CHAPTER I

INTRODUCTION

INTRODUCTION
1

Capital structure refers to the mix of long term sources of funds, such as debentures, long-term debt, preference share capital and equity share capital including reserved and surpluses (i.e. retained earnings). ome companies do not plan their capital structure, and it develops as a result of the financial decisions ta!en by the financial manager "ithout any formal planning. #hese companies may proper in the short-run, but ultimately they may face considerable difficulties in raising funds to finance their activities. $ith unplanned capital structure, these companies may also fail to economies the use of their funds. Consequently, it is being increasingly reali%ed that a company should plan its capital structure to maximi%e the use of the funds and to be able to adapt more easily to the changing conditions. #heoretically, the financial manager should plan an optimum capital structure for his company. #he optimum capital structure is obtained "hen the mar!et value per share is maximum. &n practice, the determination of an optimum capital structure is a formidable tas!, and one has to go beyond the theory. #here are significant variation among industries and among individual companies "ithin an industry in terms of capital structure. ince a number of factors influence the capital structure decision of a company, the 'udgment of the person ma!ing the capital structure decision plays a crucial part. #he board of directors or the chief financial officer (C()) of a company should develop an appropriate capital structure "hich is most advantageous to the company. #his can be done only "hen all those factors "hich are relevant to the company*s capital structure decision are properly analy%ed and balanced.

#he capital structure should be planned generally !eeping in vie" the interests of the equity shareholders and the financial requirements of a company. #he equity shareholders, being the o"ners of the company and the providers of ris! capital (equity) "ould be concerned about the "ays of financing a company*s operations. +o"ever, the interests of other groups, such as

employees, customers, creditors, society and government, should also be given reasonable consideration.

Need for the study:

-no"ing the relationship bet"een capital structure and value of firm value. #o analy%e the reason for lo" stoc! prices of the company. tudying relationship bet"een capital structure and cost of capital. #o assess the impact of alternative capital structure on return on equity. &t caters to large extent to"ards development economy of the nation. &nterest paid is tax deductable ,"hich lo"ers debts effective cost.

Objective of the study:

#o study different sources of finance available "ith the firm for its operations.

#o !no" the total value of the firm. #o analy%e earning per share under different capital structure from ,//0-/0. #o analy%e the liquidity and ability of the firm to service fixed charge through ratio analyses #o give guide lines for capital structure a planning.

METHOD
&n the follo"ing chapter the chosen method is discussed. $e have described ho" the "or! proceeded in order to fulfill the purpose, the research methods used are presented and the decisions made throughout the study are explained. 1s argued by 2aymon and +ollo"ay (,//,) finding an interesting and feasible topic is not al"ays a straightfor"ard and rational process because good ideas consist of a mixture of theory, experience and prior research. ince it is a large pro'ect to "rite a bachelor pro'ect, "e invested time to come up "ith a sub'ect that interested the three of us. Capital structure is an interesting sub'ect "ithin the field of finance. 3ast pro'ect titles presented in section ..4, served as a source of inspiration for us during the early stages of this pro'ect. $e have also used "hat aunders, 5e"is and #hornhill (,//.) refer to as a funnel approach meaning that "e started on a general level and then "e have narro"ed it do"n to finally end up "ith our specific ob'ective. #hat is, "e started by deciding that capital structure should be the theme of our "or! and then "e step by step refined it to ma!e it more focused and suitable for a bachelor pro'ect.

Theory testin
1 deductive approach is according to aunders et al. (,//.) "hen theory is tested on reality. $e used a deductive approach since "e developed a theoretical frame"or! as the initial stage of this pro'ect. #he theories presented in the theoretical frame"or! are later in the analysis tested to "hat extent they can relate to our findings. 1n inductive approach, on the other hand, is "hen one first gathers data and after"ards tries to develop a theory out of it ( aunders et al., ,//.). $e started to study the sub'ect of capital structure and built a frame"or! of "hat "e believe 6

"as the most important and representative theories presented in academic literature. 7mphasi%e "as put on capital structure models and theories that best suits the special features of 87s in particular but theories concerning special traits for family businesses are also applied. 9aturally, this selection process of determining "hich researcher*s ideas to include in our theoretical frame"or! and "hich to exclude, is biased by our o"n interests and tastes. $e might have reached other conclusions if "e had used other theories. &n order to get some influences and to get some inspiration about "hat theories that could be useful in our study, "e started the process of building a theoretical frame"or! by reading other pro'ectes about capital structure. (urther, "e tried to scan the field of research done "ithin the same topic by reading 'ournals, specialist literature and text boo!s "ithin finance. 1fter "e had developed a frame"or! of relevant theories, "e conducted intervie"s in order to gather empirical data. #he questions "ere inspired by the theories and formulated in a "ay that the ans"ers "ould include the information presented in the theories. +ence, our theory "as developed to easier understand different phenomena on ho" capital structure is formed by the different businesses and "hat determines the decision ma!ing process. ince our frame of reference "as developed before "e conducted the intervie"s the results from the intervie"s "ere coloured by this. $e might have had a broader spectrum if "e had chosen to perform the intervie"s before "riting the theoretical part of the pro'ect. +o"ever, this is in line "ith our choice of a deductive approach "ere "e narro"ed our purpose do"n to a specific issue. :y doing this "e "ere able to ma!e efficient intervie"s method because "e !ne" exactly "hat information "e "ere interested in. 1lso, it "ould have been harder for us to get companies to participate in our study if the intervie"s "ould have lasted for more than an hour. &n addition, an increased amount of time spent on each intervie"(conducting, processing and analy%ing) "ould reduce the number of possible observations "hich might have "ea!ened our conclusion.

!ources Of D"t":
There "re t#o sources of d"t" n"$e%y: 3rimary data econdary data ;

Pri$"ry D"t": 3rimary data are those, "hich are collected for the first time, and they are original in character. &f an individual or an office collects the data to study a problem, the data are the ra" material of the enquiry. #hey are primary data collected by the investigator himself to study any problem. !econd"ry D"t": econdary data are those, "hich are already collected by someone for some purpose and are available for the present study. (or instance, the data collected during census operations are primary data to the department of census and the same data, if used by a research "or!er for some study, are secondary data. &n this research the various sources of secondary data, "hich are used, are< (act heet :rochures $ebsites

&i$it"tion Of The !tudy

#he study is restricted to capital structure method follo"ed by the company. #he 3eriod of ; years i.e from ,//0 to ,/1, ta!en for analysis is a limitation. Comparative study is restricted to debt and equities of the company. #he period of research of 6; days "as a limitation. #he tudy is based largely on secondary data and the limitation existing therein "ould creep into the findings.

