Embed Size (px)
Citation preview
CONTENTS
SECTION-1 COMPANY PROFILE
SECTION-2 INTRODUCTION
FINANCIAL RATIO ANALYSIS
OPERATING CYCLE
WORKING CAPITAL MANAGEMENT
CURRENT ASSETS
CURRENT LIABILITIES
SECTION-3 RESEARCH METHODOLOGY
SECTION-4 DATA ANALYSIS AND INTERPRETATION
RATIOS
OPERATING CYCLE
WORKING CAPITAL
WOKING CAPITAL FINANCE
SECTION-5 FINDINGS AND CONCLUSIONS
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 (ASTI) is an ISO 9001:2000 certified company.
A team of highly qualified and experienced engineers manning its state-of-the-art
computer controlled manufacturing operations ensure vitally needed consistency.
Continuous improvement and innovation is an unending endeavor at ATLAS. Self
sufficient with its own high speed slitting line, modern tool room with C.N.C. turning
centre, full capacity in-house power generation facility & tube re-cutting and end
finishing facilities, ASTI is able to supply tubes within the shortest lead time through
network of branches all over the country.
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:
ERW Precision Steel Tubes
CROSS SECTION PROFILES OF TUBES:
1. Circular section
2. Rectangular section
3. Oval Shape
PRODUCT SPECIFICATIONS:
1. IS:2039(Steel Tubes for Bicycle purposes)
2. IS:3074(Steel Tubes for Automotive Purposes)
3. IS:3601(Steel Tubes for General Engineering Purpose)
4. IS:4923(Steel Tubes for Structural Purposes)
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
FINANCIAL RATIO ANALYSIS
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 Ratios give a picture of a company’s short term financial situation or solvency. Operational/Turnover Ratios show how efficient a company’s operations and how well it is using its assets. Leverage/ Capital Structure Ratios show the quantum of a debt in a company’s capital structure. Profitability Ratios use margin analysis and show the return on sales and capital employed. Valuation Ratios show the performance of a company in the capital market.
LIQUIDITY RATIOS
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.
Current ratio = Current Assets/ Current Liabilities
CR measures the ability of the company to meet its CL i.e. CA gets converted into cash
in the operating cycle of the firm and provides the funds needed to pay for CL. The
higher the CR, the greater the short- term solvency. While interpreting the current ratio,
the composition of current assets must not be overlooked. A firm with a high proportion
of current assets in the form of cash and debtors is more liquid than one with a high
proportion of current assets in the form of inventories, even though both the firms have
the same current ratio. Internationally, a current ratio of 2:1 is considered satisfactory.
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.
Quick ratio = Quick assets/ Current Liabilities
QR indicates the extent to which a company can pay its current liabilities without relying
on the sale of inventory. This is a fairly stringent measure of liquidity because it is based
on those current assets which are highly liquid. Inventories are excluded from the
numerator of the ratio because they are deemed the least liquid component of current
assets. Generally, a quick ratio of 1:1 is considered good. One drawback of the quick
ratio is that it ignores the timing of receipts and payments.
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:
Cash ratio= (Cash+ bank balances+ Current investment)/ Current Liabilities
The cash ratio is the most stringent ratio for measuring liquidity.
OPERATIONAL/ TURNOVER RATIOS
These ratios determine how quickly certain current assets can be converted into cash.
They are also called efficiency ratios or asset utilization ratios as they measure the
efficiency of a firm in managing assets. These ratios are based on the relationship
between the level of activity represented by sales or cost of goods sold and levels of
investment in various assets. The important turnover ratios are debtors turnover ratio,
average collection period, inventory/stock turnover ratio, fixed assets turnover ratio and
total assets turnover ratio.
Receivable Turnover Ratio (RTR)
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).
RTR = (Trade Receivable/Gross Sales)
It is used to calculate debtors’ holding by the company and represented in number of days
as given below:
Debtors’ holding=(Trade Receivable/Gross Sales)*360 Days
Average Collection Period (ACP)
The average time period for which receivables are outstanding is called Average
Collection Period. ACP is calculated by dividing accounts receivable by average daily
sales. It is also called collection ratio. The average collection period represents the number of
day’s worth of credit sales that is blocked with debtors (accounts receivable). It is computed as
below:
ACP= Avg. bal. of Sundry Debtors/ Avg. Daily Credit sale
The ACP can be compared with the firm’s credit terms to judge the efficiency of the credit
management.
Finished Goods Turnover Ratio (FGTR)
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.
