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1. MEANING AND CONCEPT OF FINANCE
Finance is the life blood of business. Finance is of the basic foundations of all kinds
of economic activities. Like any other functional management firm (such as production,
marketing, finance etc) Finance is a vital functional organ of the firm. If the finance
function does not operate well, the whole organizational activity will be collapsed. The
subject matter of financial management has been defined in many ways depending upon the
study of the subject.
1.1 CONCEPT OF FINANCIAL STATEMENT ANALYSIS
Financial statement analysis is the collective name for the tools and techniques that
are intended to provide relevant information to decision makers. The purpose of financial
statement analysis is to access a company financial health and performance. Financial
statement analysis consists of comparisons for the same company over periods of time and
comparisons of different companies either in the same industry or in different industries.
Financial statement analysis enables investors and creditors to evaluated past performance
and financial position, and to predict future performance.
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CHAPTER 2
RESEARCH METHODOLOGY
2.1. OBJECTIVES OF THE STUDY
1. To measure the operating performance of the company.
2. To measure Liquidity position of the company.
3. To measure long term solvency of the company
2.2. LIMITATIONS OF THE STUDY
This study mainly depends on the Secondary data i.e., Annual reports of ACC Ltd.
Operating and Financial performance of the company is analyzed using 5 years data
alone.
The Study does not consider the time value of money.
The validity of analysis and suggestions depends on the financial statements and
reports alone, provided by the company.
2.3 RESEARCH DESIGN
The research design that is adopted in this study is descriptive design. Descriptive
research is used to obtain information concerning the current status of the phenomena to
describe, "what exists" with respect to variables or conditions in
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2.4. SAMPLING DESIGN2.4.1. SAMPLIE SIZE:-
The sample size for this study is 20072011 annual reports of Profit and Loss
Account, Balance Sheet.
2.4.2. SAMPLE UNIT:-One year Financial Report will constitute a sample unit.
2.4.3. DATA SOURCES:-
Data were collected through both secondary data sources.
The Secondary data was collected mainly from
1. Annual Reports
2. Internal Records
3. Books
2.4.4. TOOLS USED:-
The collection of data were tabulated and presented in the appropriate places of
various chapters. Besides the performance of business was evaluated by analyzing and
interpreting financial statement with the help of Ratio Analysis, Trend Percentages, Common
Size financial statement, Dupont Analysis.
3.COMMON-SIZE FINANCIAL STATEMENT
Common-size Financial statements are those in which figures reported are converted
into percentages to common base. The comparative common-size financial statements show
the percentage of each cash item to the total in each period but from period to period.
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4. TREND PERCENTAGES
The method of calculating trend percentage involves the calculation of percentage
relationship that each item bears to the same item in the base year. Any year may be taken as
the base year. It is usually the earliest year. Any intervening year made be taken as the base
year. Each item of base year is taken as 100 and on that basis percentages for each of the
items of each of the years are calculated. These percentages can also be taken as index
numbers showing relative changes in the financial showing relating changes in the financial
data resulting with the passage of time.
The method of trend percentages is a useful analytical device for the management
since by substituting percentages for absolute figure.
However, Trend percentages are not calculated for all of the items in financial
statements. They are usually calculated only for major items since the purpose is to highlight
important changes.
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5. RATIO ANALYSIS
Ratio analysis is widely used tool of financial analysis. Ratios are
relationships expressed in mathematical terms between figures which are connected with
each in some manner.
It is defined as the systematic use of ratios 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. This relationship can be expressed as Percentages,
Fractions and proportion of numbers.
Financial ratios are used to evaluate Profitability, Liquidity, Capital structure of the
Company.
Types of ratios:
Ratios can be classified for the purpose of exposition into four broad groups.
1. Profitability Ratios
2. Activity Ratios
3. Liquidity Ratios
4. Capital structure Ratios
ADVANTAGES:
1. Ratio simplifies Financial statements.
2. Ratio facilities inter-firm and intra-firm comparison.
3. It helps in decision-making.
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5.1. PROFITABILITY RATIOS:
The profitability ratios are calculated to measure the overall efficiency of the
business. The management is naturally eager to measure its operating efficiency.
Profitability ratios are used as an indicator of the efficiency with which the operation of the
business.
The following ratios are calculated:
1. Net profit ratio
2. Operating profit ratio
3. Earning per share
4. Price earnings ratio
5. Earnings yield ratio
6. Return on equity
7. Return on investments
8. Return on total assets
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5.1.1. NET PROFT RATIO:
Net profit ratio indicates net margin earned on sales. Net profit Ratio expressed the
relationships between the net profit and net sales. This ratio helps in determining the
efficiency with which affairs of the business are being managed.