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CONCEPTUA& (RAME)OR4

INTRODUCTION
Capital structure refers to the mix of long term sources of funds, such as debentures, long-term debt, preference share capital and equity share capital including reserved and surpluses (i.e. retained earnings). ome companies do not plan their capital structure, and it develops as a result of the financial decisions ta!en by the financial manager "ithout any formal 14

planning. #hese companies may proper in the short-run, but ultimately they may face considerable difficulties in raising funds to finance their activities. $ith unplanned capital structure, these companies may also fail to economies the use of their funds. Consequently, it is being increasingly reali%ed that a company should plan its capital structure to maximi%e the use of the funds and to be able to adapt more easily to the changing conditions. #heoretically, the financial manager should plan an optimum capital structure for his company. #he optimum capital structure is obtained "hen the mar!et value per share is maximum. &n practice, the determination of an optimum capital structure is a formidable tas!, and one has to go beyond the theory. #here are significant variation among industries and among individual companies "ithin an industry in terms of capital structure. ince a number of factors influence the capital structure decision of a company, the 'udgment of the person ma!ing the capital structure decision plays a crucial part. #he board of directors or the chief financial officer (C()) of a company should develop an appropriate capital structure "hich is most advantageous to the company. #his can be done only "hen all those factors "hich are relevant to the company*s capital structure decision are properly analysed and balanced. #he capital structure should be planned generally !eeping in vie" the interests of the equity shareholders and the financial requirements of a company. #he equity shareholders, being the o"ners of the company and the providers of ris! capital (equity) "ould be concerned about the "ays of financing a company*s operations. +o"ever, the interests of other groups, such as employees, customers, creditors, society and government, should also be given reasonable consideration.

A sound or ",,ro,ri"te c",it"% structure shou%d h"ve the fo%%o#in fe"tures:

1>

Return #he capital structure of the company should be most advantageous. ub'ect to other considerations, it should generate maximum returns to the shareholders "ithout adding additional cost to them.

Ris- #he use of excessive debt threatens the solvency of the company. #o the point debt does not add significant ris! it should be used, other"ise its use should be avoided.

(%e7ibi%ity #he capital structure should be flexible. &t should be possible for a company to adapt its capital structure "ith a minimum cost and delay if "arranted by a changed situation. &t should also be possible for the company to provide funds "henever needed to finance its profitable activities.

C","city #he capital structure should be determined "ithin the debt capacity of the company, and this capacity should not be exceeded. #he debt capacity of a company depends on its ability to generate future cash flo"s. &t should have enough cash to pay creditors* fixed charges and principal sum.

Contro% #he capital structure should involve minimum ris! of loss of control of the company. #he o"ners of closely-held companies are particularly concerned about dilution of control.

Capital structure of a company refers to the ma!e up of its capitali%ation. 1 company procures funds by issuing various types of securities i.e., ordinary shares, preference shares, bonds and debentures. :efore issuing any of these securities, a company should decide above the !inds securities to be issued. &n "hat proportion "ill the various !inds securities be issued, should also be considered. +o"ever, in broader sense, capital structure includes all the long term capital resource including loans, bonds, shares issued, reserves etc., and the components of the total capital. ("ctors Affectin C",it"% !tructure 10

86 Tr"din on e9uity: 1 company earns the profits on its total capital (borro"ed and o"ned) on the borro"ed capital (including preference capital) company pays interest or dividend at a fixed rate. &f the fixed rate is lo"er than the general rate of earnings of the company, the ordinary share holders "ill have an advantage in the form of additional profits. #hese may be referred to as trading on equity. #hese trading on equity is an arrangement under "hich a company ma!es use of borro"ed funds including preference capital bearing a fixed rate of interest or dividend in such a "ay as to increase the rate return on equity shares, other"ise the rate of dividend on equity shares cannot go beyond the general rate of earning if "hole of its capital is raised by the issue of equity shares.

:6 Desire to Contro% the 5usiness: Luite often, the promoters "ant to retain the control of the affairs of the company. #hey raise the capital from the public by issuing deferent types of securities in such a "ay as to retain the control of "hole or substantially the "hole of the affairs of the company "ith them. (or the purpose of they raise a large proportion of funds by the issue of debentures and preference shares. 2ebenture holders and preference share holders or usually not given any voting rights as en'oyed by the equity share holders. 7quity share capital is generally held by the promoters and their near relatives. #hus the company collects its requirement of funds from the public, though the control rest "ith the promoters. ;6 M"ture of 5usiness: 9ature of business must be ta!en into account "hile preparing the financial plan and determining the capital structure a manufacturing company may have a deferent capital structure from merchandising, financing extractive or public utility concerns. #hese enterprises differ in regard to the amount of investment, ris! of failures involved trade cycles and freedom from 1?

competition. #hese deference enable one type of business to issue securities "hich are not profitable to other businesses. o, public utility concern may en'oyed advantages of fixed interest securities li!e bonds and debenture because of their monopoly and stability of income. :ut on the other hand, manufacturing concerns do not en'oy such advantages and rely a great extent on equity share capital. <6 Pur,ose of fin"ncin : #he purpose for "hich funds are being raised must be ta!en into account the time of devising financial structure of a company. &f funds are raised for betterment expenditure it is quite apparent that it "ill add nothing to the earning capacity of the company. uch expenditure may be incurred either out of funds raised bi issue of shares or still better out of retained earnings but in on case, out of borro"ed funds. )n the other hand productive pro'ects may be financed out of borro"ings. :orro"ings should never be used to meet out losses unless they are caused by paucity of funds. =6 Period of fin"nce: 9ormally funds "hich are required for a short time say for ;to 1/ years should be arranged through borro"ing because these can easily be repaid as soon as companyM s financial position improves. &n such cases shares should not be issued because, share capital except redeemable preference share capital is in possession of its o"n funds. &ssue of redeemable preference shares, too, should be avoided as it requires certain legal formalities. >6 E%"sticity of c",it"% structure: #he capital structure should be as elastic as possible so as to provide for expansion for future development or to ma!e it feasible to reduce the capital "hen it is not needed. #oo much dependence on debentures and preference shares from the very beginning ma!es the capital structure of the company rigid because of payment of fixed interest or dividend. #hese sources should be !ept in reserve for emergency or for expansion of funds is not a problem and it can very easily be done either by issue of fresh shares or debentures or by obtaining loan from ,/

financial institutions or from public but contraction of capital is really a problem. #o ma!e it feasible, redeemable preference shares or redeemable debentures "hich may be paid off after a fixed period should be issued.

?6 Need of investors: 1n ideal capital structure is that "hich suits the needs of different types of investors having varying financial status and varying psychologies. ome investors "ho prefer security of investment and stability of income usually go in for debentures. 3reference shares "ill be preferred by those "ho "ant a higher and stable income "ith enough safety of investment. 7quity shares "ill be ta!en up by those "ho are ready to ta!e ris!s for higher income and capital appreciation. #hose "ho "ant to acquire control over the affairs of the company li!e equity shares. (ACTOR! A((ECTIN. CAPITA& !TRUCTURE: #he follo"ing factors should be ta!en in vie" "hile devising a capital structure of the company<1. #rading on equity. ,. 2esire to control business. .. 9ature of business i.e. manufacturing, merchandising , financing, extractive, etc. 6. 3urpose of financing i.e. betterment or productive. ;. 3eriod of finance. 4. 7lasticity of capital structure. >. 9eed of investors. 0. Cost of financing. ?. 8ar!et conditions and sentiments of investors. 1/. 5egal restrictions. 11. 3ossibilities of regular and fixed income.

