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SECTION-6 RECOMMENDATIONS
SECTION-7 LIMITATIONS
SECTION-8 ANNEXURE
SECTION-9 BIBLIOGRAPHY
COMPANY PROFILE
ATLAS STEEL TUBE INDUSTRIES (ASTI) was established in 1987 as a captive unit of
ATLAS Cycles (Haryana) Limited, the pioneers in the bicycle industry in India and
overseas. The tube rolling capacity was enhanced to 36000 M.T. per annum by the
installation of second Tube Mill in 1994. Precision Steel Tubes from 12.00 mm Outer
Diameter to 81.20 mm Outer Diameter are produced in thickness range of 0.70 mm to
3.65 mm for Automobile, Bicycle, Furniture, General Engineering and Scaffolding
industries conforming to National & International quality standards.
ATLAS Steel Tube Industries has been recently shifted to Bawal, District Rewari
(Haryana) in Dec., 2006 on a sprawling 10 acre land for expanding existing tube mill
capacities and to add business activities using forward integration.
PRODUCT:
PRODUCT SPECIFICATIONS:
MAJOR CUSTOMERS:
1. Hero Cycles Ltd.
2. Hero Honda Motors Ltd.
3. Maruti Udyog Ltd.
4. Omax Auto Ltd.
5. Sharda Motors Ltd.
6. Honda Motors Ltd.
7. T.I.Cycles Ltd.
8. Hema Engg. Ltd.
INTRODUCTION
The major financial statements of a company are the balance sheet, income statement and
cash flow statement (statement of sources and applications of funds). These statements
present an overview of the firm. But unless the information provided by these statements
is analyzed and interpreted systematically, the true financial position of the firm can not
be understood. The analysis of financial statements plays an important role in
determining the financial strengths and weaknesses of a company relative to that of other
companies in the same industry. The analysis also reveals whether the company’s
financial position has been improving or deteriorating over time.
Financial ratio analysis involves the calculation and comparison of ratios which are
derived from the information given in the company’s financial statements. The historical
trends of these ratios can be used to make inferences about a company’s financial
condition, its operations and its investment attractiveness.
Financial ratio analysis groups the ratios into categories that tell us about the different
facets of a company’s financial state of affairs. Some of the categories of ratios are
described below:
Liquidity refers to the ability of a firm to meet its short-term (usually up to one year)
obligations. The ratios which indicate the liquidity of a company are Current Ratio,
Quick Ratio and Cash ratio. These ratios are discussed below:
Current Ratio
Current Ratio (CR) is the ratio is the ratio of total current assets to total current liabilities
(CL). Current assets include cash and bank balances; inventory of raw materials; semi-
finished and finished goods; marketable securities; debtors (net of provision for bad and
doubtful debts); bills receivables; and prepaid expanses. Current liabilities consist of
trade creditors, bills payable, bank credit, provision for taxation, dividends payable and
outstanding expenses. This ratio measures the liquidity of the current assets and the
ability of a company to meet its short-term debt obligations.
Quick Ratio
Quick Ratio (QR) is the ratio between quick current assets and current liabilities. QA
refers to those current assets that can be converted into cash immediately without any
value dilution. QA includes cash and bank balances, short-term marketable securities and
sundry debtors. Inventory and prepaid expanses are excluded since these can not be
turned into cash as and when required.
Cash Ratio
Since cash, bank balances and short term marketable securities are the most liquid assets
of a firm, financial analysts look at the cash ratio. The cash ratio is computed as follows:
The ratio between Trade receivable and Gross Sales. This helps in calculating the average
number of days it takes to collect your accounts receivable (number of days of sales in
receivables).
It is used to calculate debtors’ holding by the company and represented in number of days
as given below:
The ACP can be compared with the firm’s credit terms to judge the efficiency of the credit
management.
The ratio between Finished Goods inventory and Cost of Goods Sold. This helps in
calculating the average number of days it will take to sell your inventory.
