the company. This establishes a relationship between profits of a company and its equity capital. The company has a very good returns on equity capital over the period and are consistently on the increase starting at 207.55 in the 1 st year and ending up at 721.76 in the last year. Acharya Institute of Graduate Studies
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GRAPH No. 8 GRAPH SHOWING RETURNS ON EQUITY CAPITAL

800 700 577.77 600 500 400 300 200 100 0 2005 06 2006 07 2007 08 2008 09 207.55 238.17 386.15

721.76

2009 10

INTERPRETATION: The equity share capital (paid up) is at a constant level in the first 2 years and has increased marginally third year. In the year 2008-09 and 2009-10, it has increased just by 15% only. However the net profit (after tax) has been on the increase continuously and this has been major factor contributing for such better returns.

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Table No. 9 TABLE SHOWING EARNINGS PER SHARE


Net profit after tax - preference dividend E.P.S = No. Of equity shares

Particulars Net Profit after tax (-) Preference divided No. of equity shares Returns on equity capital ratio

2005 06

2006 07

2007 08

2008 09

2009 10

87037518

99880743

188369553

51382000

108174000

4193560

4193560

4203677

5199000

5414703

20.76

23.82

44.81

9.88

19.98

ANALYSIS :
The earnings per share is a small variation of returns on equity capital and is calculated by dividing the net profits after taxes and preferences dividend by the total number of equity shares in the firm. The higher the EPS it would be better for the equity share holders. The EPS was at 20.76 during 2005-06 and increased gradually to 23.82 during 2006-07 and increased substantially to 44.81 during 2007-08. It nose dived to 9.88 during 2008-09 and climbed back to 19.98 during 2009-10. Acharya Institute of Graduate Studies
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GRAPH No. 9 GRAPH SHOWING EARNINGS PER SHARE


44.81 45 40 35 30 25 20 15 10 5 0 2005 06 2006 07 2007 08 2008 09 2009 10 20.76

23.82 19.98

9.88

INTERPRETATION: It is inferred that the EPS was better during the first 3 years and fell down very heavily during 2008-09 due to substantial decrease in the net profit, the pattern of number of equity share is more or less stable and the fluctuations in the profit is the main culprit for the volatility in the EPS.

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Table No. 10 TABLE SHOWING DIVIDEND PAYOUT RATIO


Dividend per equity share Dividend Payout Ratio = Earning per share

Particulars Dividend per equity EPS DPO Ratio

2005 06
5 20.76

2006 07
5 23.82

2007 08
7.5 44.81

2008 09
4 9.8

2009 10
7.5 19.98

24

21

17

40

38

ANALYSIS :
Dividend payout ratio is calculated to find out the extent to which earnings per share have been retained in the business by way of transfer to reserves and surplus. Ploughing back of profits enables the company to pay dividend more in future or use it for further expansion.

The dividend payout ratio has been very volatile due to fluctuations in the EPS over the period even though dividend payments are very stable, the DPO ratio was at 24% in the beginning and dropped to 21 and 17 in the next 2 years. It increased to 40% during 2008-09 and marginally decreased to 38% during 09-10. Acharya Institute of Graduate Studies

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GRAPH No. 10 GRAPH SHOWING DIVIDEND PAYOUT RATIO


40 40 35 30 24 25 20 15 10 5 0 2005 06 2006 07 2007 08 2008 09 2009 10 21 17 38

INTERPRETATION: It is inferred that DPO ratio is varying very much due to fluctuation in EPS only even though the dividend paid per equity share is constant with marginal increase. The EPS bring dependent on net profit earned by the company and this is bound to be the cause for fluctuation over the period.

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Table No. 11 TABLE SHOWING RATIO OF RESERVES TO EQUITY SHARE CAPITAL


Reserves and surplus Ratio of reserves = To Equity share capital X 100 Equity share capital

Particulars Reserves and surplus Equity share capital REC Ratio

2005 06
221031943 41935600

2006 07
296040461 41935600

2007 08
610994644 48107030

2008 09
129473700 0 54147000

2009 10
1406538000 54147000

527

706

1270

2391

2598

ANALYSIS :
This ratio establishes relationship between reserves and equity share capital. The ratio indicates that how much profits are generally retained by the firm for future growth, higher the ratio generally better is the position of the firm. The REC ratio was at 527% during 2005-06. It has increased over the next 4 years at a very high rate at 706, 1270, 2391 & 2598% respectively.

