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Comparison and Analysis

of

Flow of Funds
PRESENTED BY – Gaurav Jain
B - 31
AMITY SCHOOL OF
BUSINESS

ACKNOWLEDGEMENT

I take this opportunity with much pleasure to thank all


the people who have helped me through the course of
my journey towards completion of this project.

I sincerely thank my mentor Ms. Neha Gautam, for her


guidance, help and motivation. Apart from the subject
of my research, I learnt a lot from her, which I am sure
will be useful in different stages of my life.

I would also sincerely like to thank Mr. Vikas Tak


(Company Secretary – ARCHIES).
And Mr Pradeep Tyle ( Sr. President – UFLEX)
For granting me information required during the
course of making of the project.
I also like to acknowledge the knowledge support from
the search engine GOOGLE.

ABSTRACT

"Corporate strategies and their effectiveness constitute a


crucial research problem in both finance and strategic
management. Product diversification is a common corporate
strategy by which an organization moves into a wider range
of products.
A growing interest in comparing the relative success of
product diversification vis-à-vis focused strategies has
spawned a rapidly expanding literature. Nevertheless, in
India, there
exists a gap in empirical research on the impact of corporate
diversification strategy on financial performance.

India’s industrial sector continues to be dominated by


business houses. These business groups often diversify
across different product lines. However, little empirical work
has been done on the relationship between Indian business
groups' financial performance and product diversification
strategies. So, it will be interesting to examine the
relationship between diversification strategy and financial
performance of Indian business groups.

Using aggregated financial statement data and capital


market data of 240 large Indian business houses, we studied
the performance of Indian business houses’vis-à-vis their
diversification strategy. To make the study robust, we made
use of multiple measures for performance and product
diversification.
We also made use of a large set of control variables and a
longer time span of 12 years (1987-99) divided into three
sub-periods (viz., 1987-91, 1991-95 and 1995-99) having
different economic conditions.
We found that product diversification strategy was
negatively related to business groups shareholder value
(Tobin's Q Ratio) for all the three periods of the study.
Shareholder value maximization depends on a group's
growth, profitability, risk and the general capital market
conditions. So, the study extended itself to investigate the
precise performance components that drove the above
result during the three different periods.
We found that during periods of low competition in the
Indian economy (1987-91), profitability and net profit
margins were negatively related to degree of product
diversification. During 1991-95, a period of high growth
rates for business groups post- liberalization, it was found
that profitability, net profit margins and sales turnover were
negatively related to a group’ product scope. In 1995-99, a
period of high competition from industrial deregulation, we
found that growth and sales turnover of business groups
were negatively related to their diversification levels.
The results in the later periods also seem to be influenced
by the capital market’ preference for focused business
groups. So, the differences among the performance
indicators across sub-periods apparently exhibit the
influence of diverse competitive factors and economic
characteristics prevailing during the
three sub-periods.
It was found that, apart from a business group’ product
diversification strategy, its size, solvency position and
international exposure levels were important factors
affecting their market-based and non-market based
performance measures during all the sub-periods of study.
INDEX
S.NO TOPIC
1. Company Profile – ARCHIES
2. Company Profile – UFLEX
Tools used to study the
Financial Stability of the Firms

 Ratio Analysis

 Cash Flow Statement


AS – (Revised)
• Ratio Analysis

It’s a tool which enables the banker or lender to


arrive at the following factors:
• Liquidity position
• Profitability
• Solvency
• Financial Stability
• Quality of the Management
• Safety & Security of the loans & advances
to be or already been provided

How a Ratio Is Expressed?


 As Percentage - such as 25% or 50%.
For example if net profit is Rs.25,000/- and the sales
is Rs.1,00,000/- then the net profit can be said to be
25% of the sales.
 As Proportion - The above figures may be
expressed in terms of the relationship
between net profit to sales as 1: 4.
 As Pure Number/Times - The same can also
be expressed in an alternatively way such as
the sale is 4 times of the net profit or profit is
1/4th of the sales.

Classification Of Ratios
Balance P&L Ratio or Balance
Sheet Ratio Income/Reven Sheet and
ue Statement Profit &
Ratio Loss Ratio

Financial Ratio Operating Ratio Composite


Ratio

• Current • Gross Profit • Fixed


Ratio Ratio Asset
• Quick • Operating Turnove
Asset Ratio r Ratio
Ratio • Expense • Earning
• Proprietar Ratio per
y Ratio • Net profit Share
• Debt Ratio Ratio
Equity • Stock • Debtors
Ratio Turnover Turnove
Ratio r Ratio

Some Important Notes


• Liabilities have Credit balance and Assets have Debit
balance
• Current Liabilities are those which have either become
due for payment or shall fall due for payment within 12
months from the date of Balance Sheet
• Current Assets are those which undergo change in their
shape/form within 12 months. These are also called
Working Capital or Gross Working Capital
• Net Worth & Long Term Liabilities are also called Long
Term Sources of Funds
• Current Liabilities are known as Short Term Sources
of Funds
• Long Term Liabilities & Short Term Liabilities are also
called Outside Liabilities
• Current Assets are Short Term Use of Funds
1. Current Ratio : It is the relationship between the current
assets and current liabilities of a concern.

Current Ratio = Current Assets/Current Liabilities


The ideal Current Ratio preferred by Banks is 1.33 : 1

2. Net Working Capital : This is worked out as surplus of Long


Term Sources over Long Tern Uses, alternatively it is the
difference of Current Assets and Current Liabilities.