PROFITABILITY RATIOS
These ratios help in measuring the profitability of a firm. There are two types of
profitability ratios:
• Profitability ratios in relation to sales and
• Profitability ratios in relation to investments.
Gross Profit Margin (GPR): This ratio measures the relationship between gross
profit and sales. It is calculated as below:
GPR = Gross Profit/ Net Sales* 100
This ratio shows the profit that remains after the manufacturing costs have been met. It
measures the efficiency of production as well as pricing.
Net Profit Margin: This ratio is computed using the following formula:
NPR = Net Profit/ Net Sales
This ratio shows the net earnings as a percentage of net sales. It measures the overall
efficiency of production, administration, selling, financing, pricing and tax management.
Jointly considered, the gross and net profit margin ratios provide an understanding of the
cost and profit structure of a firm.
Return On Investment
ROI is the ratio between Operating Profit (Before interest and tax) and Total Operating
Assets.
ROI= Operating Profit/ Total Operating Assets
OPERATING CYCLE
The operating cycle, which is also known as the cash- to cash cycle, is the process of
using cash to purchase current assets that are to be sold at a profit and collected as cash.
As an example, a company uses funds to purchase raw material inventory that is
produced into finished goods inventory, sold at a profit to create a receivable and
collected to become cash once again, then used to pay the supplier, with the profits left in
the business.
Finished Goods
Cash
PURCHASES
Production
Raw Materials Work-in-Process
Process
Sound financial management of a company involves matching the sources and uses of
cash so that obligations come due as assets mature into cash. Take a moment to study the
operating/cash cycle diagram.
The cash conversion cycle is a measure of working capital efficiency, often giving
valuable clues about the underlying health of a business. The cycle measures the average
number of days that working capital is invested in the operating cycle. It starts by adding
days inventory outstanding (DIO) to days sales outstanding (DSO). This is because a
company “invests” its cash to acquire/build inventory, but does not collect cash until the
inventory is sold and the accounts receivable are finally collected. Receivables are
essentially loans extended to customers that consume working capital; days payable
outstanding (DPO) – which essentially represent loans from vendors to the company –
are subtracted to help offset working capital needs. In summary, the cash conversion
cycle is measured in days and equals DIO+ DSO –DPO.
Working capital also known as net working capital, is a financial term which represents
operating liquidity available to a business. Along with fixed assets such as plant and
equipment, working capital is considered a part of operating capital. It is calculated as
current assets minus current liabilities.
A company can be endowed with assets and profitability but short of liquidity if its assets
cannot readily be converted into cash. Positive working capital is required to ensure that a
firm is able to continue its operations and that it has sufficient funds to satisfy both
maturing short-term debt and upcoming operational expenses.
Net Working Capital: It is the difference between total current assets and total current
liabilities. The gap between Total current assets and total current liabilities is also called
Decisions relating to working capital and short term financing are referred to as working
capital management. The management of working capital involves managing inventories,
accounts receivable and payable and cash. These involve managing the relationship
between a firm's short-term assets and its short-term liabilities. The goal of working
capital management is to ensure that the firm is able to continue its operations and that it
has sufficient cash flow to satisfy both maturing short-term debt and upcoming
operational expenses.
CURRENT ASSETS
Those assets, which mature into cash in one year or less is a current asset. Elements of
current assets are as follows:
CURRENT LIABILITES
What the company “owes” which must be paid within one year are Current
Liabilities(CL). Elements of current assets are as follows.
Note Payable to bank: Obligations evidenced by a promissory note from the bank which
have maturity dates of less than one year (N/P).
Advance from customers: Amounts received as advance from customers against some
product/ service to be supplied later.
RESEARCH METHODOLOGY
2. Data Collection:
Current Ratio
The ratio between all current assets and all current liabilities.