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GRAPH No. 11 GRAPH SHOWING RATIO OF RESERVES TO EQUITY SHARE CAPITAL

3000 2598 2391 2500

2000

1500

1270

1000 527 500

706

0 2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION: It is inferred that a substantially portion of the profits have been retained by the company for future use, which is very good. This indicates the companys ability to pay higher dividends in the future and as well as make available the funds for future expansion. Acharya Institute of Graduate Studies
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Table No. 12 TABLE SHOWING DEBT EQUITY RATIO


Outsiders funds (loan funds + current liabilities ) DER = Share holders funds (share capital (ESC + PSC) + RES+ SUR)

Particulars Outsiders funds Share holders funds Debt equity Ratio

2005 06
684388778 262967543

2006 07
918774513 337976061

2007 08
2254813993 659101674

2008 09
295773400 0 134888400 0

2009 10
2786790000 1460685000

2.60

2.71

3.42

2.19

1.90

ANALYSIS :
Debt. Equity ratio is also known as external internal equity ratio and is calculated to measure the relative claims of outsiders and the owners (share holders) against the firms assets.

The DE Ratio during 2005-06 was at 2.6 and increased to 2.71 and 3.42 in the next 2 years. It decreased to 2.19 and 1.90 during 2008-09 and 2009-10 respectively.

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GRAPH No. 12 GRAPH SHOWING DEBT EQUITY RATIO


3.42 3.5

3 2.6 2.5

2.71

2.19 1.9

1.5

0.5

0 2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION: It is inferred that the ratio has gradually increased in first 3 years and dropped down in the last two years. This can be attributed to an increase both in the current liability and as well as in the long term debt funds. However overall the figures of debt are greater that the shareholder funds which is not a positive trend. Acharya Institute of Graduate Studies
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Table No. 13 TABLE SHOWING SOLVENCY RATIO


Total liabilities to outsiders Solvency Ratio = Total assets X 100

Particulars Total liabilities to outsiders Total assets Solvency Ratio

2005 06
684388778 981483116

2006 07
918774513 1300700078

2007 08
2254813993 2961286864

2008 09
295773400 0 434853400 0

2009 10
2786790000 4282770000

70

71

76

68

65

ANALYSIS :
This ratio is a small variant of equity ratio and can be simply calculated as (100 equity ratio). This ratio indicates the relationship between the total liabilities to outsiders to total assets of a firm

The solvency ratio of the firm was at 70% during 2005-06 and increased to 71 and 76% during the next two years. During 2008-09 it fell to 68% and fell further to 65% in the last years.

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GRAPH No. 13 GRAPH SHOWING SOLVENCY RAITO


76 76

74 71 70

72

70 68 68 65

66

64

62

60

58 2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION: It is inferred that the overall solvency ratio of the firm is very good and even in the case of closure etc. the company can meet all the liabilities and still have assets to pay off the stake holders. The margin of decline from 2005-06 to 2009-10 it at variant of 5% only which is acceptable. Acharya Institute of Graduate Studies
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Table No. 14 TABLE SHOWING PERSONNEL EXPENSES RATIO


Personnel Expenses Personnel expenses Ratio = Net sales X 100

Particulars Personnel Expenses Net Sales Personnel expenses ratio

2005 06
119704896 933270356

2006 07
137910983 1114428664

2007 08
296068219 2743490827

2008 09
379800000 293658100 0

2009 10
404034000 2831023000

12.82

12.37

10.79

12.93

14.27

ANALYSIS :
This ratio refers to the percentage of personnel expenses to the net sales. The percentage of such expenses forms a major portion of the costs on the product and to the company. The standard varies from company to company and industry to industry from time to time especially in an inflation economy. However a percentage between 12 to 15 seems to be accepted as a standard. For the first 2 years the PE ratio stood at 12.82% and 12.37% respectively during 2007-08. It dropped down to 10.79%. It increased further in the next 2 years to 12.93% and 14.27% respectively. Acharya Institute of Graduate Studies
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GRAPH No. 14 GRAPH SHOWING PERSONNEL EXPENSES RATIO

16 12.82

14.27 12.93

14

12.37 10.79

12

10

0 2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION: It is inferred that the percentage seems to be stabilized in 1st two years and dropped is the 3rd year due to huge increase in net sales and stabilized further in the next year and increased only marginally in the last year by a mere 1% . The costs are reasonably and being managed very well by the firm within acceptable levels. Acharya Institute of Graduate Studies
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Table No. 15 TABLE SHOWING OTHER OPERATING EXPENSES RATIO


Other operating expenses Other oeprating expenses Ratio = Net sales Particulars Net sales other operating expenses Net sales Operating expenses ratio 2005 06
199933235

X 100

2006 07
210877515

2007 08
429815016

2008 09
531720000 293658100 0

2009 10
443908000

933270356

1114428664

2743490827

2831023000

21.42

18.92

15.66

18.10

15.68

ANALYSIS :
This expenses ratio refers to other operational expenses incurred by the firm vis-a-vis to net sales. This also forms a substantial elements in the operational expenses which could be related and as well as indirect.

