Project report On WORKING CAPITAL MANAGEMENT OF AURANGABAD POLYCONTAINERS PVT. LTD. SUBMITED BY Mr. GANESH R.

AMLE

UNDER THE GUIDANCE OF Prof. Chandrakant Phad

Submitted to the University of Pune In the partial fulfillment Of MBA

Shri Gajanan Mandals

Maharaj Shikshan Prasarak

SHARADCHANDRA PAWAR INSTITUTE OF MANAGEMENT Approved by A.I.C.T.E., & Affiliated to University of Pune Otur (Dumberwadi), Tal: Junnar, Dist. Pune. 2008-2009

I take this opportunity to extend my heartfelt gratitude to all those people, without whose support and co-operation it would not have been possible to make this project successful. First of all I would like to express my sincere thanks to Mr. Sham G. Rathod (Finance manager), and staff of Aurangabad Polycantiner Pvt. Ltd.MIDC Waluj, who responded promptly and enthusiastically to my requests for frank comments despite their congested schedule. I express my profound thanks to Mr. Ramesh Kakad (director of SPIM) who lighted the torch. Then I would like to express my sense of gratitude to my guide Prof. Chandrakant Phad for his kind co-operation and valuable guidance. Last but not least, I would like to pay my thanks to my parents and my friends without whose support and inspiration, it was a really hard task for me. Nevertheless, it was a great pleasure and valuable experience. GANESH R. AMLE

Shri Gajanan Maharaj Shikshan Prasarak Mandals SHARADCHANDRA PAWAR INSTITUTE OF MANAGEMENT Approved by A.I.C.T.E., & Affiliated to University of Pune Otur (Dumberwadi), Tal: Junnar, Dist. Pune.

CERTIFICATE This is to certify that this dissertation entitled RECEIVABLE MANAGEMENT at BANK OF INDIA(DHATAV), Submitted in partial

fulfillment of the requirement of Master of Business Administration Programme of University of Pune, embodies the result of the bonafied work carried out by Mr. ASHISH PATHAK. I find the study work complete, comprehensive and sufficiently high standard to warrant its presentation for the examination. I further certify that, the work has been carried out under my guidance and has not been submitted earlier to this or any other University for award of Degree or Dipl

Director Project Guid TABLE OF CONTENTS

SR.NO 1 2 3 4 5 5 6 OBJECTIVES

TOPIC

INTRODUCTION TO RATIO DIFFERENT TYPES OF RATIOS FINANCIAL STATEMENT OF COMPANY RATIO ANALYSIS OF COMPANY LIMITATIONS OF ACCOUNTING RATIOS CONCLUSION

Module 1 1. Executive Summary

2. OBJECTIVES AND SCOPE \ To Study the financial statement. To study the accounting ratio. To know about the importance & uses of ratio in business. To know about the different types of ratios and their significance.

2. Research Methodology Area of the Research - Finance Topic for the Research Ratio Analysis as a tool for finding and comparing the financial performance of the Companies. Period of the Research 60Days Objective of the Research The principal objective is to analyze the financial statements of Aurangabad Polycontainer, using Ratio Analysis. To compare the performance of the companies for the year 2007-08. Type of Data Primary Data : Primary data collected from the staff members of the Finance & other depts. Secondary Data : It is collected from the financial statements and website of the company. Research Design

It includes following Steps Calculations of Ratios Analyzing & interpreting the ratios. Research Findings Suggestions

Limitation of the study Data was collected mostly from secondary source. Module 2 COMPANY PROFILE Company History This company established in 1998 and after that this well known company developed very fastly.Company having three plants in all over India. The owner of company is Mr. Aurangabad Polycontainer co.Ltd. Is one of the leading companies of disposable cups, bowls, plates, and cutlery and food containers in Maharashtra. They are producing cups ranging from 50cc to 3000cc in their high-tech modern machines with their numerous forming tools. This company established in 1998 and after that this well known company developed very fastly.Company having three plants in all over India. The owner of company is Mr. They are competent to produce a large variety of cups, bowls, plates and cutlery in different shape, size and volume. In their machines millions of hygienic cups, bowls, plates, cutlery and food containers are produced. They are used safely for

drinking water, tea, coffee, fruit juice, ice cream, yoghurt and many other foods as a cup, bowl, plate and containers.

They are not only experienced and competent in producing reliable cup, bowl, plate, cutlery and food container products, but also producing Thermoform production machines and moulds in our other departments. This gives them the chance to produce according to your project in short period and deliver immediately. They are continuously expanding and developing their production capacity and product range to be able to supply customer's demands. The strength of workers is 500. And on those 500 workers 250 are un-skilled workers, 200 are semi- skilled workers and remaining 50 are skilled workers. The workers are getting his training regularly. The product of company is going under three stages. The raw material is used for product is Polypropylene. The main strength of this company is they made the advanced booking of their products. The company having the customer in all over India. This company is no need for doing the more marketing.

2. Industry Scenario The Indian downstream Plastic sector had another eventful year in 2006-07. India consumed close to 138 million tones of plastic products during the year, an increase of 5.7% over the previous year. Product exports of 37.4 million tons during the year made the plastic sector the largest contributor to Indias export earnings, constituting about 14%. Aurangabad Polycontainer co.Ltd. Is one of the leading companies of disposable cups, bowls, plates, and cutlery and food containers in Maharashtra. They are producing cups ranging from 50cc to 3000cc in their high-tech modern machines with their numerous forming tools.

Introduction Today consumption of Disposable products is breaking records. Disposable products are easy to handle, economical and can be disposed easily. With the changing lifestyle of Mankind, the use of disposable products is raising like anything. Plastic Disposable products are very popular because it can be carried easily, and very low in prices too. There is a huge variety available in Plastic Disposable products. Plastic Disposable products are like a gift for toady's hectic lifestyle, they save your energy and money both.