,1

#he 7:&# 73 analysis is an important tool in the hands of the financial manager to get an insight into the firm*s capital structure management. +e can consider the possible fluctuations in 7:&# and examine their impact on 73 under different financial plans. &f the probability of earning a rate of return on the firm*s assets less than the cost of debt in insignificant, a large amount of debt can be used by the firm to increase the earnings per share. #his may have a favourable effect on the mar!et value per share. )n the other hand, if the probability of earning a rate of return on the firm*s assets less than the cost of debt in very high, the firm should refrain from employing debt capital. &t may, thus, be concluded that the greater the level of 7:&# and lo"er the probability of do"n"ard fluctuation, the more beneficial it is to employ debt in the capital structure. +o"ever, it should be reali%ed that the 7:&#-73 is a first step in deciding about a firm*s capital structure. &t suffers from certain limitations and does not provide unambiguous guide in determining the capital structure of a firm in practice.

&i$it"tions of EP! "s " (in"ncin @ decision Criterion :

73 is one of the most "idely used measures of the company*s performance in practice. 1s a result of this, in choosing bet"een debt and equity in practice, sometimes too much attention is paid on 73 , "hich ho"ever, as some serious limitations as a financing decision criterion. 1t discussed in Chapter 1, the ma'or shortcoming of the 73 as a financing-decision criterion is that it does not consider ris!N it ignores the variability about the expected value of 73 . #he belief that investors "ould be 'ust concerned "ith the expected 73 variability. is not "ell founded. &nvestors in valuing the shares of the company consider both expected value and

EP! v"ri"bi%ity "nd fin"nci"% ris- :

#he 73 variability resulting from the use of leverage in called functional ris!. (ianncial ris! is added "ith the use of debt because of (a) the increased variability in the shareholders* earnings and (b) the threat of insolvency. 1 firm can avoid financial ris! altogether if it does not employ any debt in its capital structure. :ut then the shareholders "ill be deprived of the benefit of the expected increases in 73 . #herefore, a company may employ debt to the extent of the ,,

financial ris! perceived by shareholders "hich does not exceed the benefit of increased 73 "ill continue to increase, but the value of the company "ill fall because of the greater exposure of shareholders to financial ris! in the form of financial distress.

Debt C","city
#he technique of cash flo" analysis is helpful in determining the firm*s debt capacity. 2ebt capacity is the amount "hich a firm can service easily even under adverse conditionsN it is the amount that the firm should employ. #here may be lenders "ho are prepared to lend to you. :ut you should bollo" only if you can service debt "ithout any problem.

C"sh (%o# An"%ysis +ersus E5ITAEP! An"%ysis

&s cash flo" analysis superior to 7:&#-73 analysisO +o" does it incorporate the insights of the financial theoryO #he cash analysis has the follo"ing advantages over 7:&#-73 analysis. &f focuses on the liquidity and solvency of the firm over a long-period of time, even encompassing adverse circumstances. #hus, it evaluates the firm*s ability to meet fixed obligations. &t goes beyond the analysis of profit and loss statement and also considers charges in the balance sheet items. &t identifies discretionary cash flo"s. #he firm can thus prepare an action plan to face adverse situations. &t provides a list of potential financial flo"s "hich can be utili%ed under emergency. &t is long-term dynamic analysis and does not remain confined to a single period analysis.

C"sh (%o# An"%ysis versus Debit @ E9uity R"tio :

#he cash flo" analysis clearly reveals that a higher debt-equity raito is not ris!y if the company has the ability of generating substantial cash inflo"s in the future to meet its fixed

,.

financial obligations. (inancial ris! in this sense is indicated by the company*s cash-flo" ability, not by the debt-equity ratio. #o quote Dan +orne< P.the analysis of debt-to-equity ratios along can be deceiving, and analysis of the magnitude and stability of cash-flo"s relative to fixed charges is extremely important in determining the appropriate capital structure for the firm. #o the extent that creditors and investors analyse a firm*s cash-flo" ability to service debt, and management*s ris! preferences correspond to those of investors, capital structure decisions made in this basis should tend to maximi%e share price < #he cash flo" analysis does have its limitations. &t is difficult to predict all possible factors "hich may influence the firm*s cash flo"s. #herefore, it is not a fool-proof technique to determine the firm*s debt policy.

PRACTICA& !TRUCTURE

CON!IDERATION!

IN

DETERMININ.

CAPITA&

#he determination of capital structure in practice involves additional considerations in addition to the concerns about 73 , value and cash flo". 1ttitudes of managers "ith regard to financing decisions are quite often influenced by their desire, not to lose control to maintain operating flexibility and to have convenient and cheaper means of raising funds. #he most important considerations are Concern for dilution of control 2esire to maintain operating flexibility 7ase of mar!eting capital inexpensively Capacity for economics of scale 1gency costs.

)ide%yAhe%d Co$,"nies
#he ordinary shareholders elect the directors of the company. &f company issues ne" shares, there is ris! of dilution of control. #his is not a very important consideration in the case of a "idely-held-company. #he shares of such a company are "idely scattered. 8ost of the ,6

shareholders are not interested in ta!ing active part in the company*s management. 9or do they have time and money to attend the meetings. #hey are interested in dividends and capital gains. &f they are not satisfied, they "ill sell their shares. #hus, the best "ay to ensure control and to have the confidence of the share holders is to manager the company most efficiently and compensate shareholders in the form of dividends and capital gains. #he ris! of loss of control can be reduced by distribution of shares "idely and in small lots.

C%ose%yAhe%d Co$,"nies
#he consideration of maintaining control may be significant in case of a closely-held small company. 1 shareholder or a group of shareholders can purchase all or most of the ne" shares and control the company. 7ven if the ma'ority shares are held by the o"ner-managers, their freedom to manage the company "ill be curtailed "hen they go for initial public offerings (&3)s). (ear of sharing control and being interfered by others often delays the decision of the closely-held companies to go public. #o avoid the ris! of loss of control, small companies may slo" their rate of gro"th or issue preference shares or raise debt capital. &f the closely-held companies can ensure a "ide distribution of shares, they need not "orry about the loss of control so much.

(%e7ibi%ity
(lexibility is one of the most erious considerations in setting up the capital structure. (lexibility means the firm*s ability to adapt its capital structure to the needs of the changing conditions. #he company should be able to raise funds, "ithout undue delay and cost, "henever needed, to finance the profitable investments. &t should also be in a position to redeem its preference capital or debt "henever "arranted by the future conditions.

&o"n coven"nts :
,;

=estrictive covenants are commonly included in long-term long agreements and debentures. #hese restrictions curtail the company*s freedom in dealing "ith the financial matters and put it in an inflexible position. Covenants in long agreements may include restrictions to distribute cash dividends, to incur capital expenditure, to raise additional external finances or to maintain "or!ing capital at a particular level.

E"r%y Re,"y"bi%ity
1 considerable degree of flexibility "ill be introduced if a company has the discretion of early repaying its debt and preference share capital. #his "ill enable management to retire or replace cheaper source of finance for the expensive one "henever "arranted by he circumstances. $hen a company has excess cash inflo"s and does not have profitable investment opportunities, it becomes desirable to retire debt. imilarly, a company can ta!e advante of a declining rate of interest if it has a right to repay debt at its option. uppose that funds are available at 1; per cent rate of interest presently. #he company has outstanding debt at an 10 percent rate of interest. &t can save in terms of interest cost if it can retire the Hold* debt and replace it by the Hne"* debt.