During 2005-06 the % stood at 21.42 and dropped down in the next two year to 18.92 and 15.66 respectively. It increased to 18.10% during 2008-09 and dropped to 15.68% in the last year.

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GRAPH No. 15 GRAPH SHOWING OTHER OPERATING EXPENSES RATIO

25 21.42 18.92 20 15.66 18.1 15.68

15

10

0 2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION: It is inferred that other operating expenses was relatively high during the first 2 years and more or less stabilized in the last 3 years with net sales increasing and the expenses being kept under control adopting various costing and management techniques. Acharya Institute of Graduate Studies
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Table No. 16 TABLE SHOWING INVENTORY TURNOVER RATIO


Net sales Inventory turnover Ratio = Opening stock + closing stock X 100

2
Particulars Net sales Avg. Inventory Inventory Turnover ratio 2005 06
933270356 136858839

2006 07
1114428664 159192566

2007 08
2743490827 251567957

2008 09
293658100 0 371628000

2009 10
2831023000 400201000

6.82

7.00

10.90

7.90

7.07

ANALYSIS :
Inventory turnover ratio is normally calculated as sales / average inventory or cost of goods sold / average inventory. It reflects whether inventory has been efficiently used or not with a purpose to determine only minimum funds have been locked in the inventory. This also refers to the number of items the stock has been turned over during the period of evaluation and the efficiency with which firm is able to manage its inventory. The ITO ratio was at 6.82 during 2005-06 and dropped to 7.00 in the next year. It increased to 10.90 during 2007-08. It reverted back to 7.9 and 7.07 during the next two years.

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GRAPH No. 16 GRAPH SHOWING INVENTORY TURNOVER RATIO

12

10.9

10 7.9 8 6.82 7 7.07

0 2005 06 2006 07 2007 08 2008 09 2009 10

INTERPRETATION: It is inferred that on an average the inventory turnover ratio has been at 7 times with the exception of 1 year during 2007 -08 where it rose to 10.9 times due to heavy increase in sales. The firm can only improvise upon this very marginally as the ITO ratio has more or less stabilized during the five year period. A drop in the average inventory at increased level of production and sales can hasten the process. Acharya Institute of Graduate Studies
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Chapter 5 FINDINGS, SUGGESTIONS AND CONCLUSIONS


Findings :
1. It is observed that Financial Leverages at DTL has gradually increased over a period of first 4 years and then taken a dip in the last year only when compared to the fourth year. Overall the FL is very good for the company as a whole.

2. The Operating Leverages at DTL has started of on a negative note in the first year and has increased gradually over the second and third year only. In the last year there is a decrease of the O.L. by 75% which is very huge, even though on an overall it is still high.

3. It is observed that the Combined Leverage of DTL is showing an overall increase with wild fluctuations in between. This is due to gradual increase and decrease reflected in both Financial and Operating Leverage.

4. The absolute liquid assets available with the company to discharge its current liabilities is showing a fluctuating trend over the 5 years period, which shows the inability to payoff fully in the event of a decision taken by the management. Acharya Institute of Graduate Studies
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5. The Current Ratio over the period of 5 years has taken wide fluctuations in the figures available. The C.R. taking of well in the first year and taking a hit gradually over the next 2 years. It has climbed over the next two years.

6. The Net Profit Ratio of DTL has started well and seen a decline in the next two years and has picked up gradually during the last two years. This shows a trend of fluctuations over the period.

7. The return on Investment Ratio has seen fluctuation over a period with a decline compare to the first year. The ROI looks better overall inspite of expansion of share holders base in the company.

8. Return on Equity Capital alone has shown an increasing trend over the period and is very good due to the reason that profitability (after tax) has been increasing over a period and the equity share holder base has remained stable more or less.

9. The Earnings per Share over the five year period of study has reached the same level where it started of in the 1 st year. The fluctuations are wild only in the intervening years only.

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10. The Dividend Payout Ratio has seen wide fluctuations over a period of 5 years in DTL with a declining trend in the second and third year and increase in the 4th and 5th year.

11. The Reserves to Equity Share Capital ratios has shown an increasing trend in DTL over a period of 5 years of the study. The company has appropriated substantial portion of its profits to the reserves for meeting future contingencies.

12. The Debt Equity Ratio has seen wide fluctuations over the five year period of study with gradual increase in the first 3 years and a decline in the last 2 years. The overall DER seems to be on a negative note with outsiders funds being double the share holders funds which is not a good sign and should have been the other way round.

13. Solvency Ratio of DTL is more or less stable over the period of study. The average solvency ratio stands at 30% which is good enough and shows companys ability to pay off all the liabilities.

14. The Personnel Expenses Ratio of the company has been on the increase over the period of study. The increase in the cost being very marginal seems to be justified in an inflated economy.

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15. The Other Operating Expenses Ratio has seen wide fluctuations over the period and this could be attributed to uncontrolled expenses incurred over the period even though the sales have been on the increase.