NWC = Current Assets – Current Liabilities

3. Acid Test or Quick Ratio : It is the ratio between Quick


Current Assets and Current Liabilities.

Quick Current Assets : Cash/Bank Balances + Receivables


upto
6 months + Quickly realizable securities such as Govt.
Securities or
quickly marketable/quoted shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current


Assets/Current Liabilities
4. Debt Equity Ratio : It is the relationship between borrower’s
fund (Debt) and Owner’s Capital (Equity).

Long Term Outside Liabilities


Tangible Net Worth
Liabilities of
Long Term
Nature
Total of Capital and
Reserves & Surplus
Less Intangible
Assets

5. Proprietary Ratio : This ratio indicates the extent to which


Tangible Assets are financed by Owner’s Fund.

Proprietary Ratio = (Tangible Net Worth/Total Tangible


Assets) x 100

The ratio will be 100% when there is no Borrowing for


purchasing of
Assets.
6. Gross Profit Ratio: By comparing Gross Profit percentage
to Net Sales we can arrive at the Gross Profit Ratio which
indicates the manufacturing efficiency as well as the pricing
policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus


Cost of
Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [(Sales – Cost of goods sold)/ Net


Sales] x 100

A higher Gross Profit Ratio indicates efficiency in


production
of the unit.

7. Operating Profit Ratio :

=> (Operating Profit / Net Sales ) x 100

Higher the ratio indicates operational efficiency


8. Net Profit Ratio:
=> (Net Profit / Net Sales) x 100

It measures overall profitability.

9. Stock /Inventory Ratio:


(Average Inventory/Sales) x 365 for days
(Average Inventory/Sales) x 52 for weeks
(Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock


+ Closing Stock)
2

This ratio indicates the number of times the inventory is


rotated during
the relevant accounting period

10. Debtors Turnover Ratio : This is also called Debtors


Velocity or Average Collection Period or Period of Credit
given .

(Average Debtors/Sales ) x 365 for days


(52 for weeks &
12 for months)
11. Asset Turnover Ratio: Net Sales
Tangible Assets

12. Fixed Asset Turnover Ratio : Net Sales


Fixed Assets

13. CurrentAsset Turnover Ratio : Net Sales


Current Assets

14. Creditors Turnover Ratio : This is also called Creditors


Velocity Ratio, which determines the creditor payment
period.

(Average Creditors/Purchases) x365 for days


(52 for weeks
& 12 for months

15. Return On Assets : Net Profit after Taxes


Total Assets

16. Return On Capital Employed :

(Net Profit before Interest & Tax / Average


Capital Employed) x 100

Average Capital Employed is the average of the equity


share capital and
long term funds provided by the owners and the
creditors of the firm at
the beginning and end of the accounting period.

17. Return On Equity Capital (ROE):


Net Profit after Taxes
Tangible Net Worth

Earning Per Share: EPS indicates the quantum of net


18.

profit of the year that would be ranking for dividend for


each share of the company being held by the equity share
holders.

Net profit after Taxes and Preference Dividend


No. of Equity Shares

19. Price Earning Ratio: PE Ratio indicates the number of


times the Earning per Share is covered by its market price.

Market Price per Equity Share


Earning Per Share
• Cash Flow Statement

• Cash flow statement is additional information


to user of financial statement

• This statement exhibits the flow of incoming


and outgoing cash

• This statement assesses the ability of the


enterprise to generate cash and cash
equivalents
• It also assesses the needs of the enterprise to
utilise the cash and cash equivalents generated

• It also assesses the liquidity and solvency of


the enterprise.

Definitions

• Cash comprises cash on hand and demand deposits with


banks.

• Cash equivalents are short term, highly liquid


investments that are readily convertible into known
amounts of cash and which are subject to an
insignificant risk of changes in value.

• Cash flows are inflows and outflows of cash and cash


equivalents.
• Operating activities are the principal revenue-producing
activities of the enterprise and other activities that are
not investing or financing activities.

• Investing activities are the acquisition and disposal of


long-term assets and other investments not included in
cash equivalents.

• Financing activities are activities that result in changes


in the size and composition of the owners’ capital
(including preference share capital in the case of a
company) and borrowings of the enterprise.

Features of Cash Flow Statement

 The cash flow statement should report cash flows


during the period classified by
• Operating,
• Investing and
• Financing activities.
Sum of these three types of cash flow reflect
net increase or decrease of cash and cash
equivalents.

Operating Activities

These are principal revenue producing activities


of the enterprise.

Examples:
 Cash receipts from sale of goods /
rendering
services;

 Cash receipts from royalties, fees,


commissions
and other revenue;
 Cash payments to suppliers of goods
and service;

 Cash payments to and on behalf of


employees.

Investment Activities

 The activities of acquisition and disposal of long


term assets and other investments not included
in cash equivalent are investing activities.

It includes making and collecting loans,


acquiring and disposal of debt and equity
instruments, property and fixed assets etc.
Examples of cash flows arising from investing
activities are as follows:
 Cash payments to acquire fixed
assets

 Cash receipts from disposal of fixed


assets

 Cash payments to acquire shares,


warrants or
debt instruments of other enterprises
and
interest in joint ventures

 Cash receipt from disposal of above


investments

Financing Activities

Those activities that result in changes in size


and composition of owners capital and
borrowing of the organization.
It includes receipts from issuing shares,
debentures, bonds, borrowing and payment of
borrowed amount, loan etc.

 Sale of share

 Buy back of shares

 Redemption of preference shares

 Issue / redemption of debentures

 Long term loan / payment thereof

 Dividend / interest paid