Disposable Plastic Product

The products designed to disposed easily after use are called Disposable products & the products which are made with any kind of plastic and can be disposed easily after use are known as Disposable Plastic Products. Plastic glasses have changed the trends of glasses and are on the verge of almost replacing old fashioned glasses that were delicate and brittle. Plastic glasses are another option for glasses as they are light and can be replaced if scratched or any other problems. Also, plastic glasses are availed in the most affordable prices that make it easily accessible to the common masses. There are loads of plastic glasses of different patterns we use like; plastic glasses are used in, drinking glasses, lids and many more. At top of that there is a 8

rapid ongoing innovation and up gradation in the plastic glasses that has made them more superior and usable.

Why only Disposable Plastic Products?

Disposable products are made of various materials such as dry leaves, papers and plastic etc. Plastic is one of the most preferred material for disposable products. Plastic is known as one of the most consumptive material for disposable products. These are few characteristics of plastics which makes it most suitable for disposable products.

Plastic is an easily available material. Plastic can be molded easily in desired shape. Plastic is highly flexible. Plastic is safe to keep eatables. Plastic is counted as one of the most heat resistant material. Plastic is very cost effective.

Range & Variety

There is an extensive range available in Disposable Plastic Products. Disposable Plastic products are made with various kind of plastics. Manufactures use different kind of plastics as per the utility, design and shape of Disposable Plastic Products. The disposable plastic hand gloves, for medical use are usually made with LDPE plastics. Disposable plastic products are highly demanded in Medical Sector, packaging Industry, toys, cutlery and multipurpose boxes etc. Plastic boxes are one of the most commonly used Disposable Plastic Product. Theses boxes are available in different shapes and size. These plastics boxes are used to carry the things safely or to keep them safe for long time. Plastic plates, cups, glasses, spoons and bowls are quite popular and counted as best selling Disposable Plastic Products. 10

The list of disposable plastic products is never ending but few other most commonly used Disposable Plastic Products are Plastic Diaphragms, Plastic Boxes, Plastic Automotive Parts and Plastic Balls etc.

Some Product Of Aurangabad Polycontainer Name Rim Diameter (mm) Volume Raw Material Height Color Box Quantity Box Size (mm) Quantity per Container :350cc PP Plastic Cup :95 :350cc :PP (Polypropylene) : :Transparent or required color : : :

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Name Rim Diameter (mm) Volume Raw Material Height Color Box Quantity Box Size (mm) Quantity per Container

:400 cc PLASTIC CUP : 95 :400 cc :PP (Polypropylene) : :Transparent or required color : : :

Name Rim Diameter (mm) Volume Raw Material Height Color Box Quantity Box Size (mm) Quantity per Container

: 500 cc PLASTIC CUP -08 : 95 : : : : : : : 500 cc PP. / PS. 145.5 mm Transparent or requred color 1000 (20X50) 520 x 410 x 500

Name Rim Diameter (mm) Volume Raw Material Height Color Box Quantity

: CRYSTAL CUP -09 : 78.5 : : : : : 180 cc CYRISTAL 71 mm Clear 2000 (25X80)

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Box Size (mm) Quantity per Container

: 410x660x440

Name Rim Diameter (mm) Volume Raw Material Height Color Box Quantity Box Size (mm) Quantity per Container

: 500 cc PLASTIC CUP -08 : 95 : : : : : : : 500 cc PP. / PS. 145.5 mm Transparent or requred color 1000 (20X50) 520 x 410 x 500

Name Rim Diameter (mm) Volume Raw Material Height Color Box Quantity Box Size (mm) Quantity per Container

: 400 cc PLASTIC CUP : 95 : 400 cc : PP (Polypropylene) : : Transparent or required color : : :

INTRODUCTION TO RATIO

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Ratios are well known and most widely used tool of financial analysis. A ratio gives the mathematical relationship between one variable to another. Though the computation of a ratio involves only a simple arithmetic operation, its interpretation is a difficult exercise. The analysis of ratio can disclose relationship as well as bases of comparison that reveal conditions and trends that can not be detected by going through the individual components of the ratio. The usefulness of ratios is ultimately dependent on their intelligent and skillful interpretation. Different people use ratios for various purposes. As ratio analysis mainly helps in valuing the firm in quantitative terms, two groups of people are interested in the valuation of the firm and they are creditors and shareholders.

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DIFFERENT TYPES OF RATIOS

Generally, the financial ratios fall into three groups:

1. Liquidity ratios 2. Profitability or efficiency ratios 3. Ownership ratios (A). Earning ratios (B). Dividend ratios (C). Leverage ratio a. Capital structure ratios b. Coverage ratios

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Liquidity ratios:

Liquidity implies a firms ability to pay its debt in the short run. This ability can be measured by the use of liquidity ratios. Short-term liquidity involves the relationship between current assets and current liabilities; if a firm has sufficient net working capital (excess of current assets over current liabilities) it is assumed to have enough liabilities. The current ratio and quick ratio are the two ratios, which are commonly used to measure liquidity directly. the ratios like receivable turnover ratios and inventory turnover ratio measure the liquidity indirectly.

Current ratio: Current assets The liquidity ratio is defined as: Current liabilities

Current assets include cash, marketable securities, debtors, inventories, loans, and advances, & prepaid expenses. Current liabilities include loans, and advances taken, trade creditors, accrued expenses, and provisions.