FGTR= Finished Goods Inventory/ Cost of Goods sold
It is used to calculate Stock holding by the company in number of days.
Stock Holding= F.G. Inventory/ (Cost of Goods sold * 360 Days).
Fixed Assets Turnover Ratio (FATR)
The FAT ratio measures the net sales per rupee of investment in fixed assets. It can be
calculated as below:
FATR = Net Sales/ operating Fixed assets
This ratio measures the efficiency with which fixed assets are employed. A high ratio
indicates a high degree of efficiency in asset utilization and vice versa. However, the ratio
should be used with caution because when the fixed assets of a firm are old and
substantially depreciated, the fixed assets turnover ratio tends to be high (because the
denominator becomes very low).
Total Assets Turnover Ratio (TATR)
TATR is the ratio between the net sales and the average total assets. It can be computed
as below:
TATR = Net sales/ Average Total assets
This ratio measures how efficiently an organization is utilizing its assets.
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.
PROFITABILITY RATIOS IN RELATION TO SALES
A firm which generates a substantial amount of profits per rupee of sales can comfortably
meet its operating expanses and provide more returns to its shareholders. The relationship
between profit and sales is measured by profitability ratios. There are two type of
profitability ratios: Gross Profit Margin and Net Profit Margin.
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.
LEVERAGE/ CAPITAL STRUCTURE RATIOS
These ratios measure the long-term solvency of a firm. Financial leverage refers to the
use of debt finance. While debt capital is a cheaper source of finance, it is also a risky
source. Leverage ratios help us assess the risk arising from the use of debt capital. Two
type of ratios are commonly used to analyze financial leverage- structural and coverage
ratios. Structural ratios are based on the proportions of debt and equity in the financial
structure of a firm. Coverage ratios show the relationship between the debt commitments
and the sources for meeting them.
The long term creditors of a firm evaluate its financial strength on the basis of its ability
to pay the interest on the loan regularly during the period of the loan and its ability to pay
the principal on maturity.
Debt Assets ratio
The debt asset ratio measures the extent to which the borrowed funds support the firm’s
assets. It can be calculated as:
DAR=Debt/Assets
The numerator of the ratio includes all debt, short-term as well as long-term, and the
denominator of the ratio includes all the assets (the balance sheet total).
Interest Coverage Ratio
The ratio between EBIT and Interest Expenses. It is calculated as given below:
ICR= EBIT/Interest ExpensesThis 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.
PROFITABILITY RATIOS IN RELATION TO INVESTMENT
These ratios measure the relationship between the profits and investments of a firm.
There are three such ratios: Return on Investment, Return on Capital Employed and
Return on Shareholders’ Equity.
Return On Investment
ROI is the ratio between Operating Profit (Before interest and tax) and Total Operating
Assets.
ROI= Operating Profit/ Total Operating Assets
Return on Total Shareholders’ Equity
The total shareholders’ equity of preference share capital, ordinary share capital
consisting of equity share capital, share premium, reserves and surplus less accumulated
losses.
Return on total shareholders’ equity = (Net profit after tax)*100/ average
shareholders’ equity
Finished Goods
Earning Per Share
EPS measures the profits available to the equity shareholders on each share held. The
formula for it is as below:
EPS = Net Profit available to equity holders/ No. of ordinary shares outstanding
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.
REALIZATION Accounts SALES Receivables
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.
Days Inventory Out (DIO) +Days Sales (DSO) - Payables (DPO)
Cash Conversion Cycle (CCC)
WORKING CAPITAL
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.
There are two types of working capital.
1. Gross working capital
2. Net working capital
Gross Working Capital: It is the sum total of all current assets.
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
Working Capital Gap.
Working capital management
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:
Accounts Receivable: Amounts due from customers as a result of selling inventory
or services on terms which allow for delivery prior to the payment of cash. The
transaction exists as a receivable (A/R) on the balance sheet.
Inventory: The goods and materials a company sells/uses to make profits. Inventory
exists in three forms: raw material, work in progress, and finished goods. Prepaid
Expenses: When cash is used to purchase a good or service, the benefits of which
will be realized or received within the current year (12 months).
Notes Receivable: A loan made by the company which is evidenced by a promissory
note (N/R).
Intangibles: Assets which have no physical properties or “set” values. Examples of
intangibles include patents, research and development, and goodwill (INT).
Cash/Bank: Cash with the company either in hand or in bank or some security
deposit.
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).