Net profit after tax
Net profit Ratio = ---------------------------- x 100
Net sales
Table 3.2 Net profit ratio for the yea 2007-2011
YearNet profit after tax
Crore
Net sales
Crore
Net profit ratio
%
2007 1,439 6,991 (20.58)
2008 1,213 7,283 (16.64)
2009 1,607 8,027 (20.02)
2010 1,120 7,717 (14.51)
2011 1,325 9,439 (14.04)
(Source: ACC LTD Annual Reports year 2007-2011)
The companys net profit has decreased throughout the five years, it indicates the poor
administration capability of the concern. This ratio also indicates that firms capacity to face
adverse economic conditions such as price competition, lower demand etc. If the profit of the
firm is not sufficient or the firm incurred loss, the firm shall not be able to achieve a
satisfactory return on its investment.
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5.1.2. OPERATING PROFIT RATIO:
The operating expense ratio explains the changes in the profit margin (EBIT to Sales)
ratio. This ratio is computed by dividing operating expenses viz. cost of goods sold plus
operating expenses.
The Ratio is a complementary of net profit ratio. This ratio is measure of the
operating efficiency with which the businesses is being carried. A comparison of the cost
component is high or low in the figure of sales.
EBITDA
Operating ProfitRatio = -------------------------- *100
Net sales
(Operating cost = Cost of sales + Operating Expenses)
Table 3.3 operating ratio for the year 2007-2011
YearEBITDA
Crore
Net sales
Crore
Operating Profit ratio
%
2007 1,993 6,991 28.51
2008 1,899 7,283 26.07
2009 2,644 8,027 32.94
2010 1,812 7,717 23.48
2011 1,921 9,439 20.35
(Source: ACC LTD Annual Reports year 2007-2011)
It indicates operating efficiency of the firm. The operating ratio of the firm was
increased for the first three years. In this periods the firm has spent more operating expenses.
Hence it indicates the low efficiency of the firm. But there after in the year 2011 operating
cost is decreased. So in this period the has tried to reduce the cost.
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5.1.3. EARNING PER SHARE:
EarningPer Share highlights the overall success of the concern from owners point of
view and it is helpful in determining market price of equity share.
Net profit after tax
Earning per share = ------------------------------------------------------
Number of Equity Shares
Table 3.4 Earning per share Ratio for the year 2007-2011
Year
Net profit after tax
Crore
No.of equity
shares
Earnings per share
% (Rs.)
2007 1,439 187624404 76
2008 1,213 187681819 65
2009 1,607 187740292 85
2010 1,120 187745356 60
2011 1,325 187745356 71
(Source: ACC LTD Annual Reports year 2007-2011)
This table reflects the capacity of the concern to pay dividend to its equity
sharesholders. It has heavy loss in the year 2009-10. Hence it degrade the reputation of the
firm as well as interest of the shareholders of the company.
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5.1.4. PRICE EARNINGS RATIO:
This ratio indicates the number of times the earning per share is covered by its market
price. Price earning ratio helps the investor in deciding whether to buy or not buy the shares
of a company at a particular market price.
Market price per share
Price earnings ratio = ---------------------------------
Earnings per share
Table 3.5 Price Earnings Ratio for the year 2007-2011
Year Market Price per ShareEarning per Share
(Rs.)
Price Earnings
Ratio
2007 1223 76 16.10
2008 1171 65 18.03
2009 865 85 10.18
2010 444 60 7.40
2011 948 71 13.36
(Source: ACC LTD Annual Reports year 2007-2011)
Usually higher the Price earnings ratio, better it is. The Management should look into
the causes that have resulted into the fall of this ratio. Hence Price Earnings Ratio
decreasing, it affects the market price of shares, and also the company fails to get good name
from its shareholders.
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5.1.5. EARNINGS YIELD RATIO:
The earning yield may be defined as the ratio of earnings per share to the market
value per ordinary share. The earning yield ratio is also called the earning price ratio.
Earning per share
Earning yield = ----------------------------- x 100
Market price per share
Table 3.6 Earning yield Ratio for the year 2007-2011
YearEarning per Share
(Rs.)
Market Price per
ShareEarning yield
2007 (1.54) 10 (15.4)
2008 (1.65) 10 (16.5)
2009 (1.59) 10 (15.9)
2010 (2.63) 10 (26.3)
2011 (8.82) 10 (88.2)
(Source: ACC LTD Annual Reports year 2007-2011)
Earnings yield shows negative value. It is also increasing trend. It reveales the poor
performance of the company.