Quick ratio: 16

Quick Test (also acid-test ratio) is defined as: Quick assets = Current liabilities

Current assets - inventories = Current liabilities

The is more straight measure of because inventories, which are least liquid of current assets, are excluded from ratio. Inventories have to go two steps process of first being sold and converted into receivables and secondly collected. The quick test is so named because it gives the ability of the firm to pay its liability without relying on the sale and recovery of its inventory.

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Turnover ratio: Receivables turnover ration and inventory turnover ratio measure the liquidity of the firm in an indirect way. Here the measure of liquidity is concerned with the speed with which inventory is converted into sales and account receivable converted into cash. The turnover ratio gives the speed of conversion of current asset (liquidity) into cash in the above way. Two ratio are used to measure the liquidity of firm account receivables they are: a. Account receivable turnover ratio b. Average collection period

Account receivable turnover ratio: Net credit sale Account receivable ratio= Average accounts receivables The average account receivable is obtained by adding the beginning receivables of the period and ending receivables, and divide the sum by 2. The sales figure in the numerator is the credit sale, because from cash sale we dont get any receivables. Higher the receivables turn over ratio, greater the liquidity of the firm. However, care should be taken to see that to project higher receivable turnover ratio, firm is not following a stricter credit policy.

Average collection period One can get a sense of the speed of collections from a receivables turnover ratio and it is valuable for comparison purposes but we cant directly compare to the terms of trade that firm usually gives,

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The ratio, which gives the above ratio, is the average collection period, which is defined as no of days it takes to collect account receivables. This can be obtained by dividing 360 by average receivable turnover ratio calculated above. I.e., 360 Average collection period= Average accounts receivable turnover Average account receivable = Average daily sales

Inventory turnover: The liquidity of firm in inventory can be calculated by dividing the cost of goods sold by firms inventory. The inventory turnover, or stock turnover measures how fast the inventory is moving through the firm and generating the sales. Inventory turnover can be defined as: Cost of goods sold Inventory sold = Average inventory

Profitability or efficiency ratios

This measures the efficiency of firms activity and its ability to generate profit. 1. Profits in relation to sales: it is important from profit standpoint that the firm be able to generate adequate profit on each unit of sales. If sales lack a sufficient margin of profit, it is difficult for firm to cover its fixed changes on debt and to earn a profit for shareholders. Two popular ratio in this category are gross profit margin ratio and net profit margin ratio. 2. Profit in relation to asset: it is also important that profit be compared to capital invested by owners and creditors. If the firm cannot produce satisfactory profit on its assets base, it might be misusing its assets. They are also referred to as 19

rate of return ratio and some of them are assets turnover ratio, earning power and return on equity. Gross profit margin ratio: it is defined as Gross profit Net sale

Where net sale = sales excise duty This ratio show the profit related to sales after the direct production cost are deducted. It may be used as an indicator of efficiency of production operation and the relation between production cost and selling price.

Net profit merging ratio: It is defined as Net profit / net sale. This ratio shows the earning left for the shareholders (both equity and preference) as a percentage of net sale, it measure overall efficiency of production, administration, selling, financing, pricing, and tax management. Jointly considered, the gross and net profit ratio provided the analyst available tool to identify the source efficiency / inefficiency.

Assets turnover: it highlights the amount of assets firm use to produce its total sales. The ability to produce the large volume of sale on small assets base is important part of firms profit 20

picture. Improperly used assets increases the firms need for costly financing and expenses for maintenance and upkeep. By achieving high assets turnover, firm reduces the cost and increases the eventual profit to its owner. It is defined as sales / average assets. Assets are calculated by adding opening stock of assets (previous years closing stock of assets) and closing stock of present year.

Earning power: it is measure of operating profitability and it is defined as, Earning before taxes and interest / average total assets Assets earning power is measure of operating business performance, which is not effected by interest charges and tax payment. As it doesnt consider the effect of financial structure and tax rate, it is well suited for inner firm comparisons. Return of equity: The return of equity is important profit indicator to share holders of firm. It is calculated by the formula: Net income / exchange equity

Owner ship ratio:

Ownership ratio will help the shareholders in analyzing present and future investments in a firm. Stockholders (owners) are interested in how the value of their holding is affected by certain variables. Ownership ratio compares the investment value with factors such as debts, earning, dividend and the stock market price by understanding liquidity and profitability ratios, one can get its insight into the soundness of firms business activity, whereas as by analyzing ownership ratio the analyst is able to analyse is able assess the likely future value of market. 21

Ownership ratio is divided into three main groups. They are 1. Earning ratio

2. Leverage ratio a. Capital structure ratio b. Coverage ratio

3. Dividend ratio

Earnings ratios: the earning ratios are earning per share (EPS), price earning ratio (P/E ratio), and capitalization ratio. From earning ratio, we can get information on earnings of firm and their effect on price of common stock. EPS: Share holders are concerned about the earning of firm in two ways one is ability of funds with the firm to pay their dividends and the other to expand their interest in the firm with the retained earnings. These earnings are expressed on a per share basis, which is shorter called EPS. It is calculated by dividing net income by the no of shares outstanding. EPS=net income (PAT) / no of Outstanding shares Price earning ratio: It is (P/E multiple) calculated by taking market of stock and dividing it by earning per share. Price earning multiple = market price of share / EPS

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This ratio gives the relationship between market price of stock and its earning by revealing how earning affected the market price of firms stock.

The capitalization rate: Capitalization rate = EPS / market price of share. The P/E ratio also may be used to calculate the rate of return inventors expect before they purchase the stock. The reciprocal of P/E i.e. (market price / EPS) gives the return.