Reserve C","city
#he flexibility of the capital structure also depends on the company*s debt capacity. #he greater the debt capacity and the greater and availability of unused debt capacity, the greater the degree of flexibility. &f a company borro"s to the limit of its capacity, it "ill not be in a position to borro" additional funds to finance unforeseen and unpredictable demands except at restrictive and unfavourable terms. #herefore, a company should not borro" to the limit of its capacity, but !eep available some unused capacity to raise funds in future to meet some sudden demand for fiancQs.

M"r-et"bi%ity
,4

8ar!etability means the readiness of investors to purchase a security in a given period of time and to demand reasonable return. 8ar!etability does not influence the initial capital structure, but it is an important consideration to decide about the appropriate timing of security issues. #he capital mar!ets are changing continuously. 1t one time, the mar!et favours debenture issues, and, at another time, it may readily accept share issues. 2ue to the changing mar!et sentiments, the company has to decide "hether to raise funds "ith an equity issue or a debt issue. #he alternative methods of financing should, therefore, be evaluated in the light of general mar!et conditions and the internal conditions of the company.

M"r-et Conditions
&f the share mar!et is depressed, the company should not issue equity shares, but issue debt and "ait to issue equity shares till the share mar!et revives. 2uring boom period in the share mar!et, it may be advantageous for the company to issue shares at high premium. #his "ill help to !eep its debt capacity unutili%ed. #he internal conditions of a company may also dictate the mar!etability of securities.

(%ot"tion Costs
(lotation cost is not a very important factor influencing the capital structure of a company. (lotation costs are incurred only "hen the funds are externally raised. Ienerally, the cost of floating a debt is less than the cost of floating an equity issue. #his may encourage a company to use debt than issue equity shares. &f the o"ners* capital is increased by retaining the earnings, no flotation costs are incurred. #o repeat, except sometimes in the case of small companies, flotation costs are not a significant consideration to decide about the alternative forms of financing.

C","city of R"isin (unds

#he si%e of a company may influence its capital and availability of funds from different sources. 1 small company finds great difficulties in raising long-term loans. &f it is able to obtain some long-term loan, it "ill be available at a higher rate of interest and inconvenient ,>

terms. #he highly restrictive covenants in loan agreements in case of small companies ma!e their capital structure very inflexible and management cannot run business freely "ithout any interference. mall companies, therefore, depend on share capital and retained earning for their long-term funds.

A ency Costs :
&n practice, there may exist a conflict of interest among shareholders, debtholders and management. #hese conflicts give rise to agency problems "hich involve agency costs. 1gency costs have their influence on a firm*s capital structure.

#he conflict bet"een shareholders and debt holders arise because of the possibility of shareholders transferring the "ealth of debt holders in their favor. #he debt holders may lend money to invest in lo"-ris! pro'ects "hile the firm may invest it in high-ris! pro'ects. (irm may also raise substantial ne" debt and thus, increase the debt holders* ris!.

DETERMINANT! O( CAPITA& !TRUCTURE

ome studies have been conducted to ascertain the determinations of financial leverage under the &ndian context :hat*s (1?0/), paper concerned the impact of si%e, gro"th, business ris!, dividend policy, profitability, debt service capacity and the degree of operating leverage on the leverage ratio of the firm. #he study used the multiple regression model to find out the contribution of each characteristic. :usiness ris! (defined as earnings instability), profitability, dividend payout and debt service capacity "ere found to be significant determinants of the leverage ratio. #he study used a sample of 4, companies from engineering industry.

,0

C+13#7= &D

DATA ANA&'!I!

*
INTERPRETATION

,?

CAPITA& !TRUCTURE
31=#&CE51= I6 AuthoriBed c",it"% 7quity shares II6 Issued sh"rers III6Reserves *sur,%us 1.share premium ,.capital reserve ..capital subsidy 6.Ieneral reserve 4/;?.>/ investment 160>.;/ 60.10 ./ ,//0 ;;/ ;;/

Rs. In Lakhs
,//? ;;/ ;;/ 160>.;/ 60.10 ./ ,/1/ ;;/ ;;/ 160>.;/ 60.10 ./ ,/11 ;;/ ;;/ 160>.;/ 60.10 ./ ,/1, ;;/ ;;/ 160>.;/ 60.10 ./

6060.?.

;060.?.

;??0.?.

4,,0.?.

550 0

550 0 1487.5

4848.93

48.18 30 0

./

Inter,ret"tion:
&n the above table represent the analysis of capital structure from ,//0 to ,/1,. #he authorised capital (or) equity shares are constant from the beginning year ,//0 to ,//?(;,;/ lac!) and issued shares also constant from ,//0 to ,/1,(;,;/ lac!). #he company maintained reserves @surplus from ,//0to,/1, including share premium (160>.;/ lac!)Capital reserve (60.10 lac!s) capital investment subsidy (./ lac!s) and general reserve changed in every year from ,//0 to ,/1,.

DE5IT CAPITA& Rs6 In &"-hs &o"ns * (unds I6 !ecured &o"ns 1. #erm loans @ $.C. borro"ing from :an! ,,0..6. II6 Unsecured &o"ns ,/?..,; 16.,.1. 6/6>.6> 0>>.> >??4.;; 0,,0.;4 1/,0/..; 1./>>./6 1;,06.60
,//0 ,//? ,/1/ ,/11 ,/1,

.1

Inter,ret"tion:
#he above table sho"Ms from the loans @funds position of the net"orth. &n ,//0 to ,/1, secured loans including term loans and "or!ing capital borro"ing from ban!s increasing every year from ,//0(>??4.;; lacs)to ,/11(1;,06.60 lac!s) and unsecured loans represent the position of the debt capital from ,//0 to ,/1,. +ere ,//0 increasing from(,,0..6 lacs)and ,/1, decreased(,/?..,; lacs) and ,/11 increased (6/6>.6>lacs)and ,/1, decreased(0>>.> lacs) +ere the unsecured loans changed in flucation from ,//0 to ,/1,.

.RO)TH O( O)NER! (UND!

Rs6 &"-hs 'e"rs :CCD :CCE :C8C :C88 :C8: E9uity sh"re c",it"% ;;/ ;;/ ;;/ ;;/ ;;/ Reserve * sur,%us >40; 46>/ >;;? 0.;. ?,,; Net #orth 0,.; >/,/ 01/? 0?/. ?>>;

Inter,ret"tion:
.,

#he gro"th of o"ners funds table represent the mill position of the every year. +ere the equity share capital constant from ,//0 to ,/1, (;,;/ lac!)and reserve @surplus measured high in the year ,//0 i.e. (>40; )from then it has gradually decreased in the year ,//?,,/1,. :ut is in increased trend in the year ,/11 and ,/1, measuring (0.;.)and (?,,;) these are represent and changes in the net "orth position of the ,//0 to ,/1,.

.RO)TH O( DE5T CAPITA&

Rs. In Lakhs 'e"r :CCD :CCE :C8C :C88 :C8: !ecured %o"ns >??4.;; 0,,0.;4 1/,0/..; 1./>>./6 1;,06.60 Unsecured %o"ns ,,0..6. ,/?..,; 16.,.1. 6/6>.6> 0>>.>1 Tot"% debt 1/,>?.?0 1/.,1.01 11>1,.60 1>1,6.;1 1414,.1?

Inter,ret"tion:

..

#he above table depicts gro"th of debt capital of net"orth. +ere mentioned secured loans and unsecured loans from ,//0 to ,/1, the above loans are representing the total debt.