CR= Current Assets/Current Liabilities
CR (%)
2.6
2.5
2.4
2.3
2.2
2.1
2
1.9
1 2 3 4
CR ratio of 2:1 is considered good and above it is even better. Therefore the company is
doing well based on the CR ratio. The cushion, which is popularly termed as net working
capital (CA-CL) provides the sense of security to the company.
Quick Ratio
The ratio between all assets quickly convertible into cash and all current liabilities.
Inventory is not included into assets quickly convertible assets.
QR=(Cash + Accounts Receivable)/Current Liabilities.
Quick Ratio
2.5
2
1.5
Quick Ratio
1
0.5
0
From above graph it is seen that quick ratio is above 1:1 which is good sign for the
company i.e. even if we eliminate inventories from current assets we get to know that still
company is able to liquidate its creditors.
The ratio between Trade receivable and Gross Sales. This helps in calculating the average
number of days it takes to collect your accounts receivable (number of days of sales in
receivables).
It is used to calculate debtors’ holding by the company and represented in number of days
as given below:
85
84
83
82 Debtors
Holding (Days)
81
80
79
2005-6 2006-7 2007-8 2008-9
The graph shows that debtors’ holding has downward trend which is a good sign.
84
82
80
78
ACP(Days)
76
74
72
70
1 2 3 4
One of the variables of average collection period is average of sundry debtors, which
increases and indicates the increase in sales of the company and a goods liquidity
condition of the company and other variable i.e. average daily credit sales which is
increasing which shows the increase in sale for the company and together these variables
shows the days for which amount is blocked in debtors. Although receivables reflect the
s
liquidity of the company but almost 75% of the company’s fund is alone blocked in it,
but it tend to decreases which is good sign for the company. It is the necessity of the
company but it is the policy of the market. The company is forced to give credit near to
90 days but somehow company manages to retain it below 85 days, which is good sign.
Finished Goods Turnover Ratio
The ratio between Finished Goods inventory and Cost of Goods Sold. This helps in
calculating the average number of days it will take to sell your inventory.
25
20
No. of Days 15
Stock Hold Stock Hold
10 (Days)
0
2005-6 2006-7 2007-8 2008-9
Year
Above record and graph shows that different functions are working efficiently and
maintaining FG stock holding to an acceptable level.
FATR (%)
25
20
15
FATR (%)
10
5
0
1 2 3 4
The above graph shows that FATR is having an upward trend. It indicates efficient
utilization of company’s fixed assets.
Despite of falling operating fixed assets company’s sales increases which indicates, with
the passage of time the company is able to utilize its fixed assets efficiently or technical
capacity of the assets have increased by good maintenance or sold unproductive machines
or no technological or product obsolescence occurred or no recession in the economy and
industry and a good marketing function.
FATR indicates how efficiently our business generates sales on each rupee of fixed
assets.
The Ratio between Operating Profit (Before interest and tax) and Total Operating Assets.
ROI= Operating Profit/ Total Operating Assets
18
16
14
12
10
ROI (%)
8
6
4
2
0
1 2 3 4
From the above graph we can observe that the ROI is declining year after year. It is not a
good sign. However it should also be kept in the mind that the company shifted its plant
from Gurgaon to Bawal, Rewari (Haryana) in the financial year 2006-07.
GPR (%)
12
10
6 GPR (%)
0
1 2 3 4
Above graph shows that the G.P. ratio is declining year after year. This is a serious issue
and needs immediate attention of the concerned officials of the company.
One reason for declining graph is that the raw material cost, cost of major consumables
(Rust Preventive oil , Coolant Oil, HSD) has increased too much during past two years.
The selling price has not increased in the same ratio.
If raw material cost increases Rs.1,000/- per M.T., the selling price also increases by
Rs.1,000/- per M.T. The gap between selling price and raw material cost remains as it
was. Therefore net sales increases but GPR decreases for the same quantity of product
sold.
Further the selling price does not relate to increase in the price of consumables. However
cost of consumables has affected Rs.300/- per M.T. increase in production cost.