Accounts Payable/Creditors: Amounts due to suppliers who have provided inventory to the company (A/P).
Statutory Liabilities: Amounts to be paid according to law of land.
Advance from customers: Amounts received as advance from customers against some product/ service to be supplied later.
RESEARCH METHODOLOGY
1. Research Design: Descriptive Design.
Descriptive design includes surveys and fact-finding enquiries of
different kinds. The major purpose is description of the state of affairs as it
exists at present.
2. Data Collection:
a) Primary Data: Data which are original work of research.
Data Collection Instrument:
- Interview Method.
- Observation Method.
b) Secondary data: Interpretations of primary data.
Data Collection Instrument:
- Internal records of A.S.T.I.
- Text books.
- Internet.
3. Universe: Finite (Atlas Steel Tube Inds., Bawal )
Universe is totality of items or units in any field of enquiry. It can be
finite or infinite. In finite universe the number of items is certain.
4. Sampling Method: Non probability judgment sampling method.
Non probability judgment sampling method- researcher deliberately
or purposely draws a sample which he thinks is representative.
5. Sample Size: 15respondents.
6. Sampling Frame: Executives and staff of Accounts, Purchase, Stores,
Production, H.R., QA departments of A.S.T.I.
Sampling frame is source list of all individual units of the population. It
should be good representative of the population as far as possible.
DATA ANALYSIS AND INTERPRETATION
Current Ratio
The ratio between all current assets and all current liabilities.
CR= Current Assets/Current Liabilities
Current Ratio ( A.S.T.I.)
Year 2005-06 2006-07 2007-08 2008-09 (P)
CA (Rs. Lakhs) 2938.34 3128.94 3359.32 3617
CL (Rs. Lakhs) 1269.39 1480.82 1354 1473.1
CR (%) 2.315 2.113 2.481 2.455
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 ( A.S.T.I.)
Year 2005-06 2006-07 2007-08 2008-09 (P)
QCA (Rs. Lakhs) 2223.6 2384.27 2622.32 2850
CL (Rs. Lakhs) 1269.39 1480.82 1354 1473.1
QR 1.752 1.61 1.937 1.935
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.
Receivable Turnover Ratio (RTR)
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).
RTR=(Trade Receivable/Gross Sales)
It is used to calculate debtors’ holding by the company and represented in number of days
as given below:
Debtors’ holding=(Trade Receivable/Gross Sales)*360 Days
Receivables Turnover Ratio & Debtors’ Holding ( ASTI)
Year 2005-06 2006-07 2007-08 2008-09 (P)
GS (Rs. Lakhs) 8633.85 9718.35 10715 11722
TR (Rs. Lakhs) 1999.85 2202.08 2400 2600
RTR 0.23 0.23 0.22 0.22
Debtors’ Holding (Days) 84.054 82.71 81.75 80.96
The graph shows that debtors’ holding has downward trend which is a good sign.
AVERAGE COLLECTION PERIOD(Avg. bal. of Sundry Debtors/ Avg. Daily Credit)
YEAR 2005 2006 2007 2008(P)
ABSD (Rs. Lac) 1917.28 2100.96 2301.04 2500
ADCS (Rs. Lac) 23.02 26.308 30.59 33.46
ACP (Days) 83.29 79.86 75.22 74.72
ABCD=Average Balance Sundry Debtors; ADCS=Average Daily Credit Sales
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
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.
s
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.
FGTR= Finished Goods Inventory/ Cost of Goods sold
It is used to calculate Stock holding by the company in number of days.
Stock Holding= F.G. Inventory/ (Cost of Goods sold * 360 Days).
Finished Goods Inventory Turnover Ratio(ASTI)
Year 2005-06 2006-07 2007-08 2008-09 (P)
COGS (Rs. Lakhs) 7047.34 8135 9129.15 9933
FGI (Rs. Lakhs) 241 427.15 350 350
Stock Hold (Days) 12.45 19.17 13.99 12.86
Above record and graph shows that different functions are working efficiently and
maintaining FG stock holding to an acceptable level.
Fixed Asset Turnover Ratio
The Ratio between Net Sales and Operating Fixed Assets.
FATR= Net Sales/Operating Fixed Assets
Fixed Asset Turnover Ratio( A.S.T.I.)
Year 2005-06 2006-07 2007-08 2008-09 (P)
Net Sales (Rs. Lac) 7883.85 8848.36 9735 10650
OFA (Rs. Lac) 531.67 541.61 531.7 481.7
FATR (%) 14.83 16.34 18.31 22.11
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.