DE5T E2UIT' RATIO

Debt equity ratio= totaldebt / networth =s.5a!hs 'e"rs :CCD :CCE :C8C :C88 :C8: Debt 1/,>?.?0 1/.,1.01 11>1,.60 1>1,6.;1 1414,.1? E9uity 0net #orth1 0,.6.46 >/,/.11 01/0.>, 0?/..,6 0>>;.,1 R"tio 1.,60.0 1.6>/., 1.6666. 1.?,.6/ 1.4;.6/

Inter,ret"tion:
.6

&t is evident from the above table that debt equity ratio of the net"orth "as approximately 1.,6 times in the year ,//0. 1nd it is increased to 1.?, times in the year ,/1, and suddenly decreased 1.4; in the year ,/1,.

INTERE!T CO+ERA.E RATIO

&nterest coverage ratioR 7:&#C &9# ( 7:&# R 3:# 273 &9# ) =s. 5a!hs 'e"r :CCD :CCE :C8C :C88 :C8: E5IT ..;,.04 ..0;./, 6,6/.;0 610;.6; 6,4?./1 INT 1110..> 1/.0.6; 0?4.0. 1/0,... 11;?.1. I6C6R ,.??0 ..,4/ 6.>,0 ..04> ..40.

.;

Inter,ret"tion:
#he above table sho"s the interest coverage ratio. +ere mentioned 7:&# and &9# from ,//0 to ,/1, calculated &C=(interest coverage ratio). #he &C= measured very lo" from the starting position ,//0 (,.??0 lac!) it is increased ,//? (6.>,0 5ac!) ,/1, and ,/1, decreased finally (..40. lac!).

RETURN ON NET)ORTH
Return on net worth=PAT(net pro it!/net worth =s. 5a!hs 'e"rs :CCD :CCE :C8C :C88 :C8: Net ,rofit >01.6> 000.>6 1.?0.06 1/6,.>1 11,,.41 Net #orth 0,.6.46 >/,/.11 01/0.>, 0?/..,6 ?>>;.1; R6O6N /./? /.1. /.1> /.1, /.11 F ? 1. 1> 1, 11

.4

Inter,ret"tion:
#he return on net "orth table sho"s of net"orth position of the ,//0 to ,/1,. +ere 9et profit @ 9et "orth calculated =)9 return on equity and percentage of =)9 is every year increased and decreased from ,//0 to ,/1,.

PER(ORMANCE O( THE COMPAN' TURNO+ER

Rs. Thou 'e"rs :CCD .> Turnover ,66?/./?

:CCE :C8C :C88 :C8:

,?;;4.>> ,01/1.>. ..;14.,4 .4>;,.,;

Inter,ret"tion:
#he above table sho"s the performance of the company turnover from ,//0 to ,/1,. #he company turnover increased from ,//0(,66?/./? thou) to ,/1, (.4>;,.,; thou) finally the company turnover position is very high.

EARNIN. PER !HARE

7arning per shareR 3rofit after taxC9o of shares Rs. Lakhs 'e"rs :CCD :CCE :C8C :C88 :C8: Net ,rofit >01.6> 000.>6 1.?0.06 1/6,.>1 11,,.41 No of sh"res ;;,//,/// ;;,//,/// ;;,//,/// ;;,//,/// ;;,//,/// .0 E6P6! 16,./? 141.;? ,;6... 10?.;0 ,/6./1 F 16.,1 14.14 ,;.6. 10.?4 ,/./6

Inter,ret"tion:
(rom the above table it can be observed that 9et"orth earning per share ,//0 the 73 is (16,./?) and increased ,/1/ (,;6...)and finally decreased from ,/1,(,/6.1).

.?

E5IT AND EP! ANA&'!I!

EBIT
0A1 Interest G ?F

F of e9uty F of debt 6,.4? 11.;? .1.1/ ,.6> ,0.4. /.;; Cr ;,./;

6,.4? ?./> ...41 4./; ,>.;4 /.>6 Cr .>.,6

6,.4? 1..4; ,?./6 ;.,, ,..01 /..> Cr 46..;

P5T
0A1 t"7 G 8DF

PAT No6 of sh"res EP!

E5IT AND EP! ANA&'!I!

% of equty % of debt % of equty % of debt % of equty % of debt

70 60 50 40 30 20 10 0 EBIT PBT PAT EPS

Inter,ret"tion :
#he 73 of firm is very high "hen the capital structure consists of ,; S equity and >; S debt the no.of shares "ill increase by .6 S "hen the capital structure consists of ;/ S equity and ;/ S debt capital. #he intrest rate "ill get reduced by ,1S "hen capital structure of ;/ S equity and ;/S debt capital.

(INANCIA& &E+ERA.E

6/

INTRODUCTION:
&ever" e/ " very ener"% conce,t/ re,resents inf%uence or ,o#er6 In fin"nci"% "n"%ysis %ever" e re,resents the inf%uence of " fin"nci"% v"ri"b%e over s"$e other re%"ted fin"nci"% v"ri"b%e6 (inancial leverage is related to the financing activities of a firm. #he sources from "hich funds can be raised by a firm, from the vie"point of the cost can be categori%ed into< #hose, "hich carry a fixed finance charge. #hose, "hich do not carry a fixed charge. #he sources of funds in the first category consists of various types of long term debt including loans, bonds, debentures, preference share etc., these long-term debts carry a fixed rate of interest "hich is a contractual obligation for the company except in the case of preference shares. #he equity holders are entitled to the remainder of operating profits if any. (inancial leverage results from presence of fixed financial charges in eh firm*s income stream. #hese fixed charges don*t vary "ith 7:&# or operating profits. #hey have to be paid regardless of 7:&# availability. 3ast payment balances belong to equity holders. (inancial leverage is concerned "ith the effect of changes & the 7:&# on the earnings available to shareholders.

DE(INITION:
(inancial leverage is the ability of the firm to use fixed financial charges to magnify the effects of changes in 7:&# on 73 i.e., financial leverage involves the use of funds obtained at fixed cost in the hope of increasing the return to shareholder. #he favorable leverage occurs "hen the (irm earns more on the assets purchase "ith the funds than the fixed costs of their use. #he adverse business conditions, this fixed charge could be a burden and pulled do"n the companies "ealth

MEANIN. O( (INANCIA& &E+ERA.E:

1s stated earlier a company can finance its investments by debtCequity. #he company may also use preference capital. #he rate of interest on debt is fixed, irrespective of the company*s rate of return on assets. #he company
61

has a legal banding to pay interest on debt .#he rate of preference dividend is also fixed, but preference dividend are paid "hen company earns profits. #he ordinary shareholders are entitled to the residual income. #hat is, earnings after interest and taxes belong to them. #he rate of equity dividend is not fixed and depends on the dividend policy of a company. #he use of the fixed charges, sources of funds such as debt and preference capital along "ith o"ners* equity in the capital structure, is described as Tfinancial leveragesU or TgearingU or TtradingU or TequityU. #he use of a term trading on equity is derived from the fact that it is the o"ners equity that is used as a basis to raise debt, that is, the equity that is traded upon the supplier of the debt has limited participation in the companies profit and therefore, he "ill insists on protection in earnings and protection in values represented by o"ners equity*s

(INANCIA& &E+ERA.E AND THE !HAREHO&DER! RI!4

(inancial leverage magnifies the shareholders earnings "e also find that the variability of 7:&# causes 73 to fluctuate "ithin "ider ranges "ith debt in the capital structure that is "ith more debt 73 raises and falls faster than the rise and fall in 7:&#. #hus financial leverage not only magnifies 73 but also increases its variability. #he variability of 7:&# and 73s distinguish bet"een t"o types of ris!- operating ris! and financial ris!. #he distinction bet"een operating and financial ris! "as long ago recogni%ed by 8arshall in the follo"ing "ords.