GPR is Indicator of how much profit is earned on your products without consideration of
i.e. DAR=Debt/Assets
70
60
50
40
30 DAR (%)
20
10
0
2005-6 2006-7 2007-8 2008-9
Above graph indicates that % of total assets financed from debt has increased as the time
passed. Still it is good when compared to present days’ companies where average DAR is
above 69%.
70
60
50
40
Interest
30 Coverage
Ratio
20
10
0
2005-6 2006-7 2007-8 2008-9
This ratio indicates the ability of the firm to pay its interest expenses. The greater the
interest coverage ratio the higher the ability of the firm to pay its interest expenses but in
this case it has reduced drastically from 63 to just 4 times, which is not goods sign for the
company and also declining interest coverage ratio indicates that the interest is the main
component who is eating firm’s earning.
DEFINITION: The Ratio between Operating Profit (Before interest and tax) and Total
Operating Assets.
i.e. ROI= Operating Profit/ Total Operating Assets
Return on Investment (Atlas Steel Tube Inds.)
ROI (%)
20
15
10 ROI (%)
0
1 2 3 4
From the above graph we can observe that the ROI is declining year after year. It is not a
good sign. However it should also be kept in the mind that the company shifted its plant
from Gurgaon to Bawal, Rewari (Haryana) in the financial year 2006-07.
.
ELEMENTS OF OPERATING CYCLE
RMSP (Days)
25
20
15
RMSP (Days)
10
0
1 2 3 4
Raw Material storage period is decreasing year after year and average daily consumption
is increasing year after year which shows that the company either have good demand
from its customer so that what ever they produce it is sold immediately in the market or
they have just apply near to JIT system (produce only when there is some demand). There
may be another reason that raw material would cost to company more therefore company
is not able to buy more raw material which ultimately decreases its storage period.
FGSP(Days)
15
10
FGSP(Days)
5
0
1 2 3 4
In Finished goods storage period the average stock of finished goods is increasing which
means either there would be decrease in sales which result in left of produced quantity
which is market driven or company prepare it in large quantity to fulfill uncertain
demand. Also other variable of FGSP i.e. average daily cost of sale is also increasing
which might be the result of increase in prices of raw material in the market. Both of
these variables together tell that the companies store the finished goods for more days as
compared to previous years to fulfill uncertain demand. That is company is taking more
risk in blocking their funds in finished goods because there might be lots of competition
in the market.
ACP(Days)
84
82
80
78
ACP(Days)
76
74
72
70
1 2 3 4
One of the variables of average collection period is average of sundry debtors, which
increases and indicates the increase in sales of the company and a goods liquidity
condition of the company and other variable i.e. average daily credit sales which is
increasing which shows the increase in sale for the company and together these variables
shows the days for which amount is blocked in debtors. Although receivables reflect the
s
liquidity of the company but almost 75% of the company’s fund is alone blocked in it,
but it tend to decreases which is good sign for the company. It is the necessity of the
company but it is the policy of the market. The company is forced to give credit near to
90 days but somehow company manages to retain it below 85 days, which is good sign.
70
60
50
40
APP(Days)
30
20
10
0
1 2 3 4
Years
In Average payment period on the variable i.e. average balance of sundry creditors is
decreases but in very small percentage this is because company have to pay its suppliers
either in advance or in very short period say within 2 weeks or so. The other variable i.e.
average daily credit purchases is increases year after year which indicates on the increase
in production of goods, which ultimately result in increase in sales. Both of these
variables together indicates the decrease in payment days which is not good for the
company as working capital needs is offset for less days or in other words current asset is
financed for short period of time.
OVERALL PICTURE OF OPERATING CYCLE
56
55
54
Net Operating
Cycle
53
52
51
1 2 3 4
Operating cycle is also called cash cycle. The company’s average operating cycle is 54
days that means company have to arrange the finance for current assets for 54 days.