Leverage ratio:

When we extend the analysis to the long-term solvency of a firm, we have two types of leverage ratio: they structural ratios and coverage ratios. Structural ratios are based on proportion of debt and equity in the capital structure of the firm, whereas coverage ratio is derived from the relation ship between debt servicing commitments and sources of funds for meeting these obligations.

Capital structure ratio: Various capital structures ratios are: Debt equity ratio: it indicates the relative contribution of creditors and owners can be defined as debt / equity. Debt assets ratio: It measures the extent to which borrowed funds support the firms assets. It is defined as debt / assets. The composition of debt portion is same as debt equity ratio. 23

Coverage ratio: it gives the relation ship between financial changes of the firm and ability to service them. Important coverage ratios are interest coverage ratio, fixed changes coverage ratio, and debt service coverage ratio. Fund ability to meet an obligation / equity of that obligation.

Interest coverage ratio: One measure of a firms ability to handle financial burdens is the interest coverage ratio, also referred to as times interest coverage ratio. This ratio tells us how many times firm can cover or meet the interest payment associated with debt.

Interest coverage ratio: Interest coverage ratio= EBIT / interest expenses.

Fixed changes coverage ratio: interest coverage ratio considers the coverage of interest of pure debt only. Fixed changes coverage ratio measures the debt servicing ability comprehensively because it considers all the interest, principal repayments obligations, lease payments, and preferences dividends. This ratio shows how many times the pretax operating income covers all fixed financing charges. It is defined as: Earning before depreciation, debt interest and lease rentals and taxes / debt interest + lease rental + loans repayment installment / (1- tax rate) + preference dividend / (1tax rate)

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Debt service coverage ratio: Normally used by term lending financial institutions in India, the debt service coverage ratio, which is a post tax is defined as: PAT+ depreciation + other non cash charges + interest on term loan / interest on term loan +repayment of term loan

Dividend ratio: The common stockholder is very much concerned about the firms policy regarding the payment of cash dividend. If the firm not paying enough dividends the stock may not be attractive to those who are interested in current income from their investment in the company. The firm must be liquid & profitable to pay consistent and adequate dividends without profit, the will not have sufficient resources to give dividends, without liquidity the firm cannot get cash to pay the dividends. In the above respect, two dividends ratios are important. They are dividend payout ratio & dividend yield ratio. Dividend Payout ratio:

This ratio of dividend per share (DPS) to earning per share (EPS). It indicates what percentages of total earning are paid to shareholders. The percentage of earnings that is not paid out (1- dividend pay out) is required for firms feature needs. If the firm need of funds, then it may cut dividends in relations to earning & on the other hand, if the firm fined that it lacks opportunities to use the firms generated, it might increase the dividends. But in both the cases, consistency of dividend payment is important to the shareholders.

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Dividend Yield ratio:

This is ratio of dividends per share (DPS) to market price of share. Dividend yield = dividend per share / market price of the share This ratio gives current return on investment. This is mainly of interest to the investors who are desirous of getting income from dividends. No dividend yield exist of firms which do not declare dividends.

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FINANCIAL STATEMENT OF COMPANY (IPCL) Income Statement As on( Months ) Profit / Loss A/C Net Sales Operating Income (OI) OPBDIT OPBDT OPBT Non-Operating Income Extraordinary/Prior Period Tax Profit after tax(PAT) Cash Profit Dividend-Equity Balance Sheet As on Assets Gross Block Net Block Capital WIP Investments Inventory Receivables Other Current Assets Balance Sheet Total(BT) Liabilities Equity Share Capital Reserves Total Debt Creditors and Acceptances Other current liab/prov. Balance Sheet Total(BT) As On(Months) Sales of Products/Services 31-Mar05(12) Rs mn 81722.60 82740.30 17451.00 15020.90 9963.90 294.40 %OI 98.77 100.00 21.09 18.15 12.04 0.36 31-Mar04(12) Rs mn 80704.20 81525.50 11475.20 8115.00 3183.00 183.60 %OI 98.99 100.00 14.08 9.95 3.90 0.23 31-Mar03(12) Rs mn %OI 49445.00 98.25 50325.60 100.00 12253.80 24.35 7699.60 15.30 3024.20 6.01 170.00 0.34 -7795.20 -15.49 190.70 -4791.70 278.40 558.50 31-Mar-03 Rs mn 96382.80 60606.10 426.20 885.10 9788.10 2980.90 10499.90 85186.30 Rs mn 2490.50 20144.60 33242.30 7866.30 21442.60 85186.30 0.38 -9.52 0.55 1.11

-1339.30 -1.62 1017.60 1.23 7901.40 9.55 12958.40 15.66 1117.00 1.35 31-Mar-05 Rs mn 97857.70 50050.00 588.00 1653.30 6231.20 7010.60 11214.00 76747.10 Rs mn 2490.50 26720.00 7602.50 19948.70 19985.40 76747.10

-560.00 -0.69 71.00 2735.60 7667.60 620.50 31-Mar-04 Rs mn 96468.90 53859.30 806.60 1512.30 7731.00 4032.90 5416.20 73358.30 Rs mn 2490.50 20230.70 26939.60 11206.30 12491.20 73358.30 0.09 3.36 9.41 0.76

%BT 127.51 65.21 0.77 2.15 8.12 9.13 14.61 100.00 %BT 3.25 34.82 9.91 25.99 26.04 100.00

%BT 131.50 73.42 1.10 2.06 10.54 5.50 7.38 100.00 %BT 3.39 27.58 36.72 15.28 17.03 100.00

%BT 113.14 71.15 0.50 1.04 11.49 3.50 12.33 100.00 %BT 2.92 23.65 39.02 9.23 25.17 100.00

31-Dec-2005(3) 21430.00

31-Dec-2004(3) 19270.00

% Change 11.21

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Other Income Total Income Total Expenses Stock Adjustments OPBDIT Interest Depreciation Extraordinary Items Prior Period Adjustments Provision for Tax After Tax Profit Equity Capital Reserves Notes to Accounts Latest Quarterly/Halfyearly