RETURN ON INVESTMENT (ROI)
The Ratio between Operating Profit (Before interest and tax) and Total Operating Assets.
ROI= Operating Profit/ Total Operating Assets
Return on Investment ( Atlas Steel Tube Inds.)
Year 2005-06 2006-07 2007-08 2008-09 (P)
OP(Rs. Lac) 579.96 361.16 259.85 356
TOA(Rs. Lac) 3470.01 3670.5 3891.0 4098
ROI (%) 16.7 9.84 6.68 8.69
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.
Gross Profit Margin Ratio (GPR)
The Ratio between Gross Profit and Net Sales.
GPR=Gross Profit/Net Sales
Gross Profit Margin ( Atlas Steel Tube Inds.)
Year 2005-06 2006-07 2007-08 2008-09 (P)
GP (Rs. Lac) 836.51 713.3 605.85 717
NS (Rs. Lac) 7883.85 8848.36 9735 10650
GPR (%) 10.61 8.06 6.22 6.73
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
selling and administration costs.
Debt Asset Ratio
Definition: The ratio between Debt and Assets.
i.e. DAR=Debt/Assets
Debt Assets Ratio (ASTI)
Year 2005-06 2006-07 2007-08 2008-09 (P)
DEBT(Rs.Lakhs) 1342.84 1554.27 1427.45 1546.55
Assets(Rs.Lakhs) 3470.01 2515.1 2572.13 2966.23
DAR (%) 38.7 61.8 55.5 52.1
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%.
Interest Coverage Ratio (ICR)
Definition: The ratio between EBIT and Interest Expenses.
i.e. ICR= EBIT/Interest Expenses
Interest Coverage Ratio (ASTI)
Year 2005-06 2006-07 2007-08 2008-09 (P)
EBIT (Rs. Lac) 579.96 361.16 259.85 356
Interest Exp.(Rs. Lac) 9.21 78.29 80 85
ICR 62.97 4.61 3.25 4.19
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.
RETURN ON INVESTMENT (ROI)
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.)
Year 2005-06 2006-07 2007-08 2008-09 (P)
OP(Rs. Lac) 579.96 361.16 259.85 356
TOA(Rs. Lac) 3470.01 3670.5 3891.0 4098
ROI (%) 16.7 9.84 6.68 8.69
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
RAW MATERIAL STORAGE PERIOD (RMSP)
(Avg. stock of R.M./ Avg. daily Consumption of R.M.)
Years 2005 2006 2007 2008(P)
ASRM(Rs. Lac) 377.74 268.61 215.87 262.5
ADCRM (Rs. Lac) 16.68 21.08 22.31 24.65
RMSP (Days) 22.64 12.74 9.68 10.65
ASRM=Average Stock of R.M.; Average Daily Consumption of R.M.
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.
FINISHED GOODS STORAGE PERIOD(Avg. stock of finished goods/Avg. daily cost of goods sold)
YEARS 2005 2006 2007 2008(P)
ASFG (Rs.) 222.31 334.07 388.58 350
ADCOGS (Rs.) 22.5 26.49 27.6 32.58
FGSP (Days) 9.88 12.61 14.08 10.74
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.
AVERAGE COLLECTION PERIOD(Avg. bal. of Sundry Debtors/Avg. Daily Credit)
YEARS 2005 2006 2007 2008(P)
ABSD (Rs. Lac) 1917.28 2100.96 2301.04 2500
ADCS (Rs. Lac) 23.02 26.308 30.59 33.46
ACP (Days) 83.29 79.86 75.22 74.72
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
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.
AVERAGE PAYMENT PERIOD(Avg. bal. Of Creditors/Avg. Daily Credit)
YEARS 2005 2006 2007 2008(P)
ABSD (Rs.) 1050.71 1047.79 974.59 1072
ADCS (Rs.) 17.12 20.59 22.5 24.72
ACP (Days) 61.37 50.89 43.32 43.37
s
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.
Years
OVERALL PICTURE OF OPERATING CYCLE
2005 2006 2007 2008(P)Days Days Days Days
RM Storage Period 22.67 12.74 9.68 10.65
Conversion Period 0 0 0 0
FG Storage Period 9.88 12.61 14.08 10.74
Avg. Collection Period 83.29 79.86 75.22 74.72
Gross Operating Cycle 115.84 105.21 98.98 96.11
Avg. Payment Period -61.38 -50.88 -43.32 -43.36
Net Operating Cycle 54.46 54.33 55.66 52.75
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.