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5.1.6. RETURN ON EQUITY:
In real sense, equity shareholders are the real owners of the company. They assume
the highest risk in the company. Equity shareholders are getting residual claim after paying
interest and performance dividend. Return on equity capital, which is the relationship
between profits of a company an its equity capital, can be calculated as:
Net profit after tax
Return on Equity = -------------------------------- * 100
Net worth
Table 3.7 Return on equity for the year 2007-2011
YearNet profit after tax
Crore
Net worth
Crore
ROE
%
2007 1,439 4,153 (34.65)
2008 1,213 4,928 (24.61)
2009 1,607 6,016 (26.71)
2010 1,120 6,469 (17.31)
2011 1,325 7,192 (18.42)(Source: ACC LTD Annual Reports year 2007-2011)
Here, the company has not earned profit, hence, the net loss erode the shareholders
net worth year after year. The return on equity ratio has also showed decreasing trend . The
companys profitability position was not good.
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5.1.7. RETURN ON INVESTMENT:
The Conventional approach of calculating return on investment is to divide PAT by
investment. Investment represent pool of funds supplied by shareholders ad lenders, while
PAT represent reside income of shareholders therefore it is conceptually unsound to use PAT
in the calculation of ROI.
Operating profit
ROI = -------------------------------- *100
Capital employed
Table 3.8 Return on investment for the year 2007-2011
YearNet profit after tax
Crore
Capital employed
Crore
Ratio
%
2007 1,439 4,791 (30.04)
2008 1,213 5,746 (21.11)
2009 1,607 6,932 (23.18)
2010 1,120 7,355 (15.22)
2011 1,325 8,221 (16.12)
(Source: ACC LTD Annual Reports year 2007-2011)
In the year 2007-2011 the company has incurred operational loss. Eventhough the
company employed huge amount of capital but due to its inefficient operation, its operating
profit turned into loss.
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5.1.8. RETURN ON TOTAL ASSETS:
The ROTA may also be called profit to asstRatio. There are various approaches
possible to define net profits and assets, according to the purpose and intent of the calculation
of the ratio.
The ROTA based on this ratio would be an under estimate as the interest paid to the
creditors is excluded from the net profits.
Net profit after Tax
ROTA = ------------------------------------- * 100
Total assets
Table 3.9. Return on total asset for the year 2007-2011
YearNet profit after tax
Crore
Total asset
Crore
Return on Total
Assets
%
2007 1,439 7,489 (19.41)
2008 1,213 8,517 (14.24)
2009 1,607 10,059.15 (15.98)
2010 1,120 11,041.34 (10.14)
2011 1,325 11,816.71 (11.21)
(Source: ACC LTD Annual Reports year 2007-2011)
In the year 2009-2010 the company incurred net loss. The return on total assets
showed negative (loss) balance in all the 5 years. It was not good indication to conduct the
business in forthcoming years.
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5.2. ACTIVITY / TURNOVER RATIOS:
Turnover ratios are also known as Activity or Efficiency ratios. These indicate
the efficiency with which the capital employed is rotated in the business. Activity ratio
measures the efficiency of asset management. Turnover ratio indicates the number of times
the capital has been rotated in the process of doing business.
The following ratios are calculated:
5.2.1. FIXED ASSETS TURNOVER RATIO:
Fixed assets turnover ratio indicates the extent to which the investments in fixed
assets contribute towards coast of goods sold. If compared with a previous period it indicates
whether the investment in fixed assets has been judicious or not.
Cost of goods sold
Fixed assets turnover ratio = --------------------------------------
Fixed assets
Table 3.10. Fixed assets turnover ratio for the year 2007-2011
Year Cost of goods sold Fixed Assets Ratio
2007 1026302079 4599847844 0.22
2008 1085499769 1317459132 0.8
2009 713705801 1233959900 0.57
2010 2757442192 8727028918 0.31
2011 3814339033 8195640982 0.46
(Source: ACC LTD Annual Reports year 2007-2011)
The above table dealt with fixed assets turnover ratio. Higher the ratio, more is the
efficiency in probability of a business concern. A lower ratio is the indication of under
utilization of fixed assets in the year 2006-07 and 2009-10 is lower, is indicates lower
utilization of fixed assets.
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5.2.2. DEBTORS TURNOVER RATIO:
Debtors turnover is found out by dividing credit sales for average debtors. Debtors
turnover indicates the number of times debtors turnover each year. The higher the value of
debtors turnover, the more efficient is the management of credit. The average number of days
for which debtors remain outstanding is called the average collection period.