16. The Inventory Turnover Ratio is more or less stable over the five year period of study at an average of 7.5. There are hardly any changes and wide fluctuations and more or less the company has stabilized its operations over the period.

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SUGGESTIONS : 1. The company is earning profits sufficient enough and as such, the F.L is at higher levels. Care should be taken to reduce the level of risk to ideal conditions upon heavy borrowings, which could hurt its profits. 2. The companys contribution to get a better O.L. was very good only during the year 2008-09. During the remaining years it has reflected only a marginal increase. It would be better if the company increases the profit margin to cover Variable Costs also, either by increase in sale volume or increasing the margin of profit or reducing the cost trying a maximize the benefit of large scale production 3. As stated above the contributions having very good in 2008-09 and the C. L is very good. Both the financial and operating cost being very high the company has not been in a position to show better results in first 3 years. Efforts should be made to stabilize the various cost of the company at the level at which it is reflected during 2009-10 with effective budgeting control techniques. This would arrest the spiraling increase in costs. 4. The ALR of the company is very low compared to the standards of 50% or 0.5 : 1. This is due to the high level of current liabilities and increasing trend over the period.

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Company can make efforts to reduce the current liabilities to the extent possible so that the ALR shows better figures.

5. The standard for CR is 2:1 and the companys data shows a marginal decrease from the accepted standards and efforts have to be put in by the management to improve the business cycle and exercise control over both trade debtors and trade creditors. This would improve its current ratio well above the standards.

6. The company has seen an increase in both net profits (after taxation) as well as net sales. In spite of this there has been a fluctuation in the NPR due to probable increase in the operating expenses over the period and as well as interest payments on heavy long term borrowings. The management should make efforts to reduce costs in order to maximize profits at enhanced level of operations, which is possible.

7. The ROI can be improved upon further by reducing external borrowing and the payment of interest associated with it. Excess funds in reserve and surplus can be utilized in a phased manner to reduce the debt percentage in the financials of the company.

8. The return to the equity share holders has been very satisfactory with very good returns and as well as better figure under the reserves and surplus.

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9. The earnings per share can be improved upon further with cost deduction and reducing the long term debt borrowings with interest gradually. This would have a better market price for the share in the stock market overall. 10.The fluctuation in the dividends payout ratio can be attributed mainly due to variations is the EPS only even though dividends paid per share is more or less stable over the period of 5 years. In the last two years the indication are substantial portion of the profit has been retained by the company from its earnings under reserve and surplus which is good.

11.Even though it is the management decision to appropriate a substantial portion of profits into reserves it might be used for future expansions or diversifications. However a portion of that could be used to reduce the companys long term debts over a period gradually.

12.The debt equity ratio is in a very precarious status over the period of study and the only positive element being it is at the lowest in the last year. The management has to make concerted efforts to reduce, their long term debts as early as possible to show as improved DER.

13.The long terms solvency position of the firm is good and the company has sufficient assets to clear outsiders liability comfortably and still have Acharya Institute of Graduate Studies
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funds with it. This can further be improved upon with long term debt reduction gradually over a period.

14.The management can look into automization and computerization of as many operations as possible in order to reduce the number of employees and its related expenses.

15.Exercise of strict budgetary control over the other operating expenses is the need of the hour due to high volatility. The variance in expenses should be monitored on monthly basis to have a tighter control of the expenses.

16.With the increase in sales over the period it is only the average inventory that has increased and contributed for its stability To improve this further the management has to make concerted efforts to reduce the inventory levels within the company for better results and effective inventory utilization

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CONCLUSION

The overall financial performance of DTL seems to be good and showing better performance year after year.

The management needs to exercise effective monetary control on expenditure adopting techniques like Budgetary Control etc. This would enhance the profit margin to higher levels. The long term debt borrowing has to be settled in order to reduce the interest burden on the companys profitability.

An effort has only been made to conduct a study of financial analysis and leverages based on the classification of items both in the balance sheet & profit and loss account and other related reports for 5 financial accounting years.

Thus we conclude to say the overall performance of DTL has been satisfactory and only some elements seems to be fluctuating very widely which needs proper monitoring and control using different Managerial Accounting Techniques.

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BIBLIOGRAPHY
BOOKS: Management accounting By : Appnnaiah Reddy,Mukund Sharma Finantical management theory & practice By: Prasanna Chandra Financial management By; I.M. Pandey Financial management By: P.V. Kulkarni, B.G. Satya Prasad Business finance By: Shashi K. Gupta, R.K.Sharma Financial management By: Appannaiaha Reddy, Mukund Sharma Cost & financial analysis By: Shashi K. Gupta, Neethi Gupta, Anu Putney Internet: www.google.com, www.investopedia.com www edia.com, www.dynamatics .com

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