ELEMENTS OF WORKING CAPITAL
CURRENT ASSETSA comparative statement of Current Assets (of A.S.T.I., Bawal) for the past four
years is given below:
Year 2005 2006 2007 2008
Actual Actual Actual Projection
A Current Assets
1 Raw Material 355.48 181.74 250 275
2 Other consumables spares 119.58 136.84 137 142
3 Finished Goods 239.68 426.09 350 350
4 Receivables 1999.85 2202.08 2400 2600
5 Advances to suppliers 11.77 14.93 20 20
6 Other current assets
including cash & bank
balance
211.99 167.26 202.32 230
Total 2938.35 3128.94 3359.94 3617
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.
Prepaid Expenses: The company doesn’t have any prepaid expenses.
Notes Receivable: Atlas Steel Tube Ind. have not given or invested in any outside
business.
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 LIABILITESA comparative statement of Current Liabilities (of A.S.T.I., Bawal) for the past four
years is given below:
Year 2005 2006 2007 2008(P)
B Current Liabilities
1 Creditors Purchase of raw
material
1167.4 928.18 1021 1123
2 Advance from customers 4.06 4.27 5 5
3 Statutory Liabilities 0 6.06 8 10
4 Other Current liabilities
(Short term Borrowing etc.
97.93 542.31 320 335
Total Current Liabilities 1269.39 1480.82 1354 1473
Although current liabilities increases by 16% in year, 2006 but in 2007 it fell to 8.56%.
The liabilities might increase by 8.79% in year, 2008.
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
Comparative statement of Woking Capital, in case of ASTI
is given below:
( All figures in Rs.Lacks)
Year 2005 2006 2007 2008(P)
1 Total Current Assets 2938.35 3128.94 3359.32 3617
2 Total Current Liabilities 1269.39 1480.82 1354 1473
3 Working Capital Gap (1-2) 1668.96 1648.12 2005.32 2144
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.
Computation of Maximum Permissible Bank finance for Working
Capital
2005
Actual
2006
Actual
2007 Actual 2008
Projection
1 Total Current Assets 2938.35 3128.94 3359.32 3617
2 Total Current Liabilities 1269.39 1480.82 1354 1473
3 Working Capital Gap (GCP) (1-2) 1668.96 1648.12 2005.32 2144
4 Min. stipulated net working capital i.e.
25% of WCG/ 25% of total current
assets as the case may be depending
upon the method of lending
417.24 412.03 501.33 536
5 Actual/Projected net working capital 1668.96 1648.12 2005.32 2144
6 Item 2 minus item4 1251.72 1236.09 1503.99 1608
7 Maximum permissible bank finance 1251.72 1236.09 1503.99 1608
0 500 1000 1500 2000
1
2
3
4 Maximum permissible bankfinance
Min. stipulated net workingcapital i.e. 25% of WCG/25% of total current assetsas the case may bedepending upon the method
FINDINGS AND CONCLUSION
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
Speed
(M/min)
Mill
Time
(Min)
Power Consumed
(times)Ton Mtr
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
My study has certain limitations, which I am giving underneath:
1. My limited knowledge.
2. Limited period of time.
3. My inexperience because this is my first such study.
4. Almost no resources available.
5. Sometimes the respondents ( because of their job) were not able to concentrate
on their answers.
6. Research is based on financial statements of the company, which themselves
have certain limitations.
ANNEXURE
QUESTIONARE
Questions asked from respondents during interview:
1. Whether shifting from Gurgaon to Bawal has been good for the company and
employees?
2. When cost of raw material changes, how the price of product is decided?
3. Why ASTI’s average collection period is much more than average payment
period?
4. Which jobs can be outsourced?
5. Which jobs should be outsourced?
6. Which jobs can be converted to piece rate?
7. Which jobs should be converted to piece rate?
8. From where working capital gap is financed?
9. Can there be other source of financing working capital gap in a better way?
10. How product price is decided?
11. Do you think, the pricing of the products is right?
12. Which pricing is better?( based on average weight or based on size)
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.
Solomon, Ezra and J.J.Pringle, An introduction to Financial Management. New Delhi:
Prentice Hall Of India (P) Ltd.
Atlas Steel Tube Web site, downloaded on August 9, 2009
(http//www.atlassteeltubes.com/)
Annual Reports of Atlas Steel Tube Inds. Bawal, Rewari (Haryana)
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)