Net credit sales
Debtors Turnover Ratio = -----------------------------------
Closing debtors
Table 3.11 Debtors turnover ratio for the year 2007-2011
Year
Net Credit Sales
Crore Closing Debtors
Debt
Turnover
Ratio
Debt
collection
period
(Days)
2007 4,991 293.65 16.99 22
2008 5,283 310.17 17.03 21
2009 7,027 203.90 34.46 11
2010 6,717 178.28 37.67 10
2011 8,439 260.41 32.40 11
(Source: ACC LTD Annual Reports year 2007-2011)
Debtors velocity indicates the number of times the debtors are turned over during a
year. Generally higher the value of debtors turnover more efficient in the management of
debtors. Similarly, lower debtor turnover implies inefficient management of debtor.
From the table the ratio for the year 2009-10 was very low, when compared with other
remaining years performance.
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5.3. LIQUIDITY RATIOS
Liquidity is the ability of company meets its short-term obligations when they fall
due. As company should have enough cash and the current assets, which can be converted
into cash so that it can pay its suppliers and lenders on time.
The following ratios are calculated:
1. Current ratio
2. Quick ratio / Liquid ratio
3. Net working capital ratio
4. Cash ratio
5.3.1. CURRENT RATIO:
Current ratio is a widely used indicator of companys ability to pay its debts in
the short-term. It is the relationships between current assets and current liabilities. Current
assets are those assets which can be easily converted into cash within a short period of time
or with in an operating cycle generally one year. Current liabilities are those which are
payable with in a short period of time generally one year.
Current assets
Current ratio = -------------------------------------
Current liabilities
Table 3.14 Current Ratio for the year 2007-2011
Year Current Assets
(In Crores)
Current Liabilities
(in Crores)
Ratio
2007 2,203 2,221 0.99
2008 2,760 2,766 0.99
2009 2,256 3,114 0.72
2010 2,753 3,746 0.73
2011 3,618 3,664 0.99
(Source: ACC LTD Annual Reports year 2007-2011)
From the table, it reveals the current ratio was steady in the year 2007 and 2008 ,but
it dropped after that.Then it increased again in 2011. Internationally accepted current ratio is
2:1 i.e., current assets shall be 2 times of current liabilities. The ability of the concern also
depends on current asset position. Here, current assets are not sufficient to meet its current
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liabilities. Hence the companys solvency position is not good for all the years indicated
above.
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5.3.2. QUICK RATIO
This ratio is also termed as Acid Test Ratios and Liquidity Ratio. This ratio is
ascertained by comparing the liquid assets to current liabilities. Prepaid expenses and stock
are not taken as quick assets. Bank overdraft is not taken as quick liability.
Quick assets
Quick Ratio = ----------------------------
Current liabilities
Table 3.15.Quick ratio for the year 2007-2011
YearQuick assets
(in crores )
Current liabilities
( in crores)Ratio
2007 1710.17 2,221 0.77
2008 1631.94 2,766 0.59
2009 1463.58 3,114 0.47
2010 2659.66 3,746 0.71
2011 2418.24 3,664 0.66
(Source: ACC LTD Annual Reports year 2007-2011)
From the above table in 2007-2011 the ratio is less than the ideal ratio 1. Here, quick
liabilities are twice when compared with quick assets. Hence, this position is not healthy for
the soundness of the business.
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5.3.3. NET WORKING CAPITAL RATIO:
Net working capital represents the excess of current assets over current liabilities.
Net working capital measures the firms potential reservior of funds. Net working capital is a
measures of liquidity.
Net working capital
Net Working capital ratio = ---------------------------------
Capital employed
Net working capital = Current assetsCurrent liabilities
Table 3.16 Net working capital ratio for the year 2007-2011
YearNet working capital
(inRs.)
Net Assets (or)
Capital employed
(inRs.)
Ratio
2007 18 4,791 (0.003)
2008 6 5,746 (0.001)
2009 858 6,932 (0.123)
2010 993 7,355 (0.135)
2011 46 8,221 (0.005)
(Source: ACC LTD Annual Reports year 2007-2011)
The table revealed the networking capital ratio from the year 2007 to 2011. The
company borrowed loan for its working capital requirements, because current liabilities were
higher than that of current assets, in every year.
Hence liquidity position is not good.
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5.3.4. CASH RATIO
Cash ratio means the availability to meet out the current liabilities. This ratio is also
named as Absolute Liquid Ratio. It is the Relationship between the Absolute liquid assets
include cash in hand, cash at bank and marketable securities or temporary investments.