OPERATIN. RI!4: A
)perating ris! can be defined as the variability of 7:&# (or return on total assets). #he environment internal and external in "hich a firm operates determines the variability of 7:&#. o long as the environment is given to the firm, operating ris! is an unavoidable ris!. 1 firm is better placed to face such ris! if it can predict it "ith a fair degree of accuracy.

THE +ARIA5I&IT' O( E5IT HA! T)O COMPONENT!

1. ,. Dariability of sales Dariability of expenses
6,

86 +ARIA5I&IT' O( !A&E!:
#he variability of sales revenue is in fact a ma'or determinant of operating ris!. ales of a company may fluctuate because of three reasons. (irst the changes in general economic conditions may affect the level of business activity. :usiness cycle is an economic phenomenon, "hich affects sales of all companies. econd certain events affect sales of company belongings to a particular industry for example the general economic condition may be good but a particular industry may be hit by recession, other factors may include the availability of ra" materials, technological changes, action of competitors, industrial relations, shifts in consumer preferences and so on. #hird sales may also be affected by the factors, "hich are internal to the company. #he change in management the product mar!et decision of the company and its investment policy or stri!e in the company has a great influence on the company*s sales.

:6 +ARIA5I&IT' O( EHPEN!E!: A
Iiven the variability of sales the variability of 7:&# is further affected by the composition of fixed and variable expenses. +igher the proportion of fixed expenses relative to variable expenses, higher the degree of operating leverage. #he operating leverage affects 7:&#. +igh operating leverage leads to faster increase in 7:&# "hen sales are rising. &n bad times "hen sales are falling high operating leverage becomes a nuisanceN 7:&# declines at a greater rate than fall in sales. )perating leverage causes "ide fluctuations in 7:&# "ith varying sales. )perating expenses may also vary on account of changes in input prices and may also contribute to the variability of 7:&#.

(INANCIA& RI!4: A
(or a given degree of variability of 7:&# the variability of 73 and =)7 increases "ith more financial leverage. #he variability of 73 caused by the use of financial leverage is called Tfinancial ris!U. (irms exposed to same degree of operating ris! can differ "ith respect to financial ris! "hen they finance their assets differently. 1 totally equity financed firm "ill have no financial ris!. :ut "hen debt is used the firm adds financial ris!. (inancial ris! is this avoidable ris! if the firm decides not to use any debt in its capital structure.

6.

MEA!URE! O( (INANCIA& &E+ERA.E: A

#he most commonly used measured of financial leverage are< 1) 2ebt ratio< the ratio of debt to total capital, i.e.,

$here, 2 is value of debt, is value of equity and D is value of total capital 2 and may be measured in terms of boo! value or mar!et value. #he boo! value of equity is called not "orth. ,)
81

2ebt-equity ratio< #he ratio of debt to equity, i.e., &nterest coverage< the ration of net operating income interest charges, i.e., (or 7:&#) to

#he first t"o measures of financial leverage can be expressed in terms of boo! or mar!et values. #he mar!et value to financial leverage is the erotically more appropriate because mar!et values reflect the current altitude of investors. :ut, it is difficult to get reliable information on mar!et values in practice. #he mar!et values of securities fluctuate quite frequently. #here is no difference bet"een the first t"o measures of financial leverage in operational terms. #hey are related to each other in the follo"ing manner.

#hese relationships indicate that both these measures of financial leverage "ill ran! companies in the same order. +o"ever, the first measure (i.e., 2CD) is more specific as its value ranges bet"een %eros to one. #he value of the second
66

measure (i.e., 2C ) may vary from %ero to any large number. #he debt-equity ratio, as a measure of financial leverage, is more popular in practice. #here is usually an accepted industry standard to "hich the company*s debt-equity ratio is compared. #he company "ill be considered ris!y if its debt-equity ratio exceeds the industrystandard. (inancial institutions and ban!s in &ndia also focus on debt-equity ratio in their lending decisions. #he first t"o measures of financial leverage are also measures of capital gearing. #hey are static in nature as they sho" the borro"ing position of the company at a point of time. #hese measures thus fail to reflect the level of financial ris!, "hich inherent in the possible failure of the company to pay interest repay debt. #he third measure of financial leverage, commonly !no"n as coverage ratio, indicates the capacity of the company to meet fixed financial charges. #he reciprocal of interest coverage that is interest divided by 7:&# is a measure of the firm*s incoming gearing. 1gain by comparing the company*s coverage ratio "ith an accepted industry standard, the investors, can get an idea of financial ris! .ho" ever, this measure suffers from certain limitations. (irst, to determine the company*s ability to meet fixed financial obligations, it is the cash flo" information, "hich is relevant, not the reported earnings. 2uring recessional economic conditions, there can be "ide disparity bet"een the earnings and the net cash flo"s generated from operations. econd, this ratio, "hen calculated on past earnings, does not provide any guide regarding the future ris!y ness of the company. #hird, it is only a measure of short-term liquidity than of leverage.

(INANCIA& &E+ERA.E AND THE !HARE HO&DERI! RETURN:

6;

#he primary motive of a company in using financial leverage is to magnify the shareholder*s return under favorable economic conditions. #he role of financial leverage in magnifying the return of the shareholders is based under assumption that the fixed charges funds (such as the loan from financial institutions and other sources or debentures) can be obtained at a cost lo"er than the firm*s rate of return on net assets. #hus, "hen the difference bet"een the earnings generali%ed by assets financed by the fixed charges funds and cost of these funds is distributed to the shareholders, the earnings per share (73 ) or return on equity increase. +o"ever, 73 or =)7 "ill fall if the company obtains the fixed charges funds at a cost higher than the rate of return on the firm*s assets. &t should, there fore, be clear that 73 , =)7 and =)& are the important figures for analy%ing the impact of financial leverage.

COM5INED E((ECT O( OPERATIN. AND (INANCIA& &E+ERA.E!