360.00 21790.00 17190.00 0.00 4600.00 270.00 1190.00 0.00 0.00 860.00 2280.00 2490.00 0.00 Click here

370.00 19640.00 15330.00 0.00 4310 340.00 1150.00 0.00 0.00 930.00 1890.00 2490.00 0.00 Click here

-2.70 10.95 12.13 -6.73 -20.59 3.48 ---7.53 20.63 0.00 --

Detailed Quarterly

RATIO ANALYSIS OF COMPANY (APCL)

Ratio Analysis As on OPBIT/Prod.cap.empl.(%) PBIT/Cap. Employed (%) PAT/Networth (%) Tax/PBT (%) Total Debt/Networth (x) Long Term Debt/Networth (x) PBDIT/Finance Charges (x) Current Ratio (x) RM Inventory (days consumption) FG inventory (days cost of sales) Receivables (days gross sales) Creditors (days cost of sales) Op. curr. assets (days OI) Share Statistics

31-Mar-05 35.85 31.33 27.05 11.41 0.26 0.25 6.75 0.61 11.71 17.09 27.35 111.52 108.00

31-Mar-04 13.82 12.62 12.04 2.53 1.19 0.52 3.30 0.73 13.49 15.88 16.37 58.39 72.00

31-Mar-03 13.89 -0.08 -21.17 -4.14 1.47 0.73 1.02 0.79 32.55 42.22 18.84 75.42 169.00

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EPS (Rs.) CFPS (Rs.) Book Value (Rs.) DPS (Rs.)

31-Mar-05 31.83 52.20 117.68 4.50

31-Mar-04 11.02 30.89 91.53 2.50

31-Mar-03 -19.30 1.12 91.19 2.25

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Ratio Analysis 30

Definition A ratio can be defined as The indicated proportion of two mathematical expressions", and as the relationship between two or more things". Ratio Analysis is a widely used tool of financial analysis. The term ratio in it refers to the relationship expressed in mathematical terms between two individual figures or group of figures connected with each other in some logical manner and are selected from financial statements of the concern. The Ratio Analysis is based on the fact that a single accounting figure by itself may not communicate any meaningful information but when expressed as a relative to some other figure, it may definitely provide some significant information. The relationship between two or more accounting figures is called a financial ratio. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items or variables. What the ratios do is that they reveal the relationship in a more meaningful way so as to enable us to draw conclusion about the performance, strengths and weaknesses of a firm. Importance of Ratio Analysis As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis and enables the drawing of inferences regarding the performance of a firm. Ratio Analysis is relevant in assessing the performance of a firm in respect of the following aspects: 1. Liquidity Position 2. Long term solvency 3. Operating efficiency 4. Overall profitability 5. Inter Firm comparison 6. Trend Analysis

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Liquidity Position With the help of Ratio Analysis conclusions can be drawn regarding the liquidity position of the firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have the ability to meet its short term liabilities if it has sufficient liquid funds to pay interest on its short maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios are particularly useful in credit analysis by banks and other suppliers of short term loans. Long Term Solvency Ratio Analysis is equally useful for assessing the long term financial viability of a firm. This aspect of the financial position of a borrower is of concern to the long term creditors, security analysts & the present and potential owners of a business. The long term Solvency is measured by the leverage/capital structure & profitability ratios which focus on earning power and operating efficiency. Ratio Analysis reveals the strengths and weaknesses of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly, the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. Operating Efficiency Yet another dimension of the usefulness of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in the management and utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets total as well as its components. Overall Profitability Unlike the outside parties which are interested in one aspect of the financial position of a firm, the management is constantly concerned about the over all profitability of the enterprise. That is, they are concerned about the ability of the firm to meet its short term as well as long-term obligations to its creditors, to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together.

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Inter Firm Comparison Ratio analysis not only throws light on the financial position of a firm but also serve as a stepping stone to remedial measures. This is made possible due to inter-firm comparison & comparison with industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norms. One of the popular techniques is to compare the ratios of a firm with the industry averages. It should be reasonably expected that the performance of the firm should be in broad conformity with that of the industry to which it belongs. An inter-firm comparison would demonstrate the firms position vis--vis its competitors. If the results are at variance either with the industry average or with the industry average or with those of the competitors, the firm can seek to identify the probable reasons and, in that light, take remedial measures. Trend Analysis Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of a trend analysis of ratios lies in the fact that the analysts can know the direction of movement that is, whether the movement is favorable or unfavorable.

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Classifications of the Ratios 35

ACTIVITY RATIO 1. 2. 3. 4. 5. 6. 7. 8. Capital Turnover Ratio Asset Turnover Ratio/Capital Employed Turnover Ratio Fixed Assets Turnover Ratio Current Assets Turnover Ratio Working Capital Turnover Ratio Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio

PROFITABILITY RATIO 1. 2. 3. 4. 5. 6. 7. 8. Return on Equity / Net Worth Earnings Per Share Price Earnings Ratio Dividend Payout Ratio Dividend Per Share Gross Profit Ratio Operating Profit Ratio Net Profit Ratio

CAPITAL STRUCTURE RATIO 1 .Debt Equity Ratio LIQUIDITY RATIO 1. Current Ratio 2. Liquid / Quick Ratio

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Activity Ratios

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The Activity ratios are also called as Turnover Ratios or Performance Ratios. These ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios usually indicate the frequency of sales w.r.t its assets. These assets may be capital assets or working capital or average inventory. These ratios are usually calculated with reference to sales/cost of goods sold and are expressed in terms of rate or times. Several Activity ratios are as follows

1.

Capital Turnover Ratio :-

This ratio indicates the firms ability of generating sales per rupee of long term investment. The higher the ratio, more efficient the utilization of owners and long-term creditors funds.

Capital Turnover Ratio = Sales / Capital Employed Capital Employed = Share Capital + Reserves & Surplus

For the year 2007 Particulars Sales Capital Employed Capital Turnover Crompton Greaves 3401.17 659.33 5.16 ABB 5930.31 1611.9 3.68 Siemens 7726.81 1589.4 4.86

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Interpretation: From the above graph we can see that Crompton Greaves is utilizing owners and long term creditors fund most efficiently as compared to its competitors. Crompton Greaves is followed by Siemens and lastly ABB having the lowest capital turnover. The capital turnover of 5.16 times of CG is a very good sign for the company.

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2. Asset Turnover Ratio / Capital Employed Turnover Ratio The Assets Turnover Ratio is the relation between Net Assets which includes Net Current Assets as well as Net Fixed Assets. It gives the amount of sales generated by the company for every one rupee of capital employed in Net Assets. This ratio shows the firms ability in generating sales from all financial sources committed to total assets.

Assets Turnover Ratio = Sales / Net Assets Net Assets = Net Current Assets + Net Fixed Assets

For the year 2007 Particulars Sales Net Assets Assets Turnover Crompton Greaves 3401.17 750.88 4.53 ABB 5930.31 1435.97 4.13 Siemens 7726.81 1030.05 7.50

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Interpretation: From the above graph we can see that the assets turnover is the highest for Siemens followed by CG and ABB. For every 1 rupee of capital employed in net assets Siemens is producing sales of Rs. 7.50 and similarly for CG there are sales of Rs. 4.53 and for ABB it is Rs. 4.13. From this we can conclude that Siemens having the highest assets turnover utilizes its assets most efficiently. It also says that Siemens produces a large volume of sales for minimum amount of net assets comparatively.

3. Fixed Assets Turnover Ratio

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A high fixed assets turnover ratio indicates efficient utilization of fixed assets in generating sales. Fixed Assets Turnover Ratio = Sales / Net Fixed Assets Net Fixed Assets = Gross Block Depreciation

For the year 2007 Particulars Sales Net Fixed Assets Fixed Assets Turnover Crompton Greaves 3401.17 375.03 9.07 ABB 5930.31 337.39 17.58 Siemens 7726.81 462.26 16.72

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Interpretation: A high ratio indicates efficient utilization of fixed assets in generating sales. A company whose plant and machinery are old may show a higher fixed assets turnover ratio than the company which is new. As per the graph above fixed assets turnover of ABB (17.58) is higher as compared to Siemens (16.72) and way ahead of Crompton Greaves (9.07). The huge difference in the ratio could be because of higher turnover and the other reason could be that most of the assets are depreciated till date.

4. Current Asset Turnover Ratio 43

This ratio is used by the firm to know its efficiency of utilizing Current Assets. It also helps in determining that for generating a sale of one rupee how much investment should be made in current assets.

Current Assets Turnover = Sales / Current Assets

For the year 2007 Particulars Sales Current Assets Current Asset Turnover Crompton Greaves 3401.17 1468.57 2.32 ABB 5930.31 3830.5 1.55 Siemens 7726.81 3593.72 2.15

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Interpretation: Current Assets Turnover Ratio of CG is comparatively higher than its competitors. CG generates sales of Rs.2.32 with every one rupee investment made in current assets. The current assets turnover ratio for ABB is the least with sales of Rs. 1.55 being generated for every one rupee invested in current assets. This also implies that management of current assets is the best for CG.

5. Working Capital Turnover Ratio 45

Working Capital is the excess of current assets over current liabilities. This ratio indicates extent of working capital, which should always be moderate. The decline in working capital indicates that either working capital is in excess of requirements or there is operational efficiency. It should be stable if not increasing overtime. On contrary, if it is falling, it indicates large build up current assets or fall in the level of current liabilities or both. It is a measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales. The higher the ratio, the better because it means that the company is generating many sales compared to the money it uses to found the sales.

Working Capital Turnover Ratio = Net Sales / Working Capital Working Capital = Current Assets Current Liability

For the year 2007 Particulars Sales Working Capital Working Capital Turnover

Crompton Greaves 3401.17 723.59 4.70

ABB 5930.31 1098.58 5.40

Siemens 7726.81 567.79 13.61

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Interpretation: From the above graph it can be seen that Siemens as the highest working capital turnover. Thus, it is indicated that for one rupee of sales company need Rs. 0.08 of net current assets where as for CG and ABB Rs. 0.21 and Rs. 0.19 amount of investment is required in net current assets.

6. Inventory Turnover Ratio This ratio indicates how efficiently the firm is managing its inventory. This ratio roughly indicates how many times per year the inventory is replaced. This ratio 47

provides an important tool to the management for controlling stock of raw material, work in progress and finished goods. Higher ratio indicates better inventory management. It is an indicator of the liquidity of the inventory, since it tells rapidly with which the inventory is turned into receivables through sales. While making inferences it should be kept in mind that stock turnover ratio is greatly influenced by nature of business.

Inventory Turnover Ratio = Cost of goods sold (Sales) / Average Inventory Average Inventory = (Opening Inventory + Closing Inventory) / 2

For the year 2007 Particulars Cost of Goods Sold (Sales) Average Inventory Inventory Turnover

Crompton Greaves 3401.17 219.41 15.50

ABB 5528.48 421.70 13.11

Siemens 6635.16 616.65 10.76

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Interpretation: The inventory turnover shows how rapidly the inventory is turning into receivables through sales. A high inventory turnover is indicative of good inventory management. From the above graph it can be observed that inventory turnover for CG is the best among its competitors. It can be interpreted that inventory management techniques for CG in highly effective. The inventory turnover for Siemens is comparatively low which implies excessive inventory levels than warranted by production and sales activity, or slow moving or obsolete inventory.

7.

Debtors Turnover Ratio:

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Debtors form an important part of current assets. Quality of debtors determines to a great extent the firms liquidity. For determining the quality of debtors two ratios are used debtors turnover ratio and net collection period ratio. If sales are regarded as the growth variable of a business, receivables is the first constraint to such variable. Receivables form the major part of Current Assets. Hence, high debtors turnover ratio indicates less percentage of debtors. Debtors Turnover Ratio = Credit Sales / Average Debtors Average Debtors = (Opening Debtors + Closing Debtors) / 2

For the year 2007 Particulars Credit Sales Average Inventory Debtors Turnover

Crompton Greaves 3401.17 731.77 4.65

ABB 5930.31 1996.91 2.97

Siemens 7726.81 1745.41 4.43

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Interpretation: Debtors turnover for CG is comparatively higher than ABB and Siemens. The higher values of debtors turnover indicate efficient management of credit. The time lag between credit sales and the cash received is low for CG as compared to its competitors. This also shows good prospects for the company in future.

8. Creditors Turnover ratio

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This ratio indicates speed with which payment is made to creditors for the credit purchases. It is also referred to as average accounts payable. This ratio helps the creditors to have an idea regarding when they will be receiving their payments. It also helps the company to demand for better discount from the creditors. It is calculated as follows: Creditors Turnover Ratio = Net Credit Purchases / Average Creditors Average Creditors = (Opening Creditors + Closing Creditors) / 2

For the year 2007 Particulars Credit Purchases Average Creditors Creditors Turnover

Crompton Greaves 1878.13 594.76 3.16

ABB 2381.34 1319.94 1.80

Siemens 4897.3 1916.68 2.56

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Interpretation: From the graph it can be seen that creditors turnover for CG is the highest and for ABB is the lowest. It can be interpreted that credit period given by the suppliers is good for CG and is a very positive sign for the company. The higher creditors turnover ratio implies that the company is using other peoples money for a longer duration.

PROFITABILITY RATIOS The profitability ratio measures the profitability or the operational efficiency of the firm. These ratios reflect the final results of the business operations. The 53

results of the firm can be evaluated in terms of its earnings with reference to a given level of assets or sales or owners interest etc. Therefore, the profitability ratios are broadly classified in the two categories 1) Profitability in relation to investment. 2) Profitability in relation to sales Profitability Ratios in relation to investment

1. Return on Equity
Return on Equity measures the profitability of equity funds invested in the firm. This ratio reveals how profitability of the owners funds has been utilized by the company. This ratio is computed as Return on Equity = {Profit after Taxes / Net Worth (Equity)} * 100

For the year 2007 Particulars Profit after Taxes Net worth (Equity) Return on Equity

Crompton Greaves 192.37 659.33 29.18

ABB 491.67 1611.90 30.50

Siemens 596.54 1589.40 37.53

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Interpretation: Return on shareholders equity is calculated to see the profitability of owners investment. The return on equity is very good for Siemens, followed by ABB and lastly CG. It also indicates how well Siemens has used the resources of owners as compared to its competitors. The above graph also indicates the relative performance and strength of the company in attracting future investments.

2. Earnings per Share

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The profitability of a firm from the point of view of ordinary shareholders can be measured in terms of number of equity shares. This is known as earning per share. It is calculated as follows:

Earnings per Share = Profit after Tax / No. of shares outstanding

For the year 2007 Particulars Profit after Tax No. of shares outstanding Earnings per Shares

Crompton Greaves 192.37 36.66 5.25

ABB 491.67 21.19 23.20

Siemens 596.54 16.86 35.38

Profitability in relation to sales

1. Gross Profit Ratio:This ratio is used to compare departmental profitability or product profitability. It is the result of the relationship between prices, sales volume and costs. A change in the gross margin can be brought about by changes in any of these factors. A high ratio of gross profit to sales is a sign of good management as it implies that the cost of production of the firms is relatively low. It may also be indicative of a higher sales price without a corresponding increase in the cost of goods sold. A relatively low gross margin is definitely a danger signal.

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Gross Profit Ratio = (Gross Profit / Sales) * 100

For the year 2007 Particulars GP Sales Gross Profit Ratio

Crompton Greaves 346.36 3692.17 9.38

ABB 788.86 6001.36 13.14

Siemens 845.11 7825.34 10.80

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Interpretation: The gross profit margin for ABB is the highest among its competitors. It implies the efficiency of management of ABB in producing each unit of product. A high Gross Profit Margin is a good sign for the company. The higher the Gross Profit Margin, the lower is the cost of production. The higher Gross Profit Margin also directly reflects the low cost of procurement of raw material.

2. Operating Profit Ratio

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It is calculated to evaluate operating performance of business. Operating profit means sales less cost of sales. Operating Profit Ratio = (Operating Profit / sales) * 100

For the year 2007 Particulars OP Net Sales Operating Profit Ratio

Crompton Greaves 342.65 3401.17 10.07

ABB 724.63 5930.31 12.22

Siemens 702.27 7726.81 9.09

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Interpretation: From the above graph it can be seen that ABB has the highest Operating Profit Margin with 12.2 % followed by CG with 10.07 % and lastly Siemens with 9.09 %. The higher operating profit margin the lower is the administration and selling and distribution expenses. So, it can be interpreted that administration, selling and distribution expenses are the least for ABB.

3. Net Profit Ratio:-

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It measures overall profitability. This is net profit after tax to net sales. This ratio explains the profit generating capacity of the sales. These ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales. It reveals overall profitability of the concern. It is essentially expresses the cost price effectiveness of the operation. A high net profit margin would ensure adequate return to the owners as well as enable a firm to withstand adverse economic condition when selling price is declining, cost of production is rising & demand for the product is falling. A low net profit margin is opposite implications. However a firm with a low profit margin can earn a high rate of return on investment if it has higher inventory turnover.

Net Profit Ratio = (Net Profit / Sales) * 100

For the year 2007 Particulars NP Sales Net Profit Ratio

Crompton Greaves 192.37 3692.17 5.21

ABB 491.67 6001.36 8.19

Siemens 596.54 7825.34 7.62

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Interpretation: This ratio is the overall measure of the firms ability to turn each rupee sales into net profit. From the above graph we can say that net profit margin for ABB is the best which also indicates managements efficiency in manufacturing, administering and selling the products. The highest net profit margin for ABB also indicates the firms capacity to withstand adverse economic condition. A firm with a high net margin ratio (ABB, in the above case) would be in an advantageous position to survive in the face of falling selling prices, rising costs of production or declining demand for the product. A firm with a high net profit margin will be able to accelerate its profit at a faster rate than a firm with a low net profit margin.

Capital Structure Ratio / Leverage Ratio

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These ratios provide an insight into the financing techniques used by a business and focus on the long term solvency position. From the balance sheet one can get only the absolute fund employed and its sources, but only capital structure ratios show the relative weight of different sources.

1. Debt Equity Ratio This ratio indicates the proportion of debt fund in relation to equity. This ratio is very often referred in capital structure decisions as well as in the legislation dealing with the capital structure decisions. Lenders are also very keen to know this ratio since it shows relative weights of debt and equity. It is the indicator of leverage. According to the traditional school, cost of capital firstly decreases due to higher dose of leverage, reaches minimum and thereafter increases. So infinite increases in leverage (i.e. debt equity ratio) is not possible. But according to Modigliani-miller theory, cost of capital and leverage are independent of each other. Debt Equity Ratio = Debt / Equity Debt = Secured Loans + Unsecured Loans Equity = Share Capital + Reserves & Surplus

For the year 2007 Particulars Debt Equity Debt Equity Ratio Crompton Greaves 270.04 659.33 0.41 ABB 0.57 1611.90 0.00 Siemens 1.53 1589.40 0.00

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Interpretation: From the above graph we can say that the amount of debt for ABB and Siemens is negligible and for CG too the amount is low. Both ABB and Siemens have no borrowings, so no interest payment resulting to higher profitability. This is a very good sign for both the companies as they have the capacity to carry out all funding from their own reserves.

Liquidity Ratios

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The term liquidity and short-term solvency are used synonymously. Liquidity means ability of the business to pay its short - term liabilities. Inability to pay off short term liabilities affects its creditability as well as its credit rating. Continuous default on the part of the business leads to commercial bankruptcy. Eventually such commercial bankruptcy may lead to its sickness and dissolution. Short term lenders and creditors of a business are very much interested to know its state of liquidity because of their financial stake. Traditionally, two ratios are used to highlight the business liquidity. These are current ratio and quick ratio. 1. Current Ratio Current ratio in a business concern indicates the availability of current assets to meet its current liabilities. Higher the ratio better is the coverage. Traditionally, it is also called 2:1 ratio, i.e. 2 is the standard for current assets for each unit of current liabilities. But this is only a conservative outlook about the coverage of current liabilities. Generally the levels of current ratio vary from industry to industry depending on the specific industry characteristics. Also a company differs from the industry ratio because of its policy. Current ratio = Current Assets / Current Liabilities

For the year 2007 Particulars Current Assets Current Liabilities Current Ratio Crompton Greaves 1188.47 708.98 1.68 ABB 4136.8 3038.22 1.36 Siemens 4775.67 4207.89 1.13

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Interpretation: From the above graph we can interpret that the short term solvency position of CG is better than its competitors as its current ratio stands at 1.68: 1 which is higher than both its major competitors. We can also interpret that CG has the highest margin of safety for creditors. Higher current ratio also indicates more amount of current assets in relation to current liabilities, the more the firms ability to meet its current obligations.

2. Quick Ratio It is also called as quick ratio. Quick assets consist of only cash and near cash assets. But in a sellers market inventories are also near cash assets. Moreover, just like lag in collection of debtors, there is a lag in conversion of inventories into finished goods and sundry debtors. Obviously slow moving inventories are not near cash assets. However, while calculating the quick

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ratio we have followed the conservatism convention. Quick liabilities are that portion of current liabilities which fall due immediately. Since Bank overdraft and cash credit can be used as source finance as and when required, it is not include in the calculation of quick liabilities. Liquid Ratio: Liquid Assets / Liquid Liability Liquid Assets = Current Assets Inventories Liquid Liabilities = Current Liability B.O.D C.C For the year 2007 Particulars Liquid Assets Liquid Liabilities Quick Ratio Crompton Greaves 941.46 708.98 1.33 ABB 3648.09 3038.22 1.20 Siemens 3955.42 4207.89 0.94

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Interpretation: From the above graph we can say that all the assets of CG are liquid enough and can be easily converted into cash. Though, it doesnt mean that liquidity position of ABB and Siemens is bad. Thus, we can say that all the three companies are capable of meeting there short term liabilities.

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