Cash
Cash ratio = -------------------------
Current liabilities
Table 3.17 Cash ratio for the year 2007-2011
Year Cash Current liabilities Ratio
2007 1,489 2,221 0.67
2008 1,438 2,766 0.52
2009 1,876 3,114 0.60
2010 2,288 3,746 0.61
2011 2,832 3,664 0.77
(Source: ACC LTD Annual Reports year 2007-2011)
An ideal cash ratio is 0.75:1. This ratio is more regorious measure of a firms liquidity
position. The table indicates from the year 2007 to 2011. For the 5 years the companys cash
position is not sufficient to meet its obligations. Because the five years its position is lower
than ideal ratio.
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5.4. CAPITAL STRUCTURE RATIOS:
Capital structure ratios are also called as Leverage Ratios and Solvency Ratios.
The long term solvency of a company is affected by the extent of debt used to finance the
assets of the company. These ratios explain how the capital structure of firm is made up or
the debt equity mix adopted by the firm. Long term solvency ratios indicate a firms ability
to meet the fixed interests and repayment schedules associated with its long-term borrowings.
The important capital structure ratios are:
1. Debt-Equity ratio2. Proprietary ratio3. Debt ratio
5.4.1. DEBTEQUITY RATIO:
The debt-equity ratio is calculated to ascertain the soundness of the long-termfinancial policies of the company. It is also known as External - Internal equity ratio. The
relationship between borrowed funds and owners capital is popular measure of the long-term
financial solvency of the firm. The relationship is shown by the debt-equity ratio. The ratio
is
Long-term debt
Debt - equity ratio = ------------------------------------
Shareholders funds
Table 3.18 Debt equity ratio for the year 2007-2011
Year Long-term debt Share holders funds
DebtEquity
Ratio
%
2007 324.69 4058.72 .08
2008 394.21 4,927.73 .08
2009 541.45 6,016.22 .09
2010 646.95 6,469.49 .10
2011 503.49 7,192.27 .07
(Source: ACC LTD Annual Reports year 2007-2011)
The table dealt with debt equity ratio from the year 2007 to 2011. The standard norm
is 1:1. The company has borrowed more long-term debt for its operation. It is not healthy for
the soundness of the firm. A high debt-equity ratio indicates that the claim of outsiders are
greater than those of owners. Hence, this position affect the financial position of the concern
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.
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5.4.2. PROPRIETARY RATIO:
Proprietary ratio is variant of debt-equity ratio. Proprietary ratio establishes
relationship between the proprietors funds and the total tangible assets. This ratio focused
the attention on the general financial strength of the business enterprise. This is of particular
importance to the creditors who find out the proportion of shareholders funds in the total
assets employed in the business.
Total Shareholders Fund
Proprietary Ratio = -----------------------------------
Total Tangible Assets
Table 3.19 Proprietary ratio for the year 2007-2011
Year Share holders funds Total tangible AssetsProprietary ratio
%
2007 4058.72 2793.56 1.45
2008 4,927.73 3,446.16 1.43
2009 6,016.22 4,129.10 1.46
2010 6,469.49 5,059.63 1.28
2011 7,192.27 6,206.26 1.15
(Source: ACC LTD Annual Reports year 2007-2011)
The proprietary ratio for the year 2007 is 1.45% and subsequently it deceased to (1.15
in 2010-11). The company fails to improve or retain its shareholders funds. Higher the ratio
or the share of shareholders in the total capital of the company, better is the long term
solvency position of the company.
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5.4.3. DEBT RATIO:
Debt ratios may be used to analyze the long-term solvency of a firm. The firm may
be interested in knowing the proportion of the interest bearing debt in the capital structure. It
may therefore, compute debt ratio by dividing total debt by capital employed or net assets.
Total debt
Debt ratio = -----------------------------
Net asset
Table.3.20 Debt ratio for the year 2007-2011
YearTotal debt
Total Tangible AssetsDebt ratio
%
2007 306.41 2793.56 10.96
2008 482.03 3,446.16 13.98
2009 566.92 4,129.10 13.72
2010 523.82 5,059.63 10.35
2011 510.73 6,206.26 8.23
(Source: ACC LTD Annual Reports year 2007-2011)
The debt ratio for the year 2007 is 10.96% and it is has increased subsequently to
13.72 in the year 2008-09. This position was not good to conduct business in future. Hence,
the company has to take necessary step to avoid borrowing loan from bank or others. Huge
debts carries huge amount of interest, it affects the profitability of the concern.
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