)perating and financial leverages together cause "ide fluctuations in 73 for a given change in sales. &f a company employs a high level of operating and financial leverage, even a small change in the level of sales "ill have dramatic effect on 73 . 1 company "ith cyclical sales "ill have a fluctuating 73 N but the s"ings in 73 "ill be more pronounced if the company also uses a high amount of operating and financial leverage. #he degree of operating and financial leverage can be combined to see the effect of total leverage on 73 associated "ith a given change in sales. #he degree of combined leverage (2C5) is given by the follo"ing equation<

Bet another "ay of expressing the degree of combined leverage is as follo"s<

ince L ( -D) is contribution and L ( -D)-(-&9# is the profit after interest but before taxes, 7quation , can also be "ritten as follo"s<
64

RATIO ANA&'!I!: A
#he primary user of financial statements are evaluating part performance and predicting future performance and both of these are facilitated by comparison. #herefore the focus of financial analysis is al"ays on the crucial information contained in the financial statements. #his depends on the ob'ectives and purpose of such analysis. #he purpose of evaluating such financial statement is different form person to person depending on its relationship. &n other "ords even though the business unit itself and shareholders, debenture holders, investors etc. all under ta!e the financial analysis differs. (or example, trade creditors may be interested primarily in the liquidity of a firm because the ability of the business unit to play their claims is best 'udged by means of a through analysis of its l?iquidity. #he shareholders and the potential investors may be interested in the present and the future earnings per share, the stability of such earnings and comparison of these earnings "ith other units in thee industry. imilarly the debenture holders and financial institutions lending long-term loans maybe concerned "ith the cash flo" ability of the business unit to pay bac! the debts in the long run. #he management of business unit, it contrast, loo!s to the financial statements from various angles. #hese statements are required not only for the management*s o"n evaluation and decision ma!ing but also for internal control and overall performance of the firm. #hus the scope extent and means of any financial analysis vary as per the specific needs of the analyst. (inancial statement analysis is a part of the larger information processing system, "hich forms the very basis of any Tdecision ma!ingU process. #he financial analyst al"ays needs certain yardstic!s to evaluate the efficiency and performance of business unit. #he one of the most frequently used yardstic!s is ratio analysis. =atio analysis involves the use of various methods for calculating and interpreting financial ratios to assess the performance and status of the business unit. &t is a tool of financial analysis, "hich studies the numerical or quantitative relationship bet"een "ith other variable and such ratio value is compared "ith standard or norms in order to highlight the deviations made from those standardsCnorms. &n other "ords, ratios are relative figures reflecting the relationship bet"een variables and enable the analysts to dra" conclusions regarding the financial operations.
6>

+o"ever, it must be noted that ratio analysis merely highlights the potential areas of concern or areas needing immediate attention but it does not come out "ith the conclusion as regards causes of such deviations from the norms. (or instance, 1:C 5td. &ntroduced the concept of ratio analysis by calculating the variety of ratios and comparing the same "ith norms based on industry averages. $hile comparing the inventory ratio "as ,,.4 as compared to industry average turnover ratio of 11.,. +o"ever on closer sell tiny due to large variation from the norms, it "as found that the business unit*s inventory level during the year "as !ept at extremely lo" level. #his resulted in numerous production held sales and lo"er profits. &n other "ords, "hat "as initially loo!ing li!e an extremely efficient inventory management, turned out to be a problem area "ith the help of ratio analysisO 1s a matter of caution, it must ho"ever be added that a single ration or t"o cannot generally provide that necessary details so as to analy%e the overall performance of the business unit. &n order to arrive at the reasonable conclusion regarding overall performance of the business unit, an analysis of the entire group of ratio is required. +o"ever, ration analysis should not be considered as ultimate ob'ective test but it may be carried further based on the out come and revelations about the causes of variations. ometimes large variations are due to unreliability of financial data or inaccuracies contained there in therefore before ta!ing any decision the basis of ration analysis, their reliability must be ensured. imilarly, "hile doing the inter-firm comparison, the variations may be due to different technologies or degree of ris! in those units or items to be examined are in fact the comparable only. &t must be mentioned here that if ratios are used to evaluate operating performance, these should exclude extra ordinary items because there are regarded as non-recurring items that do not reflect normal performance. =atio analysis is the systematic process of determining and interpreting the numerical relationship various pairs of items derived form the financial statements of a business. 1bsolute figures do not convey much tangible meaning and is not meaningful "hile comparing the performance of one business "ith the other.

60

CHAPTER +

(INDIN.! AND !U..E!TION!

(indin s
1. #he 1uthori%ed capital (or) 7quity shares are constant from the beginning year ,//0 to ,/1, (;;/ la!hs). 1nd issued shares also constant from ,//0 to ,/1, (;;/ la!hs), from this "e find that retained earnings form the ma'or source of finance.

6?

,. 1nalysis of debt equity ratio reveals that the company employed more of debt for financing gro"th. #he debt equity ratio "as approximately 1.,6 times and increased to 1.?, times in the year ,/1,. .. #he &nterest coverage ratio in the year ,//0 is ,.?? indicating that the firm has very lo" debt servicing capacity. #he interest coverage ratio is high in the year ,/1/. &ndicating that the firm has sufficient earning to cover the interest charges. Company ability to service the debt has increased over the period of study. 6. #he =eturns on net "orth is high in the year ,/1/ by 1>S indicating that the firm earned greater returns on the investment. ;. #he company turnover position is gradually increasing every year from ,//0 to ,/1,. 4. (rom 7:&# 73 1nalysis 73 "ill be high "hen capital structure consists of ,;S equity and >;S debt capital. >. #he 9et profit of the firm is gro"ing for the last ; years "hich sho"s good operational efficiency of firm. 0. #he 9et "orth of firm is very high due to high reserve in relation to equity.

!u estions

1. &n order to earn sufficient profit to pay periodically the interest charges the company has to increase its covergae ratio to 4 - > times. ,. #he pattern of the Capital tructure should be so designed that it involves minimum ris! avoids loss of control of the company. .. =eserves are increasing every year so far the proper utili%ation of this reserves, Company should capitali%e by giving the bonus shares to the existing share holders. ;/

6. Company*s 7:&# is variable as "ell as interest coverage ratio is less, the company can thin! of reducing the debt capital by retiring high interest debt.

;1

CHAPTER +I

5I5&IO.RAPH'

5I5&IO.RAPH'
5OO4! :A 2erivatives 2ealers 8odule $or! :oo! - 9C(8 (inancial 8ar!et and ervices - I)=219 @ 91#=1J19 (inancial 8anagement - 3=1 1991 C+192=1 NE)! PAPER! :A 7conomic times #imes of &ndia :usiness tandard ;,

 MA.AJINE! :A :usiness #oday :usiness "orld :usiness &ndia )E5!ITE! :A """.indianinfoline.com """.nseindia.com """.bseindia.com """.sebi.gov.in """.google.com(capital mar!et)

CHAPTER +II
;.

ANNEHURE

;6

Profit&loss account for 3 !"3!#" "

;8KC;KCE Rs6 In &"-hs ,01/1.>6 ,4/.0? 16;.6. :D=CD6C= EHPE+DETURE ra" material semifinished yarn purchases salaries@"ages po"er@ fuel tores lease rent repairs@ maintainance processing charge selling expenses 2onations &ntrest 16 1//4..>. ;8KC;KCD Rs6 In &"-hs ,?;;4.>> 1.0.;0 08:>6D=1 :E=>D6=C 1/4/..,4

PARTICU&AR! INCOME! ales 2omestic other income increaseCdecrease in stoc! of finishedgoods

!CHEDU&E

11 1, 1.