Although average gross operating cycle is 103 days but company is somewhat manage to
finance current assets for 49 days from current liability but company have to look other
options to finance its current assets for average for 54 days. Although payment period
decreased drastically from 2006 onwards but somehow company is able to manage its
average operating cycle on same 54 days by reducing their raw material storage period
and also by reducing receivable period.
CURRENT ASSETS
A comparative statement of Current Assets (of A.S.T.I., Bawal) for the past four
years is given below:
Accounts Receivable: We can see from data given above that it is increasing year
after year. From yr. 2005 to 2008, it would increase by approximately 30% due to
increase in sales.
Inventory: Inventory of Raw material has reduced by about 20% while inventory of
Finished Goods has increased by about 45% from yr.2005 to 2008. Overall we can
see that the Inventory will be up by 7% from 2005 to 2008.
Cash/Bank: The company’s cash increased up to 11.6% within 4 years i.e. from
2005 to 2008.
If we sum up all the elements of current assets we come to the figure of current assets of
different years from 2005-08 and it is increasing year after year. We can easily see that
first it increases to 6.498% then in next year 7.36% and at last @ 22.10%, due to increase
in the amount of its elements.
CURRENT LIABILITES
A comparative statement of Current Liabilities (of A.S.T.I., Bawal) for the past four
years is given below:
1500
1450
1400
1350 Total Current
1300 Liabilities
1250
1200
1150
1 2 3 4
Suggestion:
Although liabilities are not good for any company but from the fund management point
of view it is useful to finance our business. But in this situation we find that the suppliers
extract their money from the company very fast. Therefore company should try to extend
its payment period to avail benefit of the situation. They should develop good reputation,
other sources of supply so that some more days of credit are achieved to the company.
Working Capital
2500
2000
1500 Working Capital
1000 Gap(WCG) (1-2)
500
0
1 2 3 4
The above data and figure shows that with the passage of the time, the working capital
need of the company has increased due to increase in sales and also due to decrease in it
liabilities. Now company has to arrange funds to finance this working capital gap. For
financing the fund the company either takes the help of financial institution or borrowing
from bank in different ways for example letter of credit, promissory notes etc. and one of
the most popular way is to take loans against its working capital. For loans against W.C.,
company and bank (by mutually corporation) prepare maximum permissible bank finance
report and decide the amount financed by the bank.
The working capital financed through bank is difference between net working capital and
minimum stipulated net working capital i.e. 25% of working capital gap (Net working
Capital). Tandon committee recommends minimum stipulated net working capital.
According to which 75% of the Working Capital Gap would be financed by the bank and
the remaining 25% would be financed by the borrowing unit from its long-term sources
or we can say that bank would finance only 75% of the working capital to the company.
4 Min. stipulated net working capital i.e. 417.24 412.03 501.33 536
25% of WCG/ 25% of total current
assets as the case may be depending
upon the method of lending
5 Actual/Projected net working capital 1668.96 1648.12 2005.32 2144
1. AREAS OF EXCELLENCE
i) FATR has an upward trend which shows that the plant efficiency has
improved with time. It indicates that employees engaged particularly
in functions like Production & Plant maintenance have worked with
greater competence by producing more with lesser fixed assets.
ii) CR and QR show that the company is performing excellently. It’s
current liabilities are about half of the current assets which is a
comfortable position.
iii) Company has brought raw material storage period to about 10days.
This is very good in today’s vibrant time when prices of steel (i.e. raw
material) are changing frequently.
2. AREAS OF CONCERN
iv) Profit of the company has gone down drastically during past four
years. This is indicated by ROI and GPR. Company has to do
turnaround with focus on profitability.
v) Interest expanses have increased manifold during past four years. It is
due to outstanding trade receivables. Company has to borrow funds on
interest to arrange working capital. This is major area of concern. ICR
and RTR are indicators of it.
vi) Net operating cycle is too long. This is mainly due to high average
collection period of 75 days. Together with RM & FG storage period,
it takes more than 100 days to get raw material converted to cash.
CONCLUSION
ATLAS STEEL TUBE INDS. has been performing excellently for more than 15
years. It has become leading precision steel tube maker in northern India. But its
performance in terms of profitability and market presence has suffered a setback
during the past 3-4 years. If we look at product life cycle of this company, it points
towards the declining or extinction stage of the company. Because the percentage
sales of the company is declining as compared to previous years and company is not
able to increase the prices of its products because they are forced to sell at less prices
to remain in the competition and as a result its profit also decreases. All these factors
are responsible to push this company in declining stage.
I regret to reach above conclusion but following events should be kept in mind, which
are in favour of the company:
i) The company shifted its plant from PLOT No.1, UDYOG VIHAR PHASE
IV, GURGAON to PLOT NO.-1,SEC-5,HSIIDC GROWTH CENTRE,
BAWAL DISTT. REWARI, HARYANA
ii) Shifting from Gurgaon to Bawal was very efficient. The plant was in
production till Oct.1st, 2006 at Gurgaon and production started at Bawal on
12th, Dec.,2006. This was commendable achievement. Further, supplies to
customers were not interrupted because of buffer produced at Gurgaon.
RECOMMENDATIONS
1. Company’s 75% of Working Capital Gap (WCG) is financed through bank but
remaining 25% of WCG is not financed through long term liabilities because company
don’t have long term sources and that 25% troubles the company because company have
to arrange from other sources. Therefore company should try to decrease its WCG by
increasing its current liabilities or by disposing off non operating/ non performing assets.
2. Product pricing policy of the company should be reviewed. It is surprising that most
important functions like Marketing and Sales is managed by non-professionals. At
present pricing is based on per ton sale. If a customer buys one ton steel tubes of size
12.70*1.22mm and another ton of 25.40*1.22mm, the price will be the same. There is a
large gap between the costs of production of both the sizes. This is explained as below:
Size Quantity Mill Mill Power Consumed
Ton Mtr Speed Time (times)
(M/min) (Min)
12.7*1.22 1 2900 30 97 1
25.4*1.22 1 1370 95 14 7
From above table it is clear that 12.7mm tube consumes 7 times more manpower and
electricity compared to 25.40mm. It accounts for approx. Rs.1,500/- per ton more
expanses on 12.70mm.
There are many sizes which consume comparatively more resources. I recommend that
the company should start pricing on the basis of actual expanses. Atlas should reduce the
price of sizes (e.g. 25.40mm, 22.22mm etc.) which reduce production cost per Ton to
minimum. By doing so it can attract additional orders by offering above sizes cheaper
than the competitors. In turn, Atlas should increase the price of sizes like 12.00mm,
12.70mm etc., which increase cost of production. Because Atlas will offer smaller sizes
at higher price, orders of those sizes will reduce which will benefit the company
indirectly.
3. The company can out source some activities like tube cutting. This way, company
can reduce its assets by selling some machines to service provider. Liabilities of the
company will also increase because payment to service provider will be done later. By
doing so, company can reduce its Working capital gap.
LIMITATIONS
QUESTIONARE
3. Why ASTI’s average collection period is much more than average payment
period?
9. Can there be other source of financing working capital gap in a better way?
13. Do you think profit can be increased by reducing some of the expanses?
BIBLIOGRAPHY
Cooper, Donald R. and Pamela S Schindler, Business Research Methods.8th ed. New
York: McGraw-Hill Companies.
Rustagi, R.P., Fundamentals of Financial Management. 4th ed. New Delhi: Galgotia
Publishing House.
Institute of Banking Career & Studies and InfoTech & Financial Services Web site,
Tandon Committee Report downloaded on August7, 2009
(http//www.bankingindiaupdate.com)
World Wide Web online, visited between August 2, and August 15, 2009
(Web sites: http// www.investorwords.com; www.icmrindia.org)