1;

14

11?6.?/ .1,;.0> 1?>6.>> ,006..6 >00.?; >>1.>/ 1./,.;/ 1.;/.4> 01/./6 0?4.0. :=8><6;C ;;<;6?= 1;,..;6 10,/.,1 .>0.// .,.// 161/.,1 6.60 4.0? 1.?0.06 ;;.;/ 8<=<6;<

41.4.,6 1,.0.., 1>16.0, ,>?4.?6 41>.41 660.>4 ?4/.>; 1/,...? 46...? 1/.0.6; :?::86E; :;<>6=? 1.6?.?, ??4.4; 11;.// (1/..1) 0?1.?4 ..,, 000.>6 ;?.,4 E<D6CC

ross ,rofit less depreciation profit before tax less provisions for taxation defferd tax profit after tax less prior for expences taxes relating to earlier year net ,rofit add balance brought for"ard ,rofit "v"i%"b%e for ",,ro,ri"tion

BALA$%E &'EET A& ($ 3 !"3!#" "

;8KC;KCE Rs6 In &"-hs ;;/.// >;;0.>, ;8KC;KCD Rs6 In &"-hs ;;/.// 46>/.11

PARTICU&AR! !OURCE O( (UND! hare capital =eserves and surplus

!CHEDU&E

;;
1 ,

PRO(IT AND &O!! ACCOUNT (OR ;8KC;K:C88 ;8KC;K8C Rs6 In &"-hs ..;14.,4 ;,6.0, .?1.6? ;<<;:6=? 14,64.6? ,0,../; ,,>/.;; ,?/;.,4 0,1.4> 11,./, >>6.6; 10?,.04 1;;1.;/ 06?.,> 1/0,... ;8;:E6<= ross ,rofit less depreciation profit before tax less provisions for taxation defferd tax profit after tax less prior for expences #axes relating to earlier years net ,rofit 1dd balance brought for"ard ,rofit "v"i%"b%e for ",,ro,ri"tion ;8C;68: 14./.;. 16>,.;? ,0/.// 1;1.46 1/6/.?; 0.>; (1/.;1) 1/6,.>1 166.11 88D>6D: ;8KC;KCE Rs6 In &"-hs ,01/1.>. ,4/.0? 16;.6. :D=CD6C= 1.10?.4/ 11?6.?/ 1?>6.>> ,006..6 >00.?; 4.., >>1.>/ 1./,.;/ 1.;/.4> 0/..>, 0?4.0. :=8><6;C ;;<;6?= 1;,..;6 10,/.,1 .>0.// .,.// 161/.,1 6.60 4.0? 1.?0.06 ;;.;/ 8<=<6;<

PARTICU&AR! INCOME! ales 2omestic other income increaseCdecrease in stoc! of finishedgoods EHPE+DETURE ra" material semifinished yarn purchases salaries@"ages po"er@ fuel tores lease rent repairs@ maintainance processing charge selling expenses 1dministrative expenses &ntrest

!CHEDU&E

11 1, 1.

16

1;

14

;4

BALA$%E &'EET A& ($ 3 !"3!#"

PARTICU&AR! !OURCE O( (UND! hare capital =eserves and surplus !CHEDU&E ;8KC;K8C in %"-hs ;;/.// 0.;..,6 DEC;6:< &OAN (UND! ecured loans En secured loans deefferd tax liability Tot"% APP&ICATION O( (UND! (i7ed "ssets Iross bloc! (-) depreciation Net 5%ocCapital "or! in progress &nvestments Current Assets %o"ns * "dv"nces &nventories undry debtors Cash @ ban! balance )ther current assets 5oans and advances 5ess current liabilities Net current Assets 8iscellaneous expenses > 0 1.614.44 1;1>.,0 1.?.,0 6/?.14 ;606./? :CE>>6<? 4?,;.4. 16/6/.06 16>.;? :D8>:6;8 >/6>.>; 1116./, 16;.?? 61>.?6 61.>.1; 8:D>:6D= ,>?6.1. ?000.>, 101.1, :8DC868> 4 ,61/>.,, 1,>6.../ 88;>;6E: 1...?; 116?>.0> ,66>.0. ,0.10 ,141,.4 111>..;> 8C<;E6C; >0.1, 1/;1>.1; 1100.?, ,;.,, ;8KC;KCE in %"-hs ;;/.// >;;0.>, D8CD6?:

1 ,

. ;

1./>>./6 6/6>.6> 8?8:<6=8 ,1.6.;4 :D8>:6;8

1/,0/..; 16.,.1. 88?8:6<D 1?>?.?4 :8DC868>

Tot"%

;>

PRO(IT AND &O!! ACCOUNT (OR ;8KC;K:C8: ;8KC;K88 Rs6 In &"-hs .4>;,.,; .;>.41 (??1.44)V ;>88D6:C EHPE+DETURE ra" material semifinished yarn purchases salaries@"ages po"er@ fuel tores lease rent repairs@ maintainance processing charge selling expenses administrative expevces &ntrest 16 14;,;./0 ,;.?.;> ,6;.... ,0;4.>. >0>.1; 1>..4, 4>4.,. ,0.0.1/ ,/4,.,. ?.4.0; 11;?.1. ;;CCD6C: ross ,rofit less depreciation profit before tax less provisions for taxation add defferd tax profit after tax less prior for expences less taxes relating tp earlier years net ,rofit add balance brought for"ard ,rofit "v"i%"b%e for ",,ro,ri"tion ;88C68D 1>.4.11 1.>6./> .;;.// 1/0.6, 11,>.6? 6..1 /.;> 11,,.41 >00.4. 8E886:< ;8KC;K8C Rs6 In &"-hs ..;14.,4 ;,6.0, .?1.6? ;<<;:6=? 14,64.6? ,0,../; ,,>/.;; ,?/;.,4 0,1.4> 11,./, >>6.6; 10?,.04 1;;1.;/ 06?.,> 1/0,... ;8;:E6<= ;8C;68: 14./.;. 16>,.;? ,0/.// (1;1.46) 1/6/.?; 0.>; (1/.;1) 1/6,.>1 166.11 88D>6D:

PARTICU&AR! INCOME! ales 2omestic other income increaseCdecrease in stoc! of finishedgoods

!CHEDU&E

11 1, 1.

1;

14

;0

5A&ANCE !HEET A! ON ;8KC;K:C8:

PARTICU&AR! !OURCE O( (UND! hare capital =eserves and surplus !CHEDU&E ;8KC;K:C8: in %"-hs ;;/.// ?,,6.?? ?>>6.?? &OAN (UND! ecured loans En secured loans defferd tax liability Tot"% APP&ICATION O( (UND! (i7ed "ssets Iross bloc! (-) depreciation Net 5%ocCapital "or! in progress &nvestments Current Assets %o"ns * "dv"nces &nventories undry debtors Cash @ ban! balance )ther current assets 5oans and advances 5ess current liabilities Net current Assets 8iscellaneous expenses Tot"% > 0 0/.4.>4 1?;6.;4 10..01 .0>.>4 0?/;.04 8E<>D6?= >;/1.;1 11?4>.,6 1>6.,1 :?E<;6EE 1.614.44 1;1>.,0 1.?.,0 6/?.14 ;606./? :CE>>6<? 4?,;.4. 16/6/.06 16>.;? :D8>:6;8 . 6 ? 1;,06.60 0>>.>1 8>8>:68E :CCE6D8 :?E<;6EE 1./>>./6 6/6>.6> 8?8:<6=8 ,1.6.;4 :D8>:6;8 ;;/.// 0.;..,6 DEC;6:< ;8KC;K:C88 in %"-hs

1 ,

4 ,>;6>.>; 166.;./1 1.11,.>6 ,1..0> ,61/>.,, 1,>6.../ 88;>;6E: 1...?;

1..,4.41 ,64>./0

116?>.0> ,66>.0. ,0